41427 Report No. : 39175-BD BANGLADESH PUBLIC SECTOR ACCOUNTING AND AUDITING A Comparison to International Standards Country Report South Asia Region Financial Management Unit May, 2007 A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S ABBREVIATIONS AND ACRONYMS ASOSAI Asian Organization of Supreme Audit Institutions CAG Comptroller and Auditor General CAO Chief Accounts Officer CGA Controller General of Accounts CFO Chief Financial Officer CIPFA Chartered Institute of Public Finance and Accountancy, United Kingdom CONTASA Convertible Taka Special Account DFID Department for International Development, UK DOSA Dollar Special Account FIMA Financial Management Academy FMRP Financial Management Reform Project FRC Financial Reporting Council FY Fiscal Year GOB Government of Bangladesh IAASB International Auditing and Assurance Standards Board IAS International Accounting Standards ICAB Institute of Chartered Accountants of Bangladesh ICMA Institute of Cost and Management Accountants IES International Education Standards for Professional Accountants IFAC International Federation of Accountants IFAC-PSC International Federation of Accountants ­ Public Sector Committee IFRS International Financial Reporting Standards INTOSAI International Organization of Supreme Audit Institutions IPSASB International Public Sector Accounting Standards Board (of IFAC) IPSAS International Public Sector Accounting Standards (of IFAC) ISA International Standard on Auditing C O U N T R Y R E P O R T PAGE 3 MOF Ministry of Finance PAC Public Accounts Committee PEFA Public Expenditure and Financial Accountability PFM Public Financial Management SAFE Special Account Foreign Exchange SAI Supreme Audit Institution SOE State-Owned Enterprise ROSC Report on Observance of Standards and Codes TOR Terms of Reference UNDP United Nations Development Program A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S ACKNOWLEDGMENTS This assessment of accounting and auditing standards and practices in a public sector review was carried out in active collaboration with the Government of Bangladesh and various stakeholders, particularly the offices of the Comptroller and Auditor General and the Controller General of Accounts. Discussions were also held with senior officers of the Ministry of Finance, the Financial Management Academy, and the Financial Management Reform Project. A workshop was held in Dhaka on August 14, 2006 by the Government of Bangladesh (GoB), and the participating donors, to review the draft report and decide on actions to be taken. In particular, the following individuals provided their time and expertise to this assessment: Asif Ali, Comptroller and Auditor General Rezauddin M. Chowdhury, Controller General of Accounts (retired on May 3, 2006) Salauddin Ahmed Chowdhury, Director General, Financial Management Academy Arastoo Khan, Joint Secretary (Budget) MOF and Project Director, FMRP Chowdhury Saleh Ahmed, Director General, Monitoring Cell, Finance Division Al-Mamoon Md. Sanaul Huq, Director General, Mission Audit Directorate (appointed Controller General of Accounts since May 4, 2006) Md. Abul Kashem, Director General, Directorate of Local Government Audit Md. Nurun Nabi Khan, Director General, Directorate of Commercial Audit Mohammed Moslem Uddin, Director General, Foreign Aided Project Audit Directorate Md. Abdul Baset Khan, Director General, Railway Audit Directorate Gour Chandra Roy, Director General, Directorate of Civil Audit Md. Zakir Hossain, Director General, Defence Audit Directorate Mohammad Muslim Chowdhury, Deputy Secretary, Debt Management, Ministry of Finance Abdus Samad, Additional Controller General of Accounts Niaz Rahman, Director IT, C&AG's office Mike Frazer, Team Leader, Financial Management Reform Project (FMRP) Claude Lalonde, Component Leader FMRP Audit Component The review was conducted through a participatory process that involved these stakeholders whose responses to the diagnostic questionnaires were especially useful, as were the reports and information available from the Financial Management Reform Project (FMRP) and recent World Bank assessments of public financial management. The draft report developed after a consultative workshop was provided to the Government of Bangladesh for comment. The Comptroller and Auditor General found the draft report to be a well thought presentation on the current status and future needs of the accounting and auditing practices in Bangladesh and provided comments to improve the practicability of the report for adoption C O U N T R Y R E P O R T PAGE 5 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G in Bangladesh. The Controller General of Accounts agreed with the need for the gradual adoption of IPSAS and provided corrective comments for adoption. The various detailed comments provided by the agencies have been incorporated in to this final version of the report The team of advisors and development partners also contributed greatly to the early stages of the concept note and framework development, as well as drafting of earlier reports for this study, which ultimately is intended to cover all the countries of the South Asia Region: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. Twoexperiencedlocalconsultantswereheavilyinvolvedintheassessment:NasimHyder,aformerSenior Deputy Comptroller and Auditor General with an extensive background as a senior-level government accountant in Bangladesh and other countries; and Iftekhar Hossain, who has a strong commercial sector background as a partner in ACNABIN & Co., Chartered Accountants. The members of the Task Team responsible for writing this report were Task Team P. K. Subramanian, Lead Financial Management Specialist Burhanuddin Ahmed, Senior Financial Management Specialist Ronald Points, Lead Consultant, Accounting Michael Jacobs, Lead Consultant, Auditing Advisors Simon Bradbury, Manager, Loans Department, World Bank David Goldsworthy, Operations Manager, International Technical Cooperation Program, UK National Audit Office Noel Hepworth, Chartered Institute of Public Finance and Accountancy, London Abdul Mudabbir Khan, Fiscal Affairs Department, International Monetary Fund Ian Mackintosh, Chairman, UK Accounting Standards Board N.R. Rayulu, Additional Comptroller & Auditor General (International Relations), Office of the CAG of India; Nominee of Asian Organization of Supreme Audit Institutions (ASOSAI) Paul Sutcliffe, Technical Director, International Public Sector Accounting Standards Board, International Federation of Accountants Development Partner Collaborators David Biggs, Financial Management Advisor, UK Department for International Development David Gray, Governance Advisor, UK Department for International Development Kathleen Moktan, Asian Development Bank PAGE 6 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S CONTENTS Executive Summary 9 I. Introduction 17 II. Public Sector Accounting 19 A. Institutional Framework 19 (1) Accounting Laws and Regulations 19 (2) Education and Training 20 (3) Code of Conduct 21 (4) Public Sector Accountant Arrangements 22 B. Accounting Standards as Practiced 22 (1) Setting Public Sector Accounting Standards 22 (2) Financial Reports in State-Owned Enterprises 24 III. Public Sector Auditing 25 A. Institutional Framework for Public Sector Auditing 25 (1) Institutional Framework 25 (2) Setting Auditing Standards 26 (3) Ensuring Independence 27 (4) Qualifications and Skills of the Auditors 28 (5) Training 29 (6) Auditor Competence 29 (7) Quality Assurance 29 B. Auditing Standards as Practiced 29 (1) Audit Planning 30 (2) Audit Supervision 30 (3) Reviewing Internal Management Control Procedures 30 (4) Audit Evidence 31 (5) Analyzing Financial Statements 31 (6) Reporting on Financial Statements 31 (7) Reporting on Fraud 33 (8) Reporting on Compliance 33 IV. Action Plans 34 C O U N T R Y R E P O R T PAGE 7 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G Annex A. Methodology of the Assessment 40 Annex B. Accounting and Auditing Standards 42 International Public Sector Accounting Standards 43 International Education Standards 43 International Financial Reporting and International Accounting Standards 44 INTOSAI Code of Ethics and Auditing Standards 45 International Standards on Auditing 48 Annex C. Bangladesh Auditing and Accounting Legislation 49 Annex D. Benefits of Accrual Accounting 52 Annex E. Selection and Training for Accountants and Auditors 55 Supplementary Table of Standards and Gaps 57 PAGE 8 C O U N T R Y R E P O R T EXECUTIVE SUMMARY 1. This assessment of public sector accounting and auditing is meant generally to help implement more effective Public Financial Management (PFM) through better quality accounting and public audit processes in Bangladesh and to provide greater stimulus for more cost effective outcomes of government spending. More 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 against the internationally developed norms of financial reporting and auditing; (b) to assess prevailing variances; (c) to chart paths for improving the accordance with international standards; and (d) to provide a continuing basis for measuring improvements. 2. Adoption of international standards for accounting and auditing provides the basis for competent financial reporting and transparency. The International Public Sector Accounting Standards Board (IPSASB) of the International Federation of Accountants (IFAC) has developed a core set of accrual-based International Public Sector Accounting Standards (IPSAS) and also a comprehensive IPSAS on the cash basis of accounting. These IPSAS establish an authoritative set of independent international financial reporting standards for governments and others in public sector organizations. The study has taken the international standards as axiomatic with any acceptable options incorporated in the standards. The study has not assessed whether Bangladesh should adopt a limited version of the standards, as the processesofdevelopingthosestandardshavealreadyconsideredanyacceptableoptions,buttheydonot override authoritative national standards issued by governments, regulatory or professional accounting bodies. Application of IPSAS by national authorities will support developments in public sector financial reporting directed at improving decision-making, financial management, and accountability, and it will be an integral element of reforms directed at promoting social and economic development. The IPSASB has also developed guidance on the transition from cash- to accrual-based reporting. The traditional emphasis on cash accounting has been found inadequate through failure to recognize true costs, and all assets and liabilities. Cash accounting can too easily neglect asset management, accumulating arrears, future liabilities (e.g. pensions), and contingent liabilities (e.g., guarantees). 3. Annex A explains the methodology used for the assessment. The actions that need to be taken as recommended by this assessment are summarized below. 4. Bangladesh Should Adopt International Public Sector Accounting Standards. Along with the adoption of IPSAS, the Cash Basis IPSAS accounting standard should be applied first, with subsequent gradual implementation of the accrual IPSAS. The International Federation of Accountants issues the IPSAS. Annex B gives a general description of IFAC and a listing of the IPSAS. At the present C O U N T R Y R E P O R T PAGE 9 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G time, Bangladesh does not comply with the Cash Basis IPSAS, Part 1, in its annual accounts. The Government of Bangladesh (GoB) needs to restructure the present cash basis reporting to conform fully to the Cash Basis IPSAS. Appropriate authorization from the Comptroller and Auditor General (CAG) would be sufficient since no legislation is necessary. A transition path should be developed to moving towards gradual presentation of the full accrual information that would best serve the general financial statement required by Section 7 of the CAG (Additional Functions) Act. Annex C includes the text of the CAG Act. Benefits from adopting accrual reporting are set out in Annex D. 5. A Supplementary Table of Standards and Gaps of this report provides a matrix detailing the current standards, the present position, and options for improvement. A summary of the accounting issues is shown in Table ES1. TABLE ES1. SUMMARY OF ACCOUNTING STANDARDS ISSUES IN BANGLADESH Standard Current status Action to move towards the international standard 1. Does the Public No. There is an accounts Ministry of Finance (MOF) has issued an order Sector Accounting Law code. requesting the Controller General of Accounts adopt IPSAS? (CGA) to do the needful to prepare GOB financial statements in accordance with IPSAS Cash Basis. The first set of IPSAS-based statements for the core ministries (excluding specialized organizations) will be produced for (fiscal year) FY07-08. The first set of IPSAS-based statements for the specialized organizations will be produced for FY09-10. Action will be taken by early 2007 to form a committee including the CAG, CGA, MOF, and Professional Accounting Institutes, to work on an action plan to adopt accrual accounting in an appropriate timeframe as well as the legal formalities to be complied with. 2. Is the education and No Training in Accounts is MOFinconsultationwithCGAandCAGistoset training of accountants provided by FIMA. up an Education Standards Working Committee in accord with IES? (including relevant service cadres, academicians and professional accounting institutions) to chalkouttheeducationandtrainingrequirement for public sector accountants and auditors. Action is to be taken by MOF by March 2007 together with a Terms of Reference (TOR) for the Committee. 3. Does the ICAB Partially. CAG Code The IFAC Code should be a basis for a code Code of Ethics match is consistent with the specifically suited to public sector accountants. international standards? InternationalOrganizationof The CGA is to form a committee by March 2007 Supreme Audit Institutions to examine this. (INTOSAI) Code. PAGE 10 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S Standard Current status Action to move towards the international standard 4. Is there a body to There is no dedicated body. CAG, CGA and ICAB are to use the same prescribe public sector CGA does this but not as committee established for accounting standards accounting standards? a Standards Board. CAG is for this purpose. Audit Committees in public responsible for prescribing sector entities should assure compliance. The the form and manner of Financial Reporting Council should monitor maintaining the public state-owned enterprises. accounts. 5. Are the financial No. The Cash Basis IPSAS The CGA component of the Financial statements in accord for financial statements is Management Reform Project can take care of with the IPSAS not followed. this matter. standard? As the Govt. moves towards adoption of the IPSAS Cash Basis standards, the cash flow statement will be consistent with the standards. The concept of CFO managing the financial management function in each government entity will be examined by MOF. MOF to come up with a policy paper on implementation by June 2007. The FMRP might be able to provide assistance aftercompletionofthelogicalframeworktasksof theproject.Astudyisneededfortheapplication of International standards for the departmental accounts and their integration into the civil accounts in accordance with IPSAS. 6. Is the statement No. This information is As the Government moves towards adoption of of cash receipts and currently presented in the IPSAS Cash Basis standards, the cash flow payments in IPSAS formats inconsistent with statement will be consistent with the IPSAS form? the IPSAS. forms. 7. Are accounting No. Statements of There is a need to state the accounting policy policies and explanatory accounting policy are not and the basis on which the accounts are prepare notes required? provided in the budget or d. The current notes will be reviewed and made accounts documents. consistent with IPSAS as im plementation proceeds. 8. Are other disclosures Partly. Financial statements It would be necessary to reduce the reporting in accord with IPSAS? are not available within 6 lag; and to disclose some further information. months of the reporting Need to comply with the disclosure aspects of period; some items are not the treatment of foreign currency. This will be disclosed, and presentation reviewed and made consistent with IPSAS as does not meet some implementation proceeds. transparency requirements. A study of how to incorporate DOSA, CONTASA, SAFE and IMPREST system project accounts is needed for their integration into the civil accounts in accordance with IPSAS and to enable effective auditing. C O U N T R Y R E P O R T PAGE 11 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G Standard Current status Action to move towards the international standard 9. Does the government No. MOF has issued an order requesting the CGA issue a consolidated to do the needful to prepare GOB financial financial statement statements in accordance with the IPSAS Cash which consolidates all Basis. The first set of IPSAS-based statements controlled entities? for the core ministries (excluding specialized organizations) will be produced for FY07-08. The first set of IPSAS-based statements for the specialized organizations will be produced for FY09-10. A committee will be formed by March 2007 including CAG, CGA, MOF, and Professional Accounting Institutes, to work on an action plan to adopt accrual accounting as well as the legal formalities to be complied with. 6. There is a need to adopt the IFAC-issued International Standards on Auditing (ISA) in addition to the INTOSAI Auditing Standards already adopted and auditing manuals and procedures should meet these standards. The CAG of Bangladesh has already adopted an auditing standard that was developed on the basis of the INTOSAI Auditing Standards. (See Annex B for a general description of INTOSAI and a listing of the INTOSAI and IFAC auditing standards). Application of ISA can be improved by the preparation of a more modern audit manual as per the current reform program. Implementation of the standards by the CAG Office needs improvement. These standards require adequate professional competence, organizational independence and adequate resources and systems. Inadequacies in resourcing will need to be dealt with if skills are to be made adequate to meet these standards. Provision of greater discretion to the CAG in the areas of financing and personnel policies will be needed and this will require a new National Audit Act. There is a need to improve audit impact. Audit recommendationsandobservations gounheededinfartoomanyinstances. Theapplicationofthe audit findings needs to be greatly improved through a mix of strategies. Greater transparency through more interaction with the media along with more focused and effective report-writing and report follow up processes would increase the incentives for auditees to take action on audit findings. 7. The Supplementary Table of Standards and Gaps at the end of this report shows the consequences of the present position for each component of the standards, and the options for improvements that would bring Bangladesh into closer conformance with the international standards. A summary of auditing issues are shown in Table ES2. PAGE 12 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S TABLE ES2. SUMMARY OF AUDITING STANDARDS ISSUES IN BANGLADESH Standard Current status Action to move toward international standards 1. Is the SAI statutory Partially. Some additional A draft of a new audit law is expected from the framework in accord powersneedtobeestablished CAG by early 2007. with the needs of the by legislation as set out INTOSAI Auditing below. Standards? 2. Is there a body to Not an exclusive one. The The CAG and ICAB are to form a consultative prescribe public sector CAG does this rather than a committeetoprovideguidanceonissuesrelating auditing standards? prescribed body. to the implementation of auditing standards. 3. Have INTOSAI and The CAG has adopted The consultative committee will be used to IFAC audit standards the INTOSAI Auditing considerISAanddevelopformalimplementation been adopted? Standards. notes for guidance.1 The CAG has noted that INTOSAI has adopted the ISAs and will follow this in Bangladesh. 4. Has a code of ethics Yes equivalent to the INTOSAI standards been adopted? 5. Is the accountability Yes. process in the SAI in accord with INTOSAI Auditing Standards? 6. Does the SAI No. The SAI needs improved The National Audit Law should match legal framework legislation, especially for its international models.2 CAG should note that meet the INTOSAI personnel policies, funding INTOSAI has adopted the ISAs and will follow Auditing Standards arrangements, reporting this in Bangladesh for independence and processes,offenceclauses,and powers? the procedures for appointing an Auditor General. 7. Does education and No. Staff needs more Recruitment should require an accounting training of auditors professional training. The degree for auditors. Training programs should accord with INTOSAI current recruitment criteria lead to professional certification. The CAG is and IES? for the financial auditors to set up an Education Standards Working in the CAG Office do not Committee (including relevant service cadres, give sufficient attention to academicians and professional accounting accountingqualificationsand institutions) to chalk out the education and as a result there is too much training requirement for public sector auditors. pressure on government This will be done by June 2007 together with training institutions Terms of Reference. to provide specialist knowledge. 1 Bangladesh should nominate individuals to the Reference Panel of the INTOSAI Working Group on Financial Audit Guidelines, which is a subcommittee of the INTOSAI Auditing Standards Com mittee. 2 Guidance is provided by A Model National Audit Office Act, The Association of Chartered Certified Accountants, UK, 2004. C O U N T R Y R E P O R T PAGE 13 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G Standard Current status Action to move toward international standards 8. Is the SAI equipped No. Improvedmethodologies The SAI needs improved technologies for audit with the audit methods areinprocessofdevelopment. office management as well as audit processes and technologies to There is a lack of appropriate and reporting. The reform program for the meet the INTOSAI technology to support a CAG that is being provided under the Financial standards? management information Management Reform Program will support the system for the SAI. necessary improvements in this area, and the items 9 through 18 below. 9. Does the SAI have Partly. Implementation is a A Quality Assurance Function is being the quality assurance problem. established under FMRP to provide improved programs to meet research facilities. international standards? 10. Does the process Partly. Improved Systems-based audit techniques are being to plan the audits meet methodologies are in process developed under FMRP which will enable the international standards? of development. CAG to audit ministries as entities. Training is being piloted from June 2006. Auditors will be trained in preparing planning files that meet INTOSAI standards by June 2007. 11. Does the process No. Working paper systems The systems-based audit techniques being to supervise the audits and audit methodologies do developed under FMRP will do this. meet international not currently enable effective standards? supervision. Improved methodologies are in process of development. 12. Does the process to No. Improvedmethodologies The systems based audit techniques being evaluate the reliability are in process of developed under FMRP will do this. of internal control meet development. international standards? 13. Does the process Partly. The testing for The systems-based audit techniques being used in audits to assess compliance should be more developed under FMRP will do this. compliance with laws statistically based. Improved meet international methodologies are in process standards? of development. 14. Does the audit Partly. The evidence needs to The audit work is to be re-ordered under FMRP process, used to obtain be better organized. around an evidence based opinion in line with evidence for supporting INTOSAI Certification audit standards. conclusions, meet international standards? 15 Does the audit No. Current financial The FMRP opinion related audit methodology analyze the financial accounts are not in a form to will be implemented and completed by July statements to establish allow this. 2007 around evidence based opinion. whether acceptable accounting standards for financial reporting and disclosure are complied with? PAGE 14 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S Standard Current status Action to move toward international standards 16. Does the auditor No. The CAG signs the The FMRP will have developed processes for the prepare an audit accounts but does not CAG to audit ministries as entities and express opinion on the financial provide an opinion in the an audit opinion as required by the INTOSAI statements in a form form required. The audit standards by July 2007. that accords with methodology needs to international standards? change so as to support an opinion that meets international standards and provide specific assurance about the adequacy of the accounts. The audit work must be planned to meet the confidence level that is implicit in the audit opinion, and which underpins the level and extent of audit testing required in order to express that opinion. 17. Does the Partly. Audits focus on The FMRP will arrange for audit work to consideration of fraud examining transactions for report on propriety and effectiveness of public and error in an audit discrepancies and regulatory expenditure. Forensic audit training is needed. of financial statements breaches but not in a accordwithinternational sufficiently systematic way. standards? 18. Is the process for Partly. Governance Under FMRP there is a goal for Ministries taking action on audit requirements are inadequate. responding to audit reports more promptly with recommendations For State Owned Enterprises corrective measures implemented. Better quality sufficiently effective (SOEs),therearemajordelays reportsaretobeproducedwithmoremeaningful to meet international in issuing audit reports, long observations by June 2007. standards? standing unresolved audit queries, and general lack of response to audits. There is dissatisfaction with the audit reportsgoingtothePAC.CAG reports could be improved in terms of communicating clear objectives, addressing more relevant problems, making more effective recommendations and involving more extensive audit work. C O U N T R Y R E P O R T PAGE 15 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G 8. Public Financial Management (PFM) should be improved through a more ambitious and comprehensive reform program. Public financial management relies on a comprehensive and timely accounting and financial reporting system that is supported by competent assurance from a professional audit function, certifying that the system is working properly and that the information is reliable. Current enforcement of adequate compliance with financial regulations in the general budget sector and corporate governance in the public enterprise sector falls well short of satisfactory standards. The PFM Indicators Review conducted by the World Bank showed the need for a fully coordinated reform strategy for the full cycle of PFM, from budget formulation to legislative scrutiny and remedial action. The Financial Management Reform Program reported that: TheongoingfinancialmanagementreformsandbroaderpublicsectorreformsinBangladeshhavereceived strong support and advocacy from the Finance Division of the Ministry of Finance arising from a need to improve macroeconomic management and budget planning and execution, as well as a desire to move from detailed scrutiny of ministries' spending activities to an emerging focus on performance and other budgetary reforms. This is intended to lead to an increased delegation of authority to line ministries and a greater focus on public expenditure outcomes and value for money. Accountability, based on the formal adoption of international accounting and auditing standards, is a timely step for the Government to take now, and their implementation needs to be supported by a much more comprehensive PFM reform program, if any substantial impact on the problems in Bangladesh is to be gained. In addition, a modern integrated government financial management system needs to be implemented to support a comprehensive PFM reform program. 9. Improve accounting and auditing skills. Improvements in compliance with international standards needs properly trained staff. Current programs are providing some support for this. However, significant structural changes in recruitment and training arrangements are essential to move toward adequate standards. 10. PrepareaPFMsurvey. ThepreparationofaPFMindicatorssurveyprovidesthebasisformonitoring progress in adopting and applying international standards. The World Bank has prepared an update as of June 20053 and occasional updates will enable progress to be assisted if required by the Government of Bangladesh. 3Bangladesh Review of Institutional Arrangements for Public Expenditure, Financial Management and Procurement, World Bank, Dhaka, June 2005. PAGE 16 C O U N T R Y R E P O R T INTRODUCTION 1. Thepurposeofthisassessmentofpublicsectoraccountingandauditingisprimarilytohelpimplement more effective Public Financial Management (PFM) in Bangladesh, through better quality accounting and publicauditprocessesandatthesametime,tocreategreaterstimulusformorecosteffectiveoutcomesof thegovernment'sspending. Themainobjectivesinthisregardare(a)toprovidethecountry'saccounting and audit authorities and other interested stakeholders with a common, well-founded knowledge regarding the status of local practices as against the international standards of financial reporting and auditing; (b) to assess the prevailing variances; (c) to chalk out ways of improving their accordance with international standards; and (d) to provide a continuing basis for measuring improvements. 2. As part of the general support program in South Asia for assessment and improvement of public sector accounting and auditing, the World Bank with the cooperation of member governments is conducting a Review of Public Sector Accounting and Auditing Practices in member countries. In conducting this assessment, diagnostic questionnaires were developed with appropriate references to the PFM Performance Measurement Framework4 designed by the Public Expenditure and Financial Accountability (PEFA) Program5. These questionnaires were used to gather substantial insight into country performance with regard to the external auditing and financial statement reporting using PFM indicators. Annex A discusses the methodology used for conducting the assessment in this report. 3. The diagnostic questionnaire was used to gather information on national standards and practices for accounting, financial reporting, and auditing in the government budget sector and in the state-owned enterprise sector. Conducted in cooperation with country authorities, the diagnostic questionnaires incorporate the principles contained in the public sector accounting and auditing standards promulgated by International Organization of Supreme Audit Institutions (INTOSAI) and International Federation of Accountants (IFAC). Annex B summarizes the frameworks that were used in this assessment. The responses in these questionnaires stimulated further discussions among the World Bank team and country authorities. These discussions examined accounts and audit reports and working papers as a means to explore the quality of processes and products. 4The PFM Performance Measurement Framework has been developed as a contribution to the collective efforts of many stakeholders to assess and develop essential PFM systems, by providing a common pool of information for measurement and monitoring of PFM performance progress, and a common platform for dialogue. 5 The PEFA Program is a partnership among the World Bank, the European Commission, the UK Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the International Monetary Fund, and the Strategic Partnership with Africa. A Steering Committee, comprising members of these agencies, manages the Program. A Secretariat is located at the World Bank in Washington, DC. C O U N T R Y R E P O R T PAGE 17 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G 4. Historically, the system of maintenance of public accounts in Bangladesh, dates back to the mid- 1800s,thedaysofBritish-occupiedIndia.Sinceitsindependencein1971,Bangladeshhasstartedaseries of reforms in the accounting and auditing fields in association with donor agencies. The Accounts Code was revised and updated in September 1996 with the assistance of the United Kingdom Department for International Development (DFID). During 2000 and 2001, the Audit Code, Audit Standard, Code of Ethics, and manuals for the various audit directorates were developed and updated with the assistance of United Nations Development Program (UNDP), DFID, and The Netherlands Government. 5. The analysis in this report has been conducted concurrently with the PFM reform program, including the Financial Management Reform Program that started in April 2003 with the following aims: To strengthen auditing practice and information for improved parliamentary scrutiny of public financial management; To enhance aggregate fiscal management and to develop the regulatory framework for financial and performance management; To enhance resource allocation, utilization and financial management, resource management, and performance management capacity in line ministries; To enhance financial management reporting systems; To build the capacity of the Financial Management Academy (FIMA) as a sustainable center of excellence for financial management training in governance. 6. Thefive-yearFinancialManagementReformProgramisfundedbytheDFIDandtheRoyalNetherlands Government. Its logical framework will assist Bangladesh in adopting IPSAS and INTOSAI Auditing Standards in the following ways: Financial management reporting capacity will be strengthened in line ministries and CGA. A plan will be implemented for cash-based financial reporting in conformity with international standards with disclosure on accrual elements. Audit work will be re-ordered around evidence-based opinion in line with INTOSAI Auditing Standards. The CAG will audit ministries as entities and express an audit opinion as required by the INTOSAI Auditing Standards. The systems-based audit manual will enable the CAG to audit ministries as entities. 7. There needs to be a more comprehensive plan for Bangladesh to adopt the Cash Basis IPSAS as part of a longer-term program to adopt accrual-based reporting for each government entity in accordance with the IPSAS. There should be a plan for the CAG to adopt the International Standards on Auditing (ISA), as well as the more high-level INTOSAI Auditing Standards in the day-to-day auditing work. PAGE 18 C O U N T R Y R E P O R T PUBLIC SECTOR ACCOUNTING A. Institutional Framework 8. The institutional framework should include adherence to International Accounting Standards (IAS) and the use of qualified accounting staff to provide timely, relevant, and reliable financial information that is needed to support all fiscal and budget management, decision making, and reporting processes. The diagnostic questionnaires that were used in this assessment have facilitated the collection of information on the current arrangements, and the apparent gaps in the present accounting laws and regulations of Bangladesh; education and training of public sector accountants; application of a code of conduct; and numbers and characteristics of public sector accountants. (1) Accounting Laws and Regulations 9. Bangladesh accounting laws and regulations should make mention of International Accounting Standards. Current regulations are prescriptive about the maintenance and compilation of accounts, but there is no current prescription for the adoption of IPSAS. There is a need for the finance legislation to be brought up to date, including the requirements for the general budget sector to develop a consolidated financial statement on an accrual basis (with a time-bound road map to first adopt the Cash Basis IPSAS and move gradually to a full accrual basis) in accordance with IPSAS. 10. Better technology and an integrated financial management system are needed for improved public sector accounting. The basic technology currently available in Bangladesh does not support the accurate accounting that is needed for reliable reporting. Accounts are primarily compiled manually; mistakes and miscoding are common and reconciliations rare. Audit reports by the CAG show substantialaccountingdeficienciesandmajordifficultiesinrectifyingtheproblemsidentified.Manyaudit objections remain outstanding for long periods. Oversight agencies expend substantial time and effort in following up audit discrepancies, often to little effect. Computerization is proceeding slowly under the Financial Management Reform Program. A more expanded reform of the accounting system is needed to be effective. A more integrated financial management system that combines the core functions budget, treasury, payroll and human resources, debt management, pensions, and the provident fundwould be a major step toward effective financial management in the public sector. 11. Bangladesh should adopt the Cash Basis IPSAS. Bangladesh has not adopted the cash basis IPSAS but discussions with relevant authorities have ind icated a capability and also a willingness to do so if further expert advice verifies that it is practical. Under the 2003 standard for financial reporting C O U N T R Y R E P O R T PAGE 19 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G under the cash basis of accounting, the International Federation of Accountants (IFAC) Public Sector Committee now called the International Public Sector Accounting Standards Board (IPSASB) recognizes the right of governments and national standard setters to establish guidelines and accounting standards for financial reporting. The IPSASB considers that the Cash Basis IPSAS is an important step forward in improving the consistency and comparability of financial reporting and encourages its adoption. As a first step, the CGA has advised that the data is available to present a summary of the annual accounts in the form of the Cash Basis IPSAS. The ICAB should cooperate with CAG to form a consultative committee to provide guidance on issues relating to certification audit and to adopt accounting and auditing standards in the public sector. 12. All government departments should eventually use the Cash Basis IPSAS in preparing financial statements, and then move toward the accrual IPSAS. Preparing financial statements, first in accordance with the Cash Basis IPSAS, and then in accordance with the Accrual IPSAS, would make the administration and each department more accountable for transparent reporting; the budget sector and in due course each department should follow this path.6 The requirements of Section 7 of the CAG (Additional Functions) Act for an annual general financial statement do not meet the requirements of IPSAS and the legal accountability requirements are impaired. An extract of the CAG (Additional Functions) Act is given in Annex C. 13. The Government of Bangladesh can be assisted in moving in an appropriate timeframe fromtheCashBasisIPSAStotheAccrualIPSASbyutilizinganIFACstudyonthetransitional path to accrual IPSAS.7 The study has four main parts: Introduction: Chapters 1-3 address general planning and project management issues. GeneralFinancialReportingIssues:Chapters4and5dealwiththeselection,development,andapproval of accounting policies and issues associated with the definition and identification of reporting entities. Financial Elements: Chapters 6-8 outline the broad steps required for the identification, recognition, measurement, and disclosure of assets, liabilities, revenues, and expenses. The broad approaches discussed could be adapted and applied to particular items. Specific Topics: Chapters 9-15 highlight implementation issues associated with four specific accrual IPSAS,andprovideguidanceinrelationtoaselectionoftopicsnotaddressed,oronlypartiallyaddressed, by existing IPSAS. (2) Education and Training 14. Current practices for selection and training of government accountants do not provide accounting staff with satisfactory skills. It is important that accounting staff be adequately skilled at their functions. The recruitment and training arrangements should provide for this in the most efficient and effective manner. Accounting and audit specialist recruitment should require special criteria for selection, rather than the current standard general entry into the Bangladesh Civil Service. Also, 6 Quality and timeliness of annual financial statements is performance indicator No. 25 in the PFM performance measurement framework supported by the Bank and other development agencies. 7 Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities, International Federation of Accountants Public Sector Committee Study 14, December 2003. PAGE 20 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S considering the substantial private sector in this field, there are many opportunities for interchange and intake at all levels through a more open service. Details of the selection and training processes are discussed in Annex E. 15. A more focused recruitment process designed to meet the separate knowledge needs of the CAG and the CGA would be more efficient and more effective. The current practices of general recruitment to different cadres are not conducive to the development of professional services. Expert recruitment practices are common in developed Supreme Audit Institutions (SAI) and can readily be adopted by a more independently structured Bangladesh Supreme Audit Institution. This would need the Accounts and Audit Cadre and the Subordinate Accounts Service to be considered separately within or outside the Bangladesh Civil Service. The CGA noted that skills development through professional training of the Audit and Accounts Service is preferred within the Bangladesh Civil Service to convert the Audit and Accounts Service into a professional body. This will require a long term program of training. It also requires recruitment of staff with appropriate accountancy qualifications to build expertise more efficiently in the longer term. 16. More effective in-house training requires curricula more attuned to international standards. The syllabus of the Financial Management Academy (FIMA) does not cover all areas recommended by INTOSAI and IFAC. One corrective option could be for FIMA to link with public sector-oriented professional accountancy institutions, like the UK Chartered Institute of Public Finance and Accountancy (CIPFA). CIPFA has developed an international public sector audit and accountancy qualification program designed to meet public sector training needs in developing countries. The training arrangement is meant to bring qualified staff up to more productive working levels as quickly as possible. The learning materials, the initial training support, and the quality control arrangements would be provided by CIPFA; but the qualification would be provided from the outset jointly with the local institution, perhaps FIMA. The learning materials take into account international audit and accounting standards as required for adoption by public sector organizations. Both the UK Association of Certified Chartered Accountants (ACCA) and the UK Chartered Institute of Public Finance and Accountancy (CIPFA) could be considered for the provision of the skills development program. 17. A phased and progressive education program combined with practical experience is needed.FollowingtheCIPFAprogram,acertificatecouldbeofferedonpartialcompletionoftheprogram, with a diploma being awarded on its full completion. The students would enter with varied levels of experience.Somestudentswouldbenewlyappointedstaffwithasuitableeducationalachievement;they should ideally enter the program after one year's practical experience. Other staff with an appropriate range of experiences but not the required level of formal educational attainment would also benefit from the program. Vocational-based approaches should be used. Before students are awarded the diploma (butnotthecertificate)theywouldberequiredtocompletespecifiedworkexperienceandearnworkplace accreditation for demonstrated applied skills and knowledge. (3) Code of Conduct 18. A code of conduct for accountants based on IFAC or ICAB codes is needed. Issued on April 3, 2001, the CAG Code of Ethics is directed toward government auditors. There are disciplinary rules and a general code of conduct for public servants under which disciplinary actions are taken. However C O U N T R Y R E P O R T PAGE 21 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G a code for accountants based on the fundamental principles of the IFAC-issued Code of Conduct for Professional Accounts needs to be implemented and observed. There should be arrangements to ensure that accountants confirm on a regular basis that they are operating in accordance with the code. (4) Public Sector Accountant Arrangements 19. The Chief Financial Officer (CFO) function needs upgrading. For each public sector body that prepares annual accounts, there should be a responsible CFO function for maintaining systems of internal financial controls that manage risks and for preparing the accounts for signature by the Chief Accounting Officer (CAO). Current audits are not effective in ensuring that the management's systems of internal financial controls work well. The audit results are not being translated into remedial action sufficiently well, and the CFO function needs to be upgraded in line departments and other agencies to make this necessary control possible. The CAO system is currently under development through the computerization program and the MOF and CGA provides administrative control. The extent to which these developments enable the CFO functions to be implemented effectively without identifying specific officers as CFOs should be examined in due course. B. Accounting Standards as Practiced 20. The diagnostic questionnaires collected information on the current arrangements and the apparent gaps in Bangladesh for setting public sector accounting standards and for presenting financial reports. Out of this exercise came recommended activities that will help bring local standards in line with international standards. (1) Setting Public Sector Accounting Standards 21. More formalized arrangements are needed for setting accounting standards for the public sector. The Accounts Code sets out the detailed rules for the cash-based system of accounts. It is issued and amended from time to time by the CAG under his constitutional function of prescribing the form and manner in which public accounts are to be kept (Annex C). With the promulgation of IPSAS by IFAC, it would be appropriate for the CAG, who has constitutional responsibility for the form of accounts, to adopt IPSAS as the standard for the public sector. 22. Table 1 identifies the current position and the steps required if the Cash Basis IPSAS are to be adopted. TABLE 1. REQUIRED STEPS FOR ADOPTING CASH BASIS IPSAS Requirements Current deficiencies Activity required to adopt Cash Basis IPSAS Financial statements The Bangladesh reporting A statement of cash receipt and payment as presented in the IPSAS structure focuses on per the Cash Basis IPSAS can be prepared consolidatedfundandpublic using existing information from the accounting accounts and the Cash records. Also, for each entity (i.e. ministry and Basis IPSAS for financial department), an additional statement in accord statements is not followed. with the Cash Basis IPSAS can be prepared. This would require some restructuring of the CGA computerized reporting formats. PAGE 22 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S Requirements Current deficiencies Activity required to adopt Cash Basis IPSAS Information to IPSAS All this information is This work requires restructuring of the CGA in statement of cash available on the government computerized reporting formats. receipts and payments reporting system, but is in formats inconsistent with IPSAS. Accounting policies Statements of accounting Thereisaneedtostatetheaccountingpolicyand and explanatory notes policy are not provided in the basis on which the accounts are prepared. the budget or accounts documents. General considerations Financial statements are not It would be necessary to reduce the reporting available within 6 months of lag; and to disclose further information. Reporting period the reporting period, cash balances that are available Adequacy of information about the for use and cash balances entity that are subject to external restrictions and undrawn Presentation borrowing facilities are not of comparative disclosed, and presentation information does not meet certain transparency requirements. Correction of errors The nature of errors, the Further training and better supervision of disclosed amount of the correction, accounts officer would be needed to correctly and the fact that classify expenditures and disclosure of errors Nature of error comparative information and restatement of comparative information has been restated or that it where practicable. Amount of correction is impracticable to do so, is Comparative not disclosed. information restated Consolidated financial The government budget A statement of cash receipt and payment as per statements sector is a reporting entity, the Cash Basis IPSAS can be prepared. Further as well as an economic steps will be needed to include controlled entity. entities as per IPSAS and as per Section 7 of the CAG (Additional Functions) Act. Treatment of foreign The government largely Need to comply with the disclosure aspects of currency cash receipts, follows IPSAS except for the the treatment of foreign currency. payments,andbalances disclosure aspects. treated in compliance with IPSAS Effective date of The government has not Need for the CAG to formally adopt IPSAS and Part I and transitional formulated a migration path for the CGA to prepare an implementation provision compliance. and timeline for achieving plan and timeline, setting out specific steps cash basis IPSAS, Part I, to be taken including disclosure, if necessary, compliance. of application of the transitional provision (i. e. full compliance achieved within 3 years) for reporting periods beginning on a date within 3 years of first adoption of IPSAS. C O U N T R Y R E P O R T PAGE 23 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G (2) Financial Reports in State-Owned Enterprises 23. Audit reports from a sample of state-owned enterprises were examined for the purpose of this assessment (Table 2). The examination revealed that all but one (Bangladesh Chemical Industries Corporation) had qualified and another (Bangladesh Power Development Board) disclaimed audit opinions. The following accounts were examined: TABLE 2. STATE-OWNED ENTERPRISES EXAMINED State-owned enterprise Year end for independent audit Bangladesh Chemical Industries Corporation (BCIC) 2004 Chittagong Urea Fertilizer Limited (Unit of BCIC) 2004 Bangladesh Sugar and Food Industries Corporation 1997/8 Bangladesh Oil, Gas & Mineral Corporation (Petrobangla) - entity 2004 Bangladesh Oil, Gas & Mineral Corporation ­ consolidated 2004 Titas Gas Transmission & Distribution Company Ltd. 2004 (unit of Petrobangla) Bangladesh Petroleum Corporation (BPC) 2001/2 Eastern Refinery Limited (Unit of BPC) 2004 Dhaka Water Supply and Sewerage Authority 2004 Bangladesh Power Development Board 2003 Chittagong Port Authority 2001/2 Agrani Bank 1999/0 Bangladesh Biman 2001/2 24. Corporate governance in the statutory authority sector needs to be improved through more effective audit committees. Reporting for state-owned enterprises (SOEs) is delayed, not transparent, and not in accordance with International Accounting Standards. Oversight should be improved for SOE reporting. 25. The proposed Financial Reporting Council (FRC) should include commercial government authorities in its scope. These accounts were reported upon by independent chartered accounting firms and then reviewed by the CAG. The Government audit reports did not mention that the annual accounts were qualified by the independent auditors. It was not apparent that accounts were made public. Action is needed to ensure that state-owned enterprises amend their accounts in accordance with audit findings so that true and fair accounts may be issued for general public scrutiny within a stipulated period consistent with that of listed enterprises. The FRC proposed by the Bank's Report on Observance of Standards and Codes of Accounting and Auditing (ROSC Accounting & Auditing) would be able to monitor these matters. PAGE 24 C O U N T R Y R E P O R T PUBLIC SECTOR AUDITING A. Institutional Framework for Public Sector Auditing 26. Effectivescrutinybythelegislaturetoensureeffectiveimplementationoffiscalandexpenditurepolicies needs comprehensive and competent external audits that are underpinned by International Standards on Auditing.8 The environment for an effective supreme audit institution requires a comprehensive approach to public financial management. Supreme audit institutions are not stand-alone institutions. They are part of a PFM architecture that includes budgeting, accounting, internal control, audit and legislative oversight, and appropriate government response. Improving the way the SAI functions is integral to providing information for improving the overall PFM system. All of these requirements are supported by the INTOSAI and IFAC standards. These should be utilized by the Comptroller and Auditor General. 27. The diagnostic questionnaires collected information describing current arrangements and the apparent gaps in the country for the following areas: Institutional framework for the supreme audit institution, Process for setting auditing standards, Use of code of ethics or conduct, Arrangements to ensure accountability in the supreme audit institution, Arrangements to ensure independence, Arrangements to ensure adequate skills and qualifications for the auditors, Arrangement for providing training, Arrangements to ensure a desired level of competence for the auditors, Arrangements for quality assurance. Those areas with significant scope for improvement are discussed below. (1) Institutional Framework 28. A National Audit Act providing a better statutory framework in accord with INTOSAI auditing standards would be needed for a modern audit function. The Constitution establishes theComptrollerandAuditorGeneral.AnnexCgivestherelevantextractsfromPartVIIIoftheConstitution 8Scope, quality, and follow-up of external audit is performance indicator No. 26 in the PFM performance measurement framework supported by the Bank and other development agencies. C O U N T R Y R E P O R T PAGE 25 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G relating to the Comptroller and Auditor General. The CAG Additional (Functions) Act 1974 and the CAG (Additional Functions) (Amendment) Act 1975 provide for the Comptroller and Auditor General to certify appropriation and finance accounts, and audit the accounts of statutory public authorities. The Comptroller and Auditor General is appointed by the President for a term of five years or until the appointee attains the age of sixty-five, whichever is earlier. The Bangladesh Supreme Audit Institution is seeking to enhance its independence by having improved legislative authority for its personnel policies and funding arrangements. Both of these measures would significantly enhance independence. The Bangladesh Supreme Audit Institution is currently under-resourced for conducting the level and extent of auditing to meet its statutory obligations. Although the diagnostic questionnaire did not assess this issue, any resource problems will only be exacerbated as the Bangladesh Supreme Audit Institution endeavors to audit all of the entities under its mandate, and to appropriately respond to the challenges of improved financial reporting over coming years. More efficient auditing processes can alleviate the problem. 29. A new National Audit Act should contain an adequate Offences Clause. Full cooperation by auditees and ethical behavior by auditors are essential for effective audit. Current legislation is inadequate to respond to significant lack of cooperation. A culture of impunity must be strictly guarded against. (2) Setting Auditing Standards 30. The new National Audit Act should adopt International Standards on Auditing. The CAG has adopted INTOSAI Auditing Standards. These standards are too general for adequate guidance. The International Standards on Auditing are needed for effective guidance for the audit staff to improve the audit work. The IFAC International Audit and Assurance Standards Board (IAASB) is progressively rolling out International Standards on Auditing. INTOSAI is moving from maintaining its own auditing standards toward supporting IAASB in the development of its auditing standards, especially so that the IAASB Auditing Standards appropriately reflect the interests of the international public sector audit community. 31. InternationalStandardsonAuditingrepresentbestinternationalpracticesfortheauditingprofession, particularly in areas of fundamental auditing practice such as: audit evidence, documentation, audit materiality, fraud, audit errors, audit opinions, audit planning, control environment assessments, and supervising the work of audit staff. 32. The Comptroller and Auditor General has decided that Bangladesh can benefit from adopting the INTOSAI Auditing Standards as the core of its own auditing standards, as these are internationally PAGE 26 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S recognized, credible and readily available. However, it is generally recognized that INTOSAI Auditing Standards need the underpinning support of the more detailed International Standards on Auditing. With the decision by INTOSAI to adopt ISA and to prepare public sector practice notes where necessary to support each ISA, the way is open for Bangladesh to use the more comprehensive ISA to guide its work. This is quite appropriate as Bangladesh is a member of INTOSAI and its regional group, the Asian Organization of Supreme Audit Institutions (ASOSAI). (3) Ensuring Independence 33. A new National Audit Act is needed to provide effective independence. Some of the core principles of SAI independence that were set out by INTOSAI are only partially, if at all, met by the current legislative and administrative framework: financialandmanagerialautonomyandtheavailabilityofappropriatehuman,material,andmonetary resources; independence of the SAI Heads, including security of tenure and legal immunity in the normal discharge of their duties; sufficiently broad mandate and full discretion in the discharge of SAI functions; and the freedom to decide on the content and timing of their reports, and to publish and disseminate them; and existence of effective follow-up mechanisms on SAI recommendations. 34. More statutorily independent arrangements for staffing and for establishing the budget should be put in place by legislation. The CAG officers and staff are under the administrative control of the Finance Division of the Ministry of Finance, which controls the appointment, promotion, and disciplinary action for the CAG employees. The CAG independence as upheld in the Constitution has been jeopardized by this practice. The CAG should be separated from the executive branch of the government and be attached with the Parliament. The Comptroller and Auditor General should be vested with more financial powers. Also in practice the annual budget of the audit department needs to be placed and approved by the Ministry of Finance, like other ministries. The more preferable arrangement, is for budget approval to involve a Parliamentary Committee considering the CAG budget and audit plans prior to approval by the Parliament. 35. A more open appointment process for the post of Comptroller and Auditor General, which addresses term of service and ranking status, is preferred by modern audit legislation. The Comptroller and Auditor General is appointed from among senior officers of the Audit and Accounts Cadre. The Comptroller and Auditor General is appointed by the President for a term of five years or until the appointee attains the age of sixty-five, whichever is earlier. Canada and the United States provide for 10-year terms to professionally qualified persons. In Bangladesh, the current practice of a CAG tenure of five years does not provide a long enough term to initiate and implement reforms. In the Bangladesh Warrant of Precedence, the Comptroller and Auditor General is ranked sixteenth, which is below the rank of Cabinet Secretary. In many countries, including Canada, this position is of an equivalent rank to that of a minister or a federal justice. Model legislation for an audit office prepared in the United Kingdom recommends the same status of chief justice.9 9A Model National Audit Office Act. The Association of Chartered Certified Accountants, London, 2004. C O U N T R Y R E P O R T PAGE 27 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G 36. Legislation should provide an environment in which resources are adequate for the full regularity and performance audit mandate. The Comptroller and Auditor General enjoys full power to conduct audits and prepare reports. However available capacity is such that the office mainly conducts regularity and compliance audits. In this type of audit, vouchers and records of the financial transactions of public officials or organizations are verified one by one. A more explicit authority for the full range of current and prospective types of audit conducted by INTOSAI members would be more appropriate in authorizing functions and funding. The scope of the CAG audit is narrowly focused. Supreme audit institutions normally conduct audits on the overall financial management performance issues of state bodies. 37. Legislation should provide an environment in which the Comptroller and Auditor General is free to arrange for appropriate involvement with the media on audit reports. In Bangladesh, the audit report is never discussed with the media, unlike the practice in other countries. The Legislature's Public Accounts Committee (PAC)discusses the report but the press or media are not invited. Some public sector rules have been cited as restricting civil servants from making comments to the press. The model legislation reads, "The Auditor General or his/her authorized staff may provide comments and interviews to the press or other media on the subject of any published audit reports."10 This communication may need to be in Bangla, the national language. 38. Improved PAC and departmental administrative processes are needed for following up audit reports.11 There is an enormous backlog by the Public Accounts Committee in hearing the audit objections. To some degree, improved audit methodology and report writing skills will help, but the fundamental processes for scrutiny need reform. Audit Committees and corporate governance arrangements for departments and agencies need to be reformed along with improvements to the audit processes.BetterprotocolsmaybeusefulbetweentheComptrollerandAuditorGeneralanddepartments to ensure that access to the relevant records for auditors is made easy, and disruption to departments is kept at a minimum. In addition, better protocols would help ensure that draft audit reports are reviewed quickly by departments for accuracy and fairness and that the CAG and departments, as far as possible, reach agreement on reports before they are made public. Similar protocols are needed between Parliament and the CAG covering, for example, how audit reports will be handled. (4) Qualifications and Skills of the Auditors 39. When recruiting, qualifications should include an accounting degree for all appointees. The current recruitment criteria for financial auditors in the CAG Office do not give sufficient attention to accounting qualifications. As a result there is too much pressure on government training institutions to provide specialist knowledge. This has not been effective. Since there is a comprehensive tertiary education sector in Bangladesh, which includes accounting, as well as a professional accounting body, these resources should be used. A PAC survey found that both professional qualifications and training programs were ways of improving auditors' competence.12 10A Model National Audit Office Act. The Association of Chartered Certified Accountants, London, 2004. 11Legislative scrutiny of external audit reports is performance indicator No. 28 in the PFM performance measurement framework supported by the Bank and other development agencies. 12Chowdhury, Innes, Kouhy. 2005. "The Public Sector Audit Expectations Gap in Bangladesh. Managerial Auditing Journal Vol. 20 No. 8, page 900. PAGE 28 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S (5) Training 40. The CAG Office should operate a continuing professional development program for the professional personnel. Improved facilities are needed and the adequacy of proposals in the Financial Management Reform Project should be reviewed. (6) Auditor Competence 41. It is necessary to strengthen the technical and professional competence of the CAG Office and improve its operational capacity to produce and disseminate quality audit reports that meet international standards and serve the need of the stakeholders. The CAG Officehashistoricallyconcentratedmainlyonthecomplianceauditsneededtosupportproperexecution of the budget. It now needs to improve resources and training to build in-house capacity for financial, performance, forensic, environmental, and information technology audits. The CAG Office needs to create a core group of professional accountants for the certification of public accounts. Substantially enhanced technology support is needed both in hardware and software terms. Attention needs to be paid to ethical behavior. A 2005 study of PAC expectations found that PAC members saw room for improvement in the ethical standards of the CAG auditors.13 (7) Quality Assurance 42. Improved structures and indexing of more comprehensive audit working papers would help audit supervisors to ensure that audits meet specified standards of quality. The Comptroller and Auditor General periodically issues directions to the Audit Directorates for quality assurance,mentioningsupervision,review,andotherrequirementsoftheauditstandards.TheBangladesh Audit Standards cover audit planning, compliance with laws, internal control, audit evidence, and others which are being followed by the Audit Directorates. Findings, conclusions, and recommendations have been given importance, taking into consideration the materiality and significance of the audit findings. But due to lack of trained personnel and inadequate training facilities, the audit standards cannot be implemented properly, and audit working papers do not come up to the standards required. A robust quality assurance regime needs to be in place and operating effectively. Such a scheme should ensure that audit reports are systematically reviewed for quality by line managers before being released. There should be a subsequent internal independent review process, operating on a sample basis, to ensure that the work of all auditors is reviewed on a regular basis. Such a system can be further enhanced through the use of external reviewers. B. Auditing Standards as Practiced 43. The diagnostic questionnaires have collected information about the current arrangements for the audit methodology and the apparent gaps in the country in the following areas: audit planning, audit supervision, 13Chowdhury, Innes, Kouhy. 2005. "The Public Sector Audit Expectations Gap in Bangladesh. Managerial Auditing Journal Vol. 20 No. 8, page 900. C O U N T R Y R E P O R T PAGE 29 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G reviewing internal controls, reviewing compliance with laws, ensuring adequate audit evidence is collected, analyzing whether the financial statements accord with accounting standards, preparing audit 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 44. In the final results of an audit, the company's chief executive should be accountable for the fiscal and expenditure policies and their implementation. Consultations between the auditor and the senior management of the auditee are helpful at the planning stage to provide senior level focus. Engagement with the auditors and their results is likely to assist with implementation of audit findings. More consultation is needed. 45. The new audit methodology manual should introduce more comprehensive planning requirements based on the specific objectives of the audits. The current introduction of improved audit methods under the Financial Management Reform Project will make the audit process more meaningful. The present process appears to be driven by the `necessity of issuing reports' and is not having enough impact on (a) strengthening internal control, and (b) dealing with the malpractices. Generally the planning for compliance audit that is focused on assessing regularity needs to be more systematic when conclusions are drawn about the relative frequency of errors or the correctness of an overall figure for expenditure. (2) Audit Supervision 46. A more comprehensively structured working paper system is needed for the audit to attain the normal audit objectives regarding the validity of transactions. Current supervision is hampered by inadequate working paper systems and an outdated audit methodology. (3) Reviewing Internal Management Control Procedures 47. Introduce a modern audit manual that includes the audit risk model. Bangladesh has had some earlier projects to develop its auditing methods with the assistance of specialist consultants and supreme audit institutions in other countries. However, it is apparent that there is a lack of an adequate audit methodology. This manifests itself in a number of ways: It is not clear what kind of audit opinion is being sought. There is insufficient assessment of audit risk and the appropriate level and extent of audit responses necessary in order to address those risks. Also, there is no concept of audit confidence--the confidence level that is implicit in the audit opinion and that underpins the level and extent of audit testing required in order to express that opinion. PAGE 30 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S 48. An audit methodology should clearly outline the following points: the audit confidence level; the requirements for audit planning, audit work papers, and audit reporting; how audit materiality is determined and what is an acceptable level of audit risk and confidence; how to develop an appropriate mix of audit work to address the audit risks. The audit should be completed by a process which provides a method for summarizing audit errors and evaluating them against audit materiality. (4) Audit Evidence 49. The audit methodology and necessary supporting working papers should be more precisely defined in a manual of procedures. Audit evidence is crucial to an effective audit and currently is poorly documented, filed, and referenced. The technical assistance under the Financial Management Reform Project is aimed at improving this. (5) Analyzing Financial Statements 50. Audit testing needs to be more directed toward forming an audit opinion. There is a need to expand testing to undertake full financial attest audits covering all financial assertions. A financial audit should result in an audit opinion being expressed on the complete set of financial statements ratherthansolelyanidentificationofthedeficienciesfoundinthetransactionsscrutinized.Auditreports currently reflect the scope of the work undertaken in the audit. The audit report is heavily compliance based, identifying regulatory breaches in the compilation of the financial reports. Reports focus on discrepancies found and regulatory breaches. There is little systems work and control testing. Thus, recommendations for systems or control improvements do not appear. Although significant deficiencies are noted, the underlying causes of these deficiencies are not explored so that the remedies can be recommended. Such audit reports do not give much assurance. (6) Reporting on Financial Statements 51. Audits of State-owned enterprises need to improve their impact. Independent chartered accounting firms examined the audit reports of 9 state-owned enterprises and reviewed the audit reports of the Commercial Audit (CA) Department of the CAG that had been submitted to Parliament. The following problems emerged in the reviewed reports: Delayed issuance The table shows typical delays: Ministry Year Issue date Industries 2001/2 January 2004 Energy and MR Division 2000/1 April 2003 Finance Division 1999/0 January 2002 Civil Aviation & Tourism 2000/1 April 2003 C O U N T R Y R E P O R T PAGE 31 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G Long outstanding audit objections The reports below refer to unresolved audit objections, dating as far back as 1973-74 in the case of Finance Division. Audit objections Ministry Period Total Resolved Unresolved Industries 1971/72 to 351 7 344 2000/01 Energy and MR Division 1985/86 to 1999/2000 82 1 81 Finance Division 1973/74 to 1998/99 367 04 363 Civil Aviation & Tourism 1981/82 to 1999/2000 83 0 83 Late preparation of independent audited accounts The relevant Ordinance or Memorandum and Articles of Association sets a time limit for submission of annual audited accounts, but this is not being complied with by many enterprises as per the table below. Ministry Number of CA audit reports Number of CA audit required reports not received Energy and MR Division 62 27 Finance Division 36 31 Civil Aviation & Tourism 17 14 Civil Aviation & Tourism 2000/1 April 2003 Lack of response by auditees/ministries SOEs do not respond to the audit queries. Need for technically qualified audit staff All the SOEs are of a specialized nature and the quality of the audit work would be considerably improved if technically qualified personnel were made part of the audit team, or provide training to the CAG auditors. The latter approach would also require the CAG auditors to be grouped by industry specialization. Need for more revenue audit The CAG audit is limited to expenditures and does not include audit of the sales and revenue cycle. Given the importance of the revenue cycle of the public utilities revenue should be in the scope of audit work. PAGE 32 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S 52. The requirements of ISA 700, The Auditor's Reports on Financial Statements, for the form of the audit opinion should be adopted in full. The audit scope and audit opinion paragraphs for the Consolidated Financial Statements 2004 do not contain the degree of detail set by ISA 700 in paragraphs 12 to 15. This creates doubts as to the auditing standards used for the work. It also does not categorically state whether the audit provides a reasonable basis for the opinion, and if the audit was planned and performed to obtain reasonable assurance about whether the financial statements are free of material misstatement. The scope statement notes the limitations of staff, other resources, and time available. This would normally be read by a user of the accounts as an indication that the audit opinion on the accounts is thereby qualified although this is not clearly stated in the opinion paragraph. (7) Reporting on Fraud 53. There is a need for forensic audit training. Much of the audit reporting seems to relate to fraudulent behavior. The Bangladesh Supreme Audit Institution does not focus on fraud in a sufficiently systematic way. The International Standards on Auditing provide guidance for the auditor on tests for fraud. ISA 240, The Auditor's Responsibility to Consider Fraud and Error in an Audit of Financial Statements, requires the auditor to perform procedures to obtain information that is used to identify the risks of material misstatement due to fraud. In addition, it requires the auditor to evaluate the design of the entity's related controls, including relevant control activities, and determine whether they have been implemented. The ISA 240 also requires the auditor to inform the auditee's management and it's Board of any fraud and of the failure in its internal control that led to the fraud. The auditor's report should identify the action that the entity is taking about the fraud. A PAC study found that both the CAG auditors and the PAC members agreed that the audits did not confirm that no material fraud exists.14 (8) Reporting on Compliance 54. Improve the effectiveness of the audit report by more efficient action on enforcement of corporate governance requirements through the Public Accounts Committee and agency audit committees. Under the present process, the CAG submits a yearly report to the President. The Public Accounts Committee of the Parliament calls the auditee/ministry for response to the unresolved audit findings. To reduce the number of unresolved audit objections to be submitted to the President, it wouldbehelpfuliftheCAGcouldworkwiththeEstablishmentDivisiontoidentifymeasurableviolations and introduce financial and administrative penalties that can be used to correct the violation and reduce repetition. The PAC survey found that CAG reports could be improved in terms of communicating clear objectives, addressing more relevant problems, making more effective recommendations, and involving more extensive audit work. The CAG Office and Pubic Accounts Committee should review current reporting arrangements, including consideration of the legal requirements governing reporting. It may be possible for the CAG to produce a more balanced portfolio of reports during the year and/only bring to the attention of the PAC major concerns which can not be dealt with at the departmental level or which appear to have system-wide implications. This process could involve staff retraining. The staff would need to shift from a focus on identifying cases when rules have not been followed correctly, to suggesting ways in which control systems can be affordably strengthened, thus reducing the risks of errors ­ accidental or deliberate. 14Chowdhury, Innes, Kouhy. 2005. "The Public Sector Audit Expectations Gap in Bangladesh. Managerial Auditing Journal Vol. 20 No. 8. C O U N T R Y R E P O R T PAGE 33 ACTION PLANS Accounting Standards Current status Action to be taken to move towards Issue international standards 1. Has the Public Sector No. There is an accounts code. There is need for a financial management Accounting Law adopted law adopting IPSAS full accrual on a gradual IPSAS? basis and for the CGA to develop a transition path15 first adopting IPSAS Cash and then full IPSAS. The accounting software and hardware infrastructureneedstobeupgradedtosupport the accounting system needed. MOF has issued an order requesting the CGA to do the needful to prepare GOB financial statements in accordance with IPSAS cash basis. The first set of IPSAS based statements for the core ministries (excluding specialized organizations) will be produced for FY07-08. The first set of IPSAS-based statements for the specialized organizations will be produced for FY09-1 0. Form a committee including CAG, CGA, MOF, Professional Accounting Institutes, to work on an action plan to adopt accrual accounting as well as the legal formalities to be complied with. 2. Does education and No. Training in Accounts is Recruitment and education and training training of accountants provided by FIMA. standards should be revamped to match the accord with IES? need for qualified accountants. MOF in consultation with the CGA, CAG is to set up an Education Standards Working Committee (including relevant service cadres, academicians and professional accounting institutions) to chalk out the education and training requirement for public sector accountants and auditors. Action is to taken by MOF by March 2007 together with a TOR for the Committee. 15IFAC Public Sector Study 14 provides transition guidance. PAGE 34 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S Accounting Standards Current status Action to be taken to move towards Issue international standards 3. Does the ICAB Code of Partially. CAGCodeisconsistent The IFAC Code should be a basis for a code Ethicsmatchinternational with the INTOSAI Code. specificallysuitedtopublicsectoraccountants standards? after thorough examination by the CAG. The CGA is to form a committee to do this by March 2007. 4. Is there a body to There is no dedicated body. Audit Committees in public sector entities prescribe public sector The CGA does this but not should ensure compliance. The Financial accounting standards? as a Standards Board. CAG is Reporting Council should monitor state responsible for prescribing the owned enterprises. form and manner of maintaining The CGA, CAG and ICAB should establish the public accounts. a public sector committee to establish standards. The CAG, CGA and ICAB are to use the same committee established for accounting standards for this purpose. 5. Are the financial No. The Cash Basis IPSAS for A statement of cash receipt and payment as statements in accord with financial statements is not per the Cash Basis IPSAS can be prepared the IPSAS standard? followed. usingexistinginformationfromtheaccounting records. CFO with accounting qualifications should manage accounting functions in each government entity. The CGA component of the Financial Management Reform Project can take care of this matter. As the Govt. moves towards adoption of the IPSAS Cash Basis standards the cash flow statement will be consistent with the standards. The concept of CFO managing the financial management function in each government entity will be examined by MOF. MOF to come up with a policy paper on implementation by June 2007. 6.Isthestatementofcash No. This information is currently This work requires restructuring of the CGA receipts and payments in presentedinformatsinconsistent computerized reporting formats. IPSAS form? with the IPSAS. As the Government moves towards adoption of the IPSAS Cash Basis standards the cash flow statement will be consistent with the IPSAS forms. 7. Are accounting policies No. Statements of accounting There is a need to state the accounting policy and explanatory notes policy are not provided in the and the basis on which the accounts are required? budget or accounts documents. prepared. The current notes will be reviewed and made consistent with IPSAS as implementation proceeds. C O U N T R Y R E P O R T PAGE 35 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G Accounting Standards Current status Action to be taken to move towards Issue international standards 8. Are other disclosures Partly. Financial statements are It would be necessary to reduce the reporting in accord with IPSAS? not available within 6 months lag; and to disclose some further information. of the reporting period; some Need to comply with the disclosure aspects of items are not disclosed, and the treatment of foreign currency. presentationdoesnotmeetsome This will be reviewed and made consistent transparency requirements. with IPSAS as implementation proceeds. 9. Does the government No. Astatementofcashreceiptandpaymentasper issue a consolidated the Cash Basis IPSAS can be prepared. Further financial statement which steps will be needed to include controlled consolidatesallcontrolled entities. Presently all government receipts and entities? expenditures are being incorporated into the Annual Financial Accounts with the exception of assets and liabilities. MOF has issued an order requesting the CGA to do the needful to prepare GOB financial statements in accordance with the IPSAS cash basis. The first set of IPSAS based statements for the core ministries (excluding specialized organizations) will be produced for FY07-08. The first set of IPSAS based statements for the specialized organizations will be produced for FY09-10. A committee will be formed by March 2007 including CAG, CGA, MOF, and Professional Accounting Institutes, to work on an action plan to adopt accrual accounting as well as the legal formalities to be complied with. Auditing Standards Current status Action to be taken to move towards Issue international standards 1. Is the SAI statutory Partially. Some additional The draft of a new audit law is being prepared framework in accord with powers need to be established by and is expected from the CAG by early 2007. the needs of the INTOSAI legislation as set out below. Auditing Standards? 2. Is there a body to There is no dedicated body. The The CAG and ICAB are to form a consultative prescribe public sector CAG does this rather than a committee to provide guidance on issues auditing standards? prescribed body. relating to the implementation of auditing standards,especiallyinrelationtocertification audit and asset accounting and audit. PAGE 36 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S Auditing Standards Current status Action to be taken to move towards Issue international standards 3. Have INTOSAI and The CAG has adopted the The consultative committee will be IFAC audit standards been INTOSAI Auditing Standards. used to consider ISA and develop formal adopted? implementation notes for guidance.16 The CAG has noted that INTOSAI has adopted the ISAs and will follow this in Bangladesh. 4. Has a code of ethics Yes equivalenttotheINTOSAI standards been adopted? 5. Is the accountability Yes. process in the SAI in accord with INTOSAI Auditing Standards? 6. Does the SAI No. The SAI needs improved The National Audit Law should match legal framework legislation, especially for its international models.17 meet the INTOSAI personnel policies, funding Auditing Standards arrangements, reporting CAG should note that INTOSAI has adopted for independence and processes, offence clauses, and the ISAs and will follow this in Bangladesh. powers? the procedures for appointing an Auditor General. 7. Does education and No. The staff needs more Recruitment should require an accounting training of auditors accord professional training. The current degree for auditors. Training programs should with INTOSAI and IES? recruitment criteria for the lead to professional certification. financial auditors in the CAG Office do not give sufficient The CAG is to set up an Education Standards attention to accounting Working Committee (including relevant qualifications and as a result service cadres, academicians and professional there is too much pressure on accounting institutions) to chalk out the government training institutions education and training requirement for public to provide specialist knowledge. sectorauditors.ThiswillbedonebyJune2007 together with Terms of Reference. It should be noted that the matter requires Parliamentary and Government policy decisions. 8. Is the SAI equipped No. Improved methodologies are The SAI needs improved technologies for with the audit methods intheprocessofbeingdeveloped. audit office management as well as audit and technologies to meet There is a lack of technology processes and reporting. The reform program the INTOSAI standards? to support a management for the CAG that is being provided under the information system for the SAI. Financial Management Reform Program will support the necessary improvements in this area and the items 9 through 18 below. 16Bangladesh should nominate individuals to the Reference Panel of the INTOSAI Working Group on Financial Audit Guidelines, which is a subcommittee of the INTOSAI Auditing Standards Committee. 17Guidance is provided by A Model National Audit Office Act, The Association of Chartered Certified Accountants, UK, 2004. C O U N T R Y R E P O R T PAGE 37 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G Auditing Standards Current status Action to be taken to move towards Issue international standards 9. Does the SAI have Partly. A QA Committee is Improved working paper guidance and the quality assurance working at the CAG Office automation combined with more effective programs to meet and the Audit DG Offices. supervision and quality review processes are international standards? Implementation is a problem. needed. A Quality Assurance Function is being established under FMRP to provide improved research facilities. 10. Does the process Partly. Improved methodologies The testing for compliance should be more to plan the audits meet are in the process of being statistically based to enable valid conclusions international standards? developed. to be drawn about systems of control and specific system defects to be identified for remedy. Systems-based audit techniques are being developed under FMRP which will enable the CAG to audit ministries as entities. Training is being piloted from June 2006. Auditors will be trained in preparing planning files that meet INTOSAI standards by June 2007 11. Does the process to No. Working paper systems A revised working paper structure should be supervise the audits meet and audit methodologies do implemented together with revised rules for international standards? not currently enable effective audit supervision. supervision. Improved methodologies in the process The systems-based audit techniques being of being developed through the developed under FMRP will do this. entity wide audits being piloted. 12. Does the process to No. Improved methodologies Themethodologyneedstoberiskandsystems evaluate the reliability are in the process of being based. The Government has issued an Internal of internal control meet developed.. Controls Manual that can be used to improve international standards? the situation. 13. Does the process Partly. Thetestingforcompliance Themethodologyneedstoberiskandsystems used in audits to assess should be more statistically based. compliance with laws based. Improved methodologies meet international are in the process of being The systems based audit techniques being standards? developed. developed under FMRP will do this. 14.Doestheauditprocess Partly. The evidence needs to be More rigorous plans for audit testing need to usedtoobtainevidenceto better organized. be developed. support conclusions meet international standards? The systems-based audit techniques being developed under FMRP will do this. The audit work is to be re-ordered around an evidence based opinion in line with INTOSAI Certification audit standards PAGE 38 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S Auditing Standards Current status Action to be taken to move towards Issue international standards 15 Does the audit analyze No. Current financial accounts The adoption of Cash Basis IPSAS would the financial statements are not in a form to allow this. enable the CAG to do this. to establish whether acceptable accounting The FMRP opinion related audit methodology standards for financial will be implemented and completed by July reporting and disclosure 2007 around an evidence-based opinion. are complied with? 16 Does the auditor No. The CAG signs the accounts Themethodologyneedstobeaimedatforming prepare an audit but does not provide an audit an opinion on the truth and fairness of the opinion on the financial opinion in the form required. financial statements so that the CAG can sign statements in a form that The audit methodology needs an opinion in accordance with ISA 700 `The accords with international to be changed to support an Auditor's Reports on Financial Statements'. standards? opinion that meets international standards and provides specific The FMRP will have developed processes for assurance about the adequacy the CAG to audit ministries as entities and of the accounts. The audit work express an audit opinion as required by the must be planned to meet the INTOSAI standards by July 2007 confidence level that is implicit in the audit opinion, and which underpins the level and extent of audit testing required in order to express that opinion. 17.Doestheconsideration Partly. Audits focus on examining The testing needs to be more statistically of fraud and error in transactions for discrepancies based. Forensic audit training is needed. an audit of financial and regulatory breaches but not statements accord with in a sufficiently systematic way. The FMRP will arrange for audit work to international standards? report on propriety and effectiveness of public expenditure. 18. Is the process for Partly. Governance requirements Governance requirements in the SOEs need taking action on audit are inadequate. For SOEs there to be upgraded. The PAC needs additional r e c o m m e n d a t i o n s are major delays in issuing audit support and the audit reporting needs to be sufficiently effective reports,longstandingunresolved improved to suggest ways in which control to meet international audit queries, and general lack systems can be affordably strengthened standards? of response to audits. There is to reduce the risks of errors ­ accidental or dissatisfaction with the audit deliberate. reports going to the PAC. CAG reports could be improved in Under FMRP there is a goal for ministries terms of communicating clear responding to audit reports more promptly objectives, addressing more with corrective measures implemented. Better relevant problems, making more quality reports are to be produced with more effective recommendations and meaningful observations by June 2007. involving more extensive audit work. C O U N T R Y R E P O R T PAGE 39 Annex - A METHODOLOGY OF THE ASSESSMENT As part of the general support program in South Asia for the assessment and improvement of public sector accounting and auditing against international standards, the World Bank, with the cooperation of member governments, is conducting a Review of Public Sector Accounting and Auditing Practices in member countries. The development of the PFM Performance Measurement Framework18 by the Public Expenditure and Financial Accountability (PEFA) Program19 has opened the way for a diagnostic tool to be developed, that is referenced to the accounting and auditing standards of IFAC and INTOSAI, and other relevant international benchmarks. This exercise provides substantial insight into country performance in regard to the external auditing and financial statement reporting FM indicators. A set of 6 questionnaires are used to collect relevant information on country practices: 1. The public sector accounting environment-collecting basic information about financial laws and standards-setting arrangements, educational requirements for accountants compared with IFAC International Education Standards, ethical requirements compared with the IFAC Code of Ethics for Professional Accountants. 2. Public sector accounting practices for the general budget sector if using the cash basis of accounting- compared with the requirements of the Cash Basis International Public Sector Accounting Standards (IPSAS). 3. Public sector accounting practices for the general budget sector if using the accrual basis of accounting-compared with the IPSAS requirements that govern accrual reporting for the public sector. 4. Public sector auditing environment compared with the provisions of the INTOSAI Code of Ethics and the INTOSAI general standards. 5. PublicsectorauditingpracticescomparedtotherequirementsoftheINTOSAIfieldstandards and reporting standards, and the IFAC International Standards on Auditing. 18The PFM Performance Measurement Framework has been developed as a contribution to the collective efforts of many stakeholders to assess and develop essential PFM systems, by providing a common pool of information for measurement and monitoring of PFM performance progress, and a common platform for dialogue. 19 The PEFA Program is a partnership among the World Bank, the European Commission, the UK's Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the International Monetary Fund and the Strategic Partnership with Africa. A Steering Committee, comprising members of these agencies, manages the Program. A Secretariat is located in the World Bank in Washington, DC. PAGE 40 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S 6. Accounting and auditing practices for state-owned enterprises-compared with the requirements of the International Financial Reporting Standards (IFRS) and International Standards on Auditing that govern commercial reporting. The responses to the diagnostic questionnaires, prepared by the relevant country authorities with the help of in-country experts retained by the World Bank, are supplemented by a due diligence review conducted by members of a World Bank task team. Various documents are examined as part of the review, including relevant laws, codes of 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 of advisors before examination by the World Bank country team. The draft is then shared with the Governmentforresponsebeforefinalization. Discussionswillalsobeheldwiththerelevantstakeholders to devise an implementation plan to address the way forward with a view to minimizing deviations from international standards. C O U N T R Y R E P O R T PAGE 41 Annex - B ACCOUNTING AND AUDITING STANDARDS This contains a summary of 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. TheIASBisanindependent,privatelyfundedaccountingstandard-setterbasedinLondon,UK.TheBoard members come from nine countries and have a variety of functional backgrounds. In the public interest, IASB is committed to developing a set of high quality, understandable, and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. In addition, the IASB co-operates with national accounting standard-setters to achieve convergence in accounting standards around the world. The IASB issued International Accounting Standards (IAS) from 1973 to 2000. Since 2000, they have issued International Financial Reporting Standards (IFRS). IFAC has its headquarters in New York, USA and is 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 in the preparation of general purpose 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 based on IAS to the extent appropriate for the public sector. IFAC also has establishedtheInternationalAuditingandAssuranceStandardsBoard(IAASB)toprepareandpromulgate International Standards on 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 in the 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 is working with the IAASB to prepare practice notes explaining the application of each ISA in the public sector.20 20Working Group on Financial Audit Guidelines, INTOSAI Auditing Standards Committee, Swedish National Audit Office, 2004. PAGE 42 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S The various standards are listed on the following pages. International Public Sector Accounting Standards IPSAS 1, Presentation of Financial Statements IPSAS 2, Cash Flow Statements IPSAS 3, Net Surplus or Deficit for the Period, Fundamental Errors and Changes in Accounting Policies IPSAS 4, The Effects of Changes in Foreign Exchange Rates IPSAS 5, Borrowing Costs IPSAS 6, Consolidated Financial Statements and Accounting for Controlled Entities IPSAS 7, Accounting for Investments in Associates IPSAS 8, Financial Reporting of Interests in Joint Ventures IPSAS 9, Revenue from 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, Segment Reporting IPSAS 19, Provisions, Contingent Liabilities and Assets IPSAS 20, Related Party Disclosures IPSAS 21, Impairment of Non-cash Generating Assets Cash Basis IPSAS, Financial Reporting under the Cash Basis of Accounting International Education Standards IES 1, Entry Requirements to a Program of Professional Accounting Education IES 2, Content of Professional Accounting Education Programs IES 3, Professional Skills IES 4, Professional Values Ethics and Attitudes IES 5, Practical Experience Requirements IES 6, Assessment of Professional Capabilities and Competence IES 7, Continuing Professional Development IES 8, Competence Requirements for Audit Professionals C O U N T R Y R E P O R T PAGE 43 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G International Financial Reporting and International Accounting Standards IFRS 1, First-time Adoption of International Financial Reporting Standards IFRS 2, Share-based Payment IFRS 3, Business Combinations IFRS 4, Insurance Contracts IFRS 5, Non-current Assets Held for Sale and Discontinued Operations IAS 1, Presentation of Financial Statements IAS 2, Inventories IAS 7, Cash Flow 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, Accounting for Government Grants and Disclosure of Government Assistance IAS 21, The Effects of Changes in Foreign Exchange Rates IAS 23, Borrowing Costs IAS 24, Related Party Disclosures IAS 26, Accounting and Reporting by Retirement Benefit Plans IAS 27, Consolidated and Separate Financial Statements IAS 28, Investments in Associates IAS 29, Financial Reporting in Hyperinflationary Economies IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions IAS 31, Interests in Joint Ventures IAS 32, Financial Instruments: Disclosure and Presentation see also: See also Financial Instruments - other issues IAS 33, Earnings per Share IAS 34, Interim Financial Reporting IAS 36, Impairment of Assets IAS 37, Provisions, Contingent Liabilities and Contingent Assets PAGE 44 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S IAS 38, Intangible Assets IAS 39, FinancialInstruments:RecognitionandMeasurementseealso:SeealsoFinancialInstruments - other issues IAS 40, Investment Property IAS 41, Agriculture INTOSAI Code of Ethics and Auditing Standards Code of ethics Integrity. Auditors have a duty to adhere to high standards of behavior (e.g. honesty and candidness) in the course of their work and in their relationships with the staff of audited entities. Independence, objectivity and impartiality. The independence of auditors should not be impaired by personal or external interests. There is a need for objectivity and impartiality in the work and the reports, which should be accurate and objective. Conclusions in opinions and reports should be based exclusively on evidence obtained and assembled in accordance with the SAI's auditing standards. Professional secrecy. Auditors should not disclose information obtained in the auditing process to third parties except for the purposes of meeting the SAI's statutory responsibilities. Competence. Auditors must not undertake work which they are not competent to perform. Basic postulates for the auditing standards (a) The SAI should consider compliance with the INTOSAI auditing standards in all matters that are deemed material. Certain standards may not be applicable to some of the work done by SAIs, including those organized as Courts of Account, nor to the non-audit work conducted by the SAI. The SAI should determine the applicable standards for such work to ensure that it is of consistently high quality. (b) TheSAIshouldapplyitsownjudgmenttothediversesituationsthatariseinthecourseofgovernment auditing. (c) With increased public consciousness, the demand for public accountability of persons or entities managing public resources has become increasingly evident so there is a need for the accountability process to be in place and operating effectively. (d) Development of adequate information, control, evaluation and reporting systems within the government will facilitate the accountability process. The Management is responsible for correctness and sufficiency of the form and content of the financial reports and other information. (e) Appropriate authorities should ensure the promulgation of acceptable accounting standards for financial reporting and disclosure relevant to the needs of the government, and audited entities should develop specific and measurable objectives and performance targets. (f) Consistent application of acceptable accounting standards should result in the fair presentation of the financial position and the results of operations. C O U N T R Y R E P O R T PAGE 45 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G (g) The existence of 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 of the audited entity to ensure that controls are in place and functioning to help ensure that applicable statutes and regulations are complied with, and that probity and propriety are observed in decision-making. The auditor should submit proposals and recommendations where controls are found to be inadequate or missing. (h) Legislative enactments would facilitate the co-operation of audited entities in maintaining and providing access to all relevant data necessary for a comprehensive assessment of the activities under audit. (i) All audit activities should be within the SAI's audit mandate.* (h) Legislative enactments would facilitate the co-operation of audited entities in maintaining and providing access to all relevant data necessary for a comprehensive assessment of the activities under audit. (j) SAIs should work towards improving techniques for auditing the validity of performance measures. (k) SAIs should avoid conflict of interest between the auditor and the audited entity. * The full scope of government auditing includes regularity and performance audit. Regularity audit embraces: Attestation of financial accountability of accountable entities, involving examination and evaluation of financial records and expression of opinions on financial statements; Attestation of financial accountability of the government administration as a whole; Auditoffinancialsystemsandtransactionsincludinganevaluationofcompliancewithapplicable statutes and regulations; Audit of internal control and internal audit functions; Audit of the probity and propriety of administrative decisions taken within the audited entity; and Reporting of any other matters arising from or relating to the audit that the SAI considers should be disclosed. Performance audit entails the audit of economy, efficiency and effectiveness and embraces: Audit of the economy of administrative activities in accordance with sound administrative principles and practices, and management policies; Audit of the efficiency of utilization of human, financial and other resources, including examination of information systems, performance measures and monitoring arrangements, and procedures followed by audited entities for remedying identified deficiencies; and Audit of the effectiveness of performance in relation to the achievement of the objectives of the audited entity, and audit of the actual impact of activities compared with the intended impact PAGE 46 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S General auditing standards The auditor and the SAI must be independent. The auditor and the SAI must possess the required competence. The auditor and the SAI must exercise due care and concern in complying with the INTOSAI auditing standards. This embraces due care in planning, specifying, gathering and evaluating evidence, and in reporting findings, conclusions and recommendations. The SAI should adopt policies and procedures to recruit personnel with suitable qualifications. The SAI should adopt policies and procedures to develop and train SAI employees to enable them to perform their tasks effectively, and to define the basis for the advancement of auditors and other staff. The SAI should adopt policies and procedures to prepare manuals and other written guidance instructions concerning the conduct of audits. The SAI should adopt policies and procedures to support the skills and experience available within the SAI and identify the skills which are absent; provide a good distribution of skills to auditing tasks and assign a sufficient number of persons for the audit; and have proper planning and supervision to achieve its goals at the required level of due care and concern. The SAI should adopt policies and procedures to review the efficiency and effectiveness of the SAI's internal standards and procedures. Field standards (a) The auditor should plan the audit in a manner that ensures that an audit of high quality is carried out in an economic, efficient and effective way and in a timely manner. (b) The work of the audit staff at each level and audit phase should be properly supervised during the audit; and documented work should be reviewed by a senior member of the audit staff. (c) Theauditor,indeterminingtheextentandscopeoftheaudit,shouldstudyandevaluatethereliability of internal control. (d) In conducting regularity (financial) audits, a test should be made of compliance with applicable laws and regulations. The auditor should design audit steps and procedures to provide reasonable assurance of detecting errors, irregularities, and illegal acts that could have a direct and material effect on the financial statement amounts or the results of regularity audits. The auditor also should be aware of the possibility of illegal acts that could have an indirect and material effect on the financial statements or results of regularity audits. Reporting standards (a) At the end of each audit the auditor should prepare a written opinion or report, as appropriate, setting out the findings in an appropriate form; its content should be easy to understand and free from vagueness or ambiguity, include only information which is supported by competent and relevant audit evidence, and be independent, objective, fair and constructive. (b) It is for the Auditor General to decide finally on the action to be taken in relation to fraudulent practices or serious irregularities discovered by the auditors. C O U N T R Y R E P O R T PAGE 47 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G International Standards on Auditing Framework: Audit Evidence: International Framework for Assurance 500 Audit Evidence Engagements 501 AuditEvidence--AdditionalConsiderations for Specific Items General Principles and Responsibilities: 505 External Confirmations 510 Initial Engagements -- Opening Balances 200 Objective and General Principles Governing an Audit of Financial Statements 520 Analytical Procedures 530 Audit Sampling and Other Means of 210 Terms of Audit Engagements Testing 220 Quality Control for Audits of Historical 540 Audit of Accounting Estimates Information 545 Auditing Fair Value Measurements and 230 Documentation Disclosures 230R Audit Documentation 550 Related Parties 240 The Auditor's Responsibility to Consider 560 Subsequent Events Fraud in an Audit of Financial Statements 570 Going Concern 240A Fraud and Error 580 Management Representations 250 Consideration of Laws and Regulations in Using the Work of Others: an Audit of Financial Statements 600 Using the Work of Another Auditor 260 Communications of Audit Matters with 610 Considering the Work of Internal Auditing Those Charged with Governance 620 Using the Work of an Expert Risk Assessment and Response to Audit Conclusions and Reporting: Assessed Risks: 700 The Auditor's Reports on Financial 300 Planning an Audit of Financial Statements Statements 315 Understanding the Entity and Its 700R The Independent Auditor's Report on a Environment and Assessing the Risks of Complete Set of General Purpose Financial Material Misstatement Statements 320 Audit Materiality 701 Modifications to the Independent Auditor's 330 The Auditor's Procedures in Response to Report Assessed Risks 710 Comparatives 402 Audit Considerations Relating to Entities 720 OtherInformationinDocumentsContaining Using Service Organizations Audited Financial Statements Specialized Areas: 800 The Auditor's Report on Special Purpose Audit Engagements PAGE 48 C O U N T R Y R E P O R T Annex - C BANGLADESH AUDITING ACCOUNTING LEGISLATION (A) Auditing Legislation Extracts from Part VIII of the Constitution of Bangladesh relating to the Comptroller and Auditor General Section 1. Establishment of Office of the Auditor-General (1) ThereshallbeaComptrollerandAuditor-GeneralofBangladesh(hereinafterreferredtoastheAuditor- General) who shall be appointed by the President. (2) Subject to the provisions of this Constitution and of any law made by Parliament, the conditions of service of the Auditor-General shall be such as the President may, by order, determine. Section 2. Functions of the Auditor-General (1) The public accounts of the Republic and of all courts of law and all authorities and officers of the Government shall be audited and reported on by the Auditor-General and for that purpose he or any person authorized by him in that behalf shall have access to all records, books, vouchers, documents, cash, stamps, securities, stores or other government property in the possession of any person in the service of the Republic. (2) Without prejudice to the provisions of clause (1), if it is prescribed by law in the case of any body corporate directly established by law, the accounts of that body corporate shall be audited and reported on by such person as may be so prescribed. (3) Parliament may by law require the Auditor-General to exercise such functions, in addition to those specified in clause (1), as such law may prescribe, and until provision is made by law under this clause the President may, by order, make such provision. (4) The Auditor-General, in the performance of these functions under clause (1), shall not be subject to the direction or control of any other person or authority. Section 3. Term of office of the Auditor-General (1) The Auditor-General shall, subject to the provisions of this article, hold office for five years from the date on which he entered upon his office, or until he attains the age of sixty-five years, whichever is earlier. C O U N T R Y R E P O R T PAGE 49 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G (2) The Auditor-General shall not be removed from his office except in like manner and on the like ground as a judge of the 84[Supreme Court]. (3) The Auditor-General may resign his office by writing under his hand addressed to the President. (4) On ceasing to hold office the Auditor-General shall not be eligible for further office in the service of the Republic. Section 4. Acting Auditor-General At any time when the office of Auditor-General is vacant, or the President is satisfied that the Auditor- General is unable to perform his functions on account of absence, illness or any other cause, the President may appoint a person to act as Auditor-General and to perform the functions of that office until an appointment is made under article 127 or, as the case may be until the Auditor-General resumes the functions of his office. Section 5. Form and manner of keeping public accounts The public accounts of the Republic shall be kept in such form and in such manner as the Auditor- General may, with the approval of the President, prescribe. Section 6. Reports of the Auditor-General to be laid before Parliament The reports of the Auditor-General relating to the Reports of public accounts of the Republic shall be submitted to the President, who shall cause them to be laid before Parliament. (B) Accounting Legislation Extracts from CAG (Additional Functions) Act 1974, and Amendment Act 1975 Section 7. Keeping of Government accounts The Auditor General shall be responsible for keeping of the accounts of the Government. Note - subsequently modified to give the Controller General of Accounts (and others) this function Section 8. Preparation of appropriation and finance accounts The Auditor General shall ... prepare annually appropriation and finance accounts showing annual receipts and disbursements ... and shall submit those accounts to the President on such dates as he may, with the concurrence of the President, determine. Section 9. Audit of accounts of statutory public authorities, etc ...the Auditor General may audit the accounts of any statutory public authority, public enterprise and local authority Section 10. Preparation of general financial statement TheAuditorGeneralshallprepareannually,insuchformashemay,withtheconcurrenceofthePresident, determine, and submit to the President, a general financial statement incorporating a summary of the PAGE 50 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S accounts of the Government, statutory public authorities, public enterprises and local authorities for the last preceding year and the particulars of their balances and outstanding liabilities and containing such other information as to their financial position as the President may direct to be included in the statement. Note - subsequently modified to give the Controller General of Accounts this function Section 11. Making of rules The Auditor General may make rules and give directions in respect of all matters pertaining to audit of any accounts he is required to audit. C O U N T R Y R E P O R T PAGE 51 ANNEX - D BENEFITS OF ACCRUAL ACCOUNTING Extract from Study No. 14 "Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities", IFAC Public Sector Committee, December 2003 "1.18 The PSC has commented extensively on the benefits of accrual accounting for governments and individual public sector entities in previous Studies (Studies 5, 6, 8, 9 10 and 11) and Occasional Papers (Papers 1, 3, 5, 6 and 7). In order to provide some context for readers who are not familiar with the PSC's other publications, this section contains a summary of the benefits of reporting on the accrual basis. 1.19 Theinformationcontainedinreportspreparedonanaccrualbasisisusefulbothforaccountability 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 of those resources; assess the performance, financial position and cash flows of the entity; and make decisions about providing resources to, or doing business with, the entity. 1.20 At a more detailed level, reporting on an accrual basis: shows how a government financed its activities and met its cash requirements; allows users to evaluate a government's ongoing ability to finance its activities and to meet its liabilities and commitments; shows the financial position of a government and changes in financial position; provides a government with the opportunity to demonstrate successful management of its resources; and is useful in evaluating a government's performance in terms of its service costs, efficiency and accomplishments. Financial Position 1.21 Accrual accounting provides information on an entity's overall financial position and current stock of assets and liabilities. Governments need this information to: make decisions about the feasibility of financing the services they wish to provide; PAGE 52 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S demonstrate accountability to the public for their management of assets and liabilities recognized in the financial statements; plan for future funding requirements of 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 of assets and liabilities. It facilitates better management of assets, including better maintenance, more appropriate replacement policies, identification and disposal of surplus assets, and better management of risks such as loss due to theft or damage. The identification of assets and the recognition of depreciation help managers to understand the impact of using fixed assets in the delivery of services, and encourage managers to consider alternative ways of managing costs and delivering services. 1.23 Accrual accounting provides a consistent framework for the identification of existing liabilities, and potential or contingent liabilities. The recognition of obligations meeting the definition of a liability and the criteria for recognition: compels governments to acknowledge and plan for the payment of all recognized liabilities, not just borrowings; provides information on the impact of existing liabilities on future resources; means that it is possible to allocate responsibility for the management of 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 assets/equity 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 assets/equity also means that governments may be held accountable for the financial impact of their decisions on both current and future net assets/equity. Changes in an entity's net assets/equity between two reporting dates reflect the increase or decrease in its wealth during the period, under the particular measurement principles adopted and disclosed in the financial statements. Under the accrual basis of accounting, the financial statements will include a Statement of Financial Position which discloses information about assets and liabilities. Where assets and liabilities are not equal, a residual figure for net assets/equity will be reported. Where this figure is positive it can be interpreted as the net resources that may be applied for the provision of goods or services in the future, and therefore the community's investment in the reporting entity. Where the figure is negative, it may be viewed as the amount of future taxation or other revenues which are already committed to paying off debt and other liabilities. Net assets/equity can comprise some or all of the following components: contributed capital; accumulated surpluses and deficits; and reserves (for example revaluation reserve; foreign currency translation reserve). C O U N T R Y R E P O R T PAGE 53 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G Financial Performance 1.25 Accrual accounting provides information on revenues and expenses, including the impact of transactions where cash has not yet been received or paid. Accurate information on revenues is essential for assessing the impact of 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 of current programs and services. 1.26 Governments need information about expenses in order to assess their revenue requirements, the sustainability of existing programs, and the likely cost of proposed activities and services. Accrual accounting provides governments with information on the full costs of their activities so that they can: consider the cost consequences of particular policy objectives and the cost of alternative mechanisms for meeting these objectives; decide whether to fund the production of services within government sub-entities, or whether to purchase goods and services directly from non-government organizations; decide whether user fees should cover the costs associated with a service; and allocate responsibility for managing particular costs. 1.27 Accrual accounting can provide financial information on whether sub-entities are delivering specified services, and delivering them within agreed budgets. The same information, at a more detailed level, can also be used within sub-entities for the management of activity and program costs. 1.28 Accrual accounting allows an individual entity to: record the total costs, including depreciation of physical assets and amortization of intangible assets, of carrying out specific activities; recognizeallemployee-relatedcostsandtocomparethecostofvarioustypesofemployment or remuneration options; assess the most efficient way of producing their goods and services and of managing the resources over which they have been delegated authority; determine the appropriateness of cost-recovery policies; and monitor actual costs against budgeted costs. Cash Flows 1.29 Accrual accounting provides comprehensive information on current cash flows and certain projected cash flows, including the cash flows associated with debtors and creditors. It can therefore lead to better cash management and may assist in the preparation of more accurate cash budgets. PAGE 54 C O U N T R Y R E P O R T ANNEX - E SELECTION AND TRAINING FOR ACCOUNTANTS AND AUDITORS 1. There are two categories of accounting officials for the Ministries and subordinate departments: (a) cadre officers in the Bangladesh Civil Service Audit and Accounts Cadre, and (b) non-cadre officers in the Subordinate Accounts Service. Accounts and Audit Cadre 2. Cadre officers are recruited by the Public Service Commission and assigned in the Bangladesh Civil Service, including the officers assigned to work under the Controller General of Accounts (CGA) and the Comptroller and Auditor General (CAG). These officers are under the administrative control of the Ministry of Finance which controls promotion and disciplinary action. Functionally the officers work under the CGA or the CAG. There is frequent interchange of officials between the accounts department and the audit department. Thus the separation of accounts and audit has been put into effect at the functional level but not so much at the staffing level. 3. All cadre officers are trained in the Bangladesh civil service training academy for six months in a foundation course after appointment. After the training, the cadre officers are assigned to the different cadres to join the training academy of their respective departments for departmental training. The audit and accounts cadre officials join the Financial Management Academy (FIMA). The cadre officers remain probationary for two years. They are then posted to Assistant Accountant General. They may also receive advanced training at home and abroad during their continued service. 4. The cadre officers in the training academy go through the following courses: (a) Accountancy, elementary to advance; (b) Book-keeping, government accounting; (c) Fundamental rules of government, civil service rules, treasury rules; (d) Economics, budgeting, constitution; (e) Computer knowledge; (f) Auditing; (g) Précis and drafting, report writing; (h) Manuals, codes, rules of different audit directorates. C O U N T R Y R E P O R T PAGE 55 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G Subordinate Accounts Service 5. The departmental officers who may be recruited as Auditor and Apprentice are eligible to appear at the Subordinate Accounts Service Examination conducted by the CAG and finally approved by the Public Service Committee. They are called Superintendents and later on promoted as Audit & Accounts Officers to the District and Thana accounts offices. The departmental candidates go through basic training in FIMA on different subjects (e.g., accounting, auditing, budgeting etc). There is no provision for any higher level training course for them. The course duration ranges from two months or three months. The auditors must be a graduate (generalized or specialist) to be appointed to the post and learn on-the-job, supplemented by occasional refresher courses in the training academy. 6. The Accounts and Audit department has no qualified or professional accountants on its rolls except for three or four staff members with the qualification from the Institute of Cost and Management Accountants (ICMA). The CAG, under Constitutional mandate, certifies the accounts of the Republic, althoughnofullyqualifiedCharteredAccountantsareavailableinthatdepartmenttocertifytheaccounts, which, as per INTOSAI standards, is a must, Appointment of Chartered Accountants to groom a core group of professional accountants in-house has been discussed many times but never implemented due to funding constraints. PAGE 56 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S SUPPLEMENTARY TABLE OF STANDARDS AND GAPS Assessment of the National Public Sector Accounting Environment 58 The Accounting Law 58 Education and Training of Public Sector Accountants 59 Code of Ethics for Public Sector Accountants 60 Public Sector Accountant Arrangements 61 Assessment of National Public Sector Accounting Standards 61 Framework for the Preparation and Presentation of Financial Statements. 61 Preparation and Presentation of Financial Statements on the Cash Basis. 62 Assessment of Accounting and Auditing in State Owned Enterprises 62 Financial Statements Should Comply with IAS and IFRS. 62 Assessment of the Public Sector Auditing Environment 63 Statutory Framework 63 Setting Auditing Standards 65 Code of Ethics 65 Accountability in the SAI 65 Independence Provided by the Legislation 66 Qualifications and Skills of the Auditor 69 Training 69 Competence in Auditing 70 Quality of the Audit 70 Assessment of Public Sector Auditing Standards and Practices 71 Planning 71 Supervision 72 Internal Controls 73 Compliance with Laws 75 Evidence 76 Analysis of Financial Statements 77 Reporting on Financial Statements. 78 Reporting on Fraud 79 Reporting on Compliance 79 C O U N T R Y R E P O R T PAGE 57 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G Assessment of the National Public Sector Accounting Environment Timely, relevant, and reliable financial information is required to support all fiscal and budget management, decision making, and reporting processes. STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT The Accounting Law 1. For reliability, the Public sector accounting and reporting There is a need to provide requirements for public sector are governed by the accounts code and statutory guidance for the accounting and reporting several laws and government instructions general budget sector to conform should be specified by law, separating appropriation accounting from to Cash Basis IPSAS in the short cover all government-owned audit: term and IPSAS in general in entities, specify the methods the longer term. It needs to by which accounting and Constitution parts 7 and 8; be recognized that the basic auditing standards are to be CAG (Additional Functions) Act technology currently available setforthepublicsector,specify 1974, in Bangladesh provides a poor the reporting requirements CAG (Additional Functions) platform for accurate reporting. and lay down timetables for Amendment Ordinance 1984; At present accounts are the publication of audited The General Financial Rules and compiled manually and mistakes annual accounts. Regulations (GFRR), and and miscoding are common. Treasury Regulations and Audit Computerization is proceeding Code. slowly under FMRP and to be effective a much expanded These rules were reissued in 1998, but reform of the accounting system were not rationalized or revised. isneededthroughrationalization and redesign for a computerized Accounting for the general government system. budget sector is centralized through the CGA but the Railways and Defense departments are self-accounted. The CGA produces monthly consolidations. Section 4 of the CAG (Additional Functions) Act 1974 requires annual appropriation accounts and finance accounts, and Section 7 requires an annual general financial statement. In the absence of instructions for the use of IPSAS the requirements of Section 7 are not met and the legal accountability requirements are impaired. 2. Compliance with IPSAS The government of Bangladesh is A transition path to reporting for non-commercial bodies maintaining the appropriation accounts the general budget sector under and IAS for commercial bodies on a cash basis in accordance with IPSAS is needed. is needed for consistent detailed instructions to relate expenditure transparency. to authorization. Instructions are set As a first step the CGA has out in the Accounts Code, and IPSAS advised that the data is available reporting standards have not yet been to present a summary of the PAGE 58 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT adopted. The annual financial statements annual accounts in the form do not conform to the Cash Basis IPSAS. of the Cash Basis IPSAS. This requires the preparation of a summary Authorization is required from statement of cash receipts and payments the CAG who has constitutional which recognizes the cash controlled by authority to prescribe the form the reporting entity, and the disclosure of and manner in which public accounting policies and explanatory notes. accounts are to be kept, but no SOEs are required to conform to IASs. legislation is necessary for this step to be taken. Supplementary information on assets and liabilities such as loans, advances, national savings, and the general provident fund would also be included. The summary should be intended to meet the requirements of Section 7 of the CAG (Additional Functions) Act 1974 for a general financial statement of the Government, statutory public authorities and local authorities, including particulars of their balances and outstanding liabilities. Education and Training of Public Sector Accountants 3. For reliability, the Government accountants are recruited Recruitment and training curriculum requirements for without accounting qualifications. The plans need to be re-developed the accounting qualifications Financial Management Academy (FIMA) to meet the professional of public sector accountants provides accountancy training at a accountancy needs of the public should accord with standard not in accord with professional sector. Recruits should already internationally recognized standards. There are very few accountants have an accounting degree. standards of accounting with professional qualifications. FIMA's Further public sector training training as established in training faculty is mainly composed of is provided by FIMA, which is the International Education relatively junior officials who are not hampered by limited resources Standards for Professional professional trainers. For FIMA's non- and infrastructure, and by the Accountants (IES). traditional courses, the Academy depends need to deliver the traditional on serving GoB officers trained as trainers training courses required by under previous phases of the financial the CAG department. Linkage reforms. with an international institution such as the UK CIPFA to introduce its Diploma in public sector accounting and auditing through a local institution is needed, a much upgraded FIMA, or perhaps the Institute of Cost and Management Accountants C O U N T R Y R E P O R T PAGE 59 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT of Bangladesh (ICMAB) which is attached to the Ministry of Commerce. The ICMAB training curriculum includes topics relating to IAS, but its capacity is hindered by the shortage of well-trained instructors and resources, leaving ICMAB unable to deliver high-quality training programs on the practical application of international standards, and with diminished capacity for providing training in line with the IES for Professional Accountants. A study by CIPFA of the options would be valuable. 4. For reliability, public There are about 9000 staff members in The extent of continuing sector accountants the accounts cadres. Most of them have a education that is needed should be provided with generalized education and need extensive depends on the qualifications continuing professional training in basic and advanced courses in at intake. Recruitment of staff training requirements that accounting. with accounting degrees is an accord with internationally essential first step. Only then recognized standards of Before the separation of the Audit and can continuing education be accounting training. Accounts functions, meeting the training a practical option. Otherwise needsoftheCAGandtheCGAofficeswas progressive full training of the responsibility of the CAG. Now that significant numbers of current these two functions have been separated, staff as per the above proposal with CGA effectively being moved under is needed. In the absence of a the control of the Ministry of Finance, training strategy the longer- there is no individual or wing responsible term training needs should be for ensuring that the training needs of the consideredbyMinistryofFinance CGA department are met. through a re-examination of the functions of the various levels of staff in the proposed new accounting environment and the conduct of a comprehensive training-needs analysis. Code of Ethics for Public Sector Accountants The INTOSAI code covers integrity; independence, objectivity and impartiality; professional secrecy; and competence. 5. For reliability, public The CAG's Code of Ethics developed in Develop and enforce a code of sector accountants should 2002 for audit staff is in accord with the conduct, based on IFAC or ICAB be required to adhere to the INTOSAI code. However, a specific code codes. PAGE 60 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT principles laid down in a code in accord with IFAC is needed for public of ethics that are at least in sectoraccountant.Publicofficialsarerarely accordwiththeinternationally penalized for infringement of financial recognized standards for rules and regulations and fiduciary risk professional accountants. is medium to high. A code is needed to This may be based on IFAC or correct these concerns. INTOSAI codes. Public Sector Accountant Arrangements 6. For timeliness, relevance The CFO concept is not fully in place. The success of the continued and reliability, there should be The provision of a CAO for each ministry FMU exercises will be further a professionally qualified CFO provides the groundwork for a full CFO evaluated and the provision of function to be responsible function when expertise and organization greater professionalization of to the Principal Accounting arrangements are adequate. For some senior accountants in a CFO Officer (PAO), for maintaining years FMRP and its predecessors have been role would assist. FMRP notes systems of internal financial introducing pilot Financial Management "ThePAOistheonlyofficerwho controls that manage risks, Units with limited success partly because has administrative oversight and for preparing regular the FMU itself created an additional `unit' and responsibility over both financial accounts for each without a clear and precise organizational budgets in a ministry ­ there government entity. fit with the other components of the is a need to provide greater ministries'financialmanagementfunctions. support to the PAO in this 7. The CFO should also be Without an effective CFO function internal co-ordination and oversight responsibleforthemaintenance controls and fiduciary functions will not be role". The new Internal Control and management of the chart well managed, nor will expenditures and Manual at section 3.5 gives ofaccountssoastoensurethe budgets be properly executed. management the responsibility mostappropriatetechnological to establish and operate the support for financial internal control environment management practices, and, in but is silent on mechanisms addition manage training and for this. Current plans are to education needs for financial physically relocate the CAOs management, report on key from the CGA offices to the performance indicators, and ministries to spearhead the assist program managers in establishment of new financial developinganeffectivefinancial management accounting units. approach to the delivery of Thismayprovideanopportunity expected outcomes. to enhance the CAO functions to CFO level. Assessment of National Public Sector Accounting Standards Financial reporting must be adequate to meet the accountability demands of stakeholders Framework for the Preparation and Presentation of Financial Statements. 8. National accounting The Government has not adopted More formalized arrangements standards should accord with IPSAS. The Constitution gives the CAG areneededforsettingaccounting international standards to responsibility for the form and principles standards for the public sector. provide consistency. of accounts. There is no Board to assist in With the promulgation by C O U N T R Y R E P O R T PAGE 61 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT The responsibility for setting standards. IFAC of accounting standards establishing the national for the public sector, IPSAS, it accounting standards for the would be appropriate for the public sector should be well CAG to adopt them for public defined to provide reliability. sector standards. CGA and ICAB should establish a public sector committee to establish standards. Audit Committees in public sector entities should assure compliance Preparation and Presentation of Financial Statements on Cash Basis. Financial statements presented Currently Bangladesh has not adopted the Discussions with the relevant in the IPSAS standard Cash Basis IPSAS. authorities have indicated a capability to do so, and also a willingness to report on the Cash Basis IPSAS if further expert advice verifies that it is practical. Complementary improvement in the quality of the accounting records would also be needed. Assessment of Accounting and Auditing in State Owned Enterprises Financial Statements should comply with IAS and IFRS. 9. The financial statements SOEs and their auditors are required to Corporate governance in the should include (a) balance follow IAS and ISA as adopted by the ICAB, statutory authority sector needs sheet,(b)incomestatement,(c) which also regulates the accountancy to be improved through more statement of changes in equity profession apart from the government effectiveauditcommittees.These or a statement of recognized sector. There are some differences between committees should ensure that gains and losses, and (d) cash the ICAB and the international standards audit qualifications and reports flow statement [IAS 1.8] which are being reviewed by the ICAB. by the Auditor General are properly addressed by relevant Thefinancialstatementsshould Of the sample of eight annual reports officers. present fairly (or give a true examinedbythestudy,onlyone(Bangladesh and fair view of) the financial Chemical Industries Corporation ) had The proposed Financial position, financial performance an unqualified opinion, six were qualified Reporting Council should and cash flows of the entity. and one (Bangladesh Power Development include commercial government [IAS 1.13] Board) had a disclaimer opinion. The authorities in its scope. Government audit reports did not mention Thefinancialstatementsshould that the annual accounts were qualified bepreparedontheaccrualbasis by the independent auditors, but they did of accounting [IAS 1.27] raise other issues, many of which have been unresolved for years. Disclosures The financial statements in the SOE accounts were generally not should be prepared using the adequate to meet international accounting accounting policies established standards. PAGE 62 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT by the International Allowing the SOEs to issue accounts Accounting Standards. [IAS 1] which do not show a `true and fair view' is afailureinaccountability.Failuretoaddress audit objections over a long period is also a major failure in accountability. Assessment of the Public Sector Auditing Environment 10. Effective scrutiny by the legislature through comprehensive, competent external audit enables accountability for the implementation of fiscal and expenditure policies. 11. The environment for an effective SAI requires a comprehensive approach to Public Financial Management (PFM). SAIs are not stand-alone institutions; they are part of a PFM architecture that also includes budgeting, accounting, internal control, audit and legislative oversight, and government response. Improving the way the SAI functions is integral to providing information for improving the overall PFM system but the action must be within the executive under the watchful eyes of the legislature and the public. A strong demand for good public sector external auditing is necessary for the SAI to have any impact. This requires willingness of the executive branch to accept and respond to external scrutiny over its management of funds and to ensure that action is taken for reform. It also requires public presentation of the audit reports to ensure public support for effective action. Statutory Framework 12. Statutory auditing Constitution Part VIII requirements should be CAG (Additional Functions) Act 1974 established by legislation. 13. The SAI should have The public accounts of the Republic and A National Audit Act along the authority to conduct a of all courts of law and all authorities and lines of the model legislation full range of audits for all officers of the Government shall be audited proposed by the Association of government-owned or and reported on by the Auditor-General. CharteredCertifiedAccountants21 controlled entities including would be needed for a modern regularity, financial, and There is no mention of types of audits. audit function. This has an performance audits. (INTOSAI The office mainly conducts regularity objectives clause as follows: Lima Declaration Sections 18- and compliance audits. In this type 19) of audit, vouchers and records of the (1) The objectives of the Office of financial transactions of public officials or organizations are verified. the Auditor-General shall include providing an opinion on whether A more explicit authority for the full range or not: of current and prospective types of audit conducted by INTOSAI members would be a. the public accounts provide a more appropriate in authorizing functions true and fair view of the finances and funding. of the government and the individual public bodies to which The scope of the CAG's audit is narrowly they refer focused. SAIs normally conduct audits on the overall financial management b. the financial transactions of performance issues of state entities. thegovernmentandpublicbodies 21A Model National Audit Office Act, The Association of Chartered Certified Accountants, UK, 2004 C O U N T R Y R E P O R T PAGE 63 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT Of late it has decided to undertake audits comply with relevant legislation, on the internal controls of Government and regulations issued by any organizations. relevant competent body The introduction of performance audit c. the financial affairs of the has added a new dimension in ensuring government and public bodies transparency and accountability in public have been managed with due administration. But so far only one regard to probity, and that their performance audit report (from a total statutory and ethical duties to of five submitted to the President) has Parliament and the public have been discussed in the Public Accounts been met in an open and even- Committee. handed manner Foreign aided projects do not yet come d. the government, public under the CAG's jurisdiction. bodies and public money have been managed with due regard to value for money and that officers have made the best use of the resources for which they are responsible. (2) The Auditor-General will provide recommendations and advice to Parliament on significant issues which the Auditor-General has discovered. 14. The legislation should Not done. The new Audit Act should set out penalties in the event contain an adequate Offences of non-compliance with the Clause along the following lines: auditing requirements, and these penalties should be Any person commits an offence applied appropriately. who,withoutlawfuljustification or excuse: a.intentionallyobstructs,hinders or resists the Auditor-General b. intentionally refuses or fails to comply with any lawful requirement of the Auditor- General c. makes a statement or gives information to the Auditor- General knowing or reckless to the fact that the statement or information is false or misleading d. willfully suppresses any PAGE 64 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT information required by the Auditor-General in the performance of his/her duties or e. represents directly or indirectly that the person holds any authority under this act when the person actually does not hold that authority. Setting Auditing Standards 15. The government should The CAG has adopted the INTOSAI The ISAs should also be formally have adopted the INTOSAI Auditing Standards. These are at too adopted, preferably through Auditing Standards and general a level for adequate guidance and legislation. the IAASB International the ISAs are needed for effective guidance Standards for Auditing for for the audit staff. public sector entities. (ISA 200.5 and INTOSAI Auditing Standards1.0.14) Code of Ethics 16. The INTOSAI Code of The CAG's Code of Ethics developed in Improved monitoring for the Ethics should have been fully 2002 for audit staff is in accord with theCode is needed. adopted by the SAI (IFAC ISA INTOSAI code. The FMRP found that 200.4 and INTOSAI Code of monitoring procedures are not in place to Ethics 4), communicated to all enforce the Code and determine to what staff and applied. extent the provisions are being observed. Officers of audited entities have cited the lack of supervision of auditors as contributing to the negative image they held on auditors. Accountability in the SAI 17. There should be an There is no management board. A more accountability process in corporate approach would share decision the SAI. (INTOSAI Auditing making more formally within the SAI Standards 1.0.20) giving some degree of balanced power and authority. 18. There should be clear Normal public service systems apply. responsibility in the SAI for (i) advising on internal finance, keepingproperfinancialrecords andaccounts,andmaintaining systems of internal control; (ii) for ensuring compliance with laws and regulations C O U N T R Y R E P O R T PAGE 65 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT 19. The SAI should prepare The CAG has produced an annual report an annual report on its entitled,for2004,SustainingQualityAudit operations and performance Management'. It sets out achievements that is separate to its reports and lists 46 audit reports submitted to the on its audits. It should provide Presidentintheyear.Itincludesperformance an objective, balanced and measures covering timeliness, acceptance understandable account of of observations, quality improvement activities and achievements, activities, and interactions with auditees. anddetailsoffinancialposition It does not include a financial position and performance. statement, which is not normal practice for government departments. 20. The SAI should prepare a The SAI is forward-looking and has a corporate plan or equivalent. strategic plan. 21. The SAI should undergo There has been substantial review as part peer review or independent of institutional strengthening. performance audit. Independence provided by the Legislation 22. The legislation needs to be adequate for the following core principles of SAI independence if the SAI is to provide effective external scrutiny: (1) The existence and de-facto application of an appropriate and effective constitutional and legal framework. (2) The independence of the SAI Heads including security of tenure and legal immunity in the normal discharge of their duties. (3) A sufficiently broad mandate and full discretion in the discharge of SAI functions. (4) Unrestricted access to information. (5) The obligation to report on their work. (6) The freedom to decide on the content and timing of their reports and to publish and disseminate them. (7) The existence of effective follow-up mechanisms on SAI recommendations. (8) Financial and managerial autonomy and the availability of appropriate human, material and monetary resources. (Core Principles of SAI Independence, INTOSAI Sub-committee on SAI Independence, 2004) 23. The legislation should Article 129(2) of the Constitution The proposed National Audit spell out in detail the extent stipulates that the Auditor General shall Act is needed to provide effective of the SAI's independence. not be subject to direction or control of independence. (INTOSAI Lima Declaration any other person or authority. Nor can he/ Section 5) she be removed from office except in the like manner and like grounds as applicable 24. The legislation should assure the independence of to Judges of the Supreme Court. the SAI Heads and "Members" (in collegial organizations) and that is there security of tenure and legal immunity PAGE 66 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT in the normal discharge of their duties. (INTOSAI Lima Declaration Section 6) 25. The SAI's constitutional/ The control exercised over the salary and More statutorily independent statutory/legal framework budget of the CAG by the Ministry of arrangements for establishing should ensure that it has Finance compromises CAG independence. the budget should be put in available sufficient human, place. Usually this involves material and monetary a Parliamentary Committee resources. (INTOSAI Lima considering the CGA budget and Declaration Section 7) audit plans. 26. A fixed term must be long The Auditor General is appointed by the A more open appointment enough to survive changes President. The CAG is appointed from very process is preferred by modern of government and avoid senior officers of the Audit and Accounts audit legislation. pressures concerning re- cadre who, upon retirement at the age of 57 appointment impinging too or earlier, is appointed to the constitutional early in the term of office of post of the CAG and holds this office until the SAI office holder. A single he attains the age of 60 years. This practice non-renewable appointment does not provide sensible terms. For is preferable to avoid those example Canada and the US apply 10 year pressures. (INTOSAI Working terms to professionally qualified persons. Group on SAI Independence, 2004) 27. The legislation should The independence of the CAG's office is Greater autonomy should be ensure that the Head of the severely constrained by the operation of given to the AG. Suitable clauses SAI is free to determine the the Rules of Business of the Government, are as follows: organization of the audit under which CAG is subject to the office, including personnel direction and control of the Finance The Auditor-General shall and contract management Ministry. The recruitment for the filling employ such persons as are systems and material of posts at the CAG's office is subject to necessary for efficiently and acquisition/disposal policies direction and control of both the Finance effectively executing the Auditor- and procedures. The SAI Secretary and the Establishment Secretary. General's functions, duties and should be able to determine Officers attached to the office of the CAG powers. Within the framework personnel policies, including can be removed subject to the due process of the budget approved for the the selection, recruitment, requirements of the Government Servants' Office of the Auditor-General, training, remuneration, Conduct Rules. the Auditor-General has the promotion, discipline, and authority to assess staffing needs dismissal of staff and contract and appoint, train, assign, pay, personnel. (INTOSAI Lima promote, reward and dismiss Declaration Section 6) staff. Employees in the Office of the Auditor-General shall be considered to be in an excepted service. They are not part of the publicservicesnoraretheysubject to any of the rules, regulations or C O U N T R Y R E P O R T PAGE 67 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT procedures promulgated by Public Service Commission. The Auditor-General shall establish job descriptions with clearly defined responsibilities, qualifications and performance expectations for all positions in the Audit Office. The staff of the Office of the Auditor-Generalshallbemanaged to ensure that: a. there is fair, open and equal treatment of individuals applying for or being offered positions b. staff appointments and advancement decisions are made on the qualification and merit of all individuals eligible for consideration and c. disciplinary, removal or other adverse actions are done in accordance with clear, established and consistently applied criteria and processes. The staff shall be appointed at such remuneration and on such other terms and conditions as the Auditor-General may decide. In so deciding, the Auditor- General shall consider the terms and conditions determined by the Public Services Commission. 28. There should be This is provided by the Constitution. unrestricted access to information. (INTOSAI Lima Declaration Section 10) 29. The legislation should give The Auditor General is required to submit The law should require the CAG theSAItherightandobligation reports to the President to be presented to report to go the President (or the to report on their work. theParliament.UndertheRulesofBusiness, PrincipalOfficeroftheParliament) (INTOSAI Lima Declaration the CAG has to submit the report to the for tabling in the Parliament Section 16) President through the Prime Minister. This directly with timings specified practice may impair the independence and in the legislation. There should PAGE 68 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT The legislation should give the objectiveness of the reports prepared by be more involvement with the SAI the right and obligation this office. It may compromise the CAG in media to provide informed public to report effectively on its fulfillingitsobligationtoprovidetimelyand scrutiny to the audit reports. work, and the freedom to truthful reports on government operations decide on the content and to help the Parliament exercise its oversight timing of its reports and to role on the public administration's financial publish and disseminate them discipline. Reporting by the CAG is now expeditiously. (INTOSAI Lima up to date after clearance of a substantial Declaration Section 17) backlog. 30. To the extent the In the last eight Parliaments the PAC has Improved PAC and departmental findings of the Supreme Audit only been formed six times. There is an processesareneededforhandling Institution are not delivered as enormous backlog in hearing the audit audit reports. To some degree legally valid and enforceable objections by the PAC. From 1971-72 to improved audit methodology and judgments, the Supreme Audit July 2002, only 18.3% out of the 770 audit report writing skills will assist, Institutionshallbeempowered reports submitted to the President and but the fundamental processes to approach the authority the Parliament have been discussed. The for scrutiny need reform. Audit which is responsible for taking Ministries do not respond promptly to the Committees and corporate the necessary measures and PAC's recommendations. governance arrangements need require the accountable party to be reformed along with to accept responsibility. (Lima improvements to the audit Declaration Section 11.2) processes. Qualifications and Skills of the Auditor 31. There is a need for qualified accountants to sign audit opinions; also auditors must have adequate professional expertise and technical knowledge to carry out audits. 32. The syllabus of the This is not the case. government's and the SAI's accounting schools should cover all areas recommended by the International Education Standards for Professional Accountants' (IES) 33. There should be adequate The criteria do not give sufficient attention Recruitment should require professional criteria for to accounting qualifications. an accounting degree for all recruitment and promotion appointees. of auditors. (INTOSAI Lima Declaration Section 14 and INTOSAI Auditing Standards 2.1.4) Training 34. The SAI should operate Training facilities are inadequate for this Improvements in training a continuing professional purpose. facilities are proposed in the C O U N T R Y R E P O R T PAGE 69 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT development program for FMRP schedule. its professional personnel. (INTOSAI Lima Declaration Section 14 and INTOSAI Auditing Standards 2.1.5- 2.1.12) Competence in Auditing 35. The SAI should equip Audit manuals are available, but capacity A new methodology is being itself with the full range of up- to implement these manuals remains weak written as part of the FMRP. to-date audit methodologies, and there is a need for more training and Complementary equipment, including systems-based development in practical use. Training will facilities and skills must also be techniques, analytical review not be sufficient, however, unless there is developed. methods, statistical sampling, sustained demand from the executive and and audit of automated thelegislatureforbetterauditreportsanda information systems. willingness to use such reports to improve (INTOSAI Auditing Standards performance. 2.2.37) Quality of the Audit 36. The SAI should have the Some quality assurance and control Examination of working quality assurance programs processes are applied. papers suggested that better in place to ensure audit organization and indexing of the performance and results. working papers would be further Written quality control benefited by including records of policiesandproceduresshould the supervision for quality. be communicated to the audit personnel in a manner that provides reasonable assurance that the policies and procedures are understood and implemented. (ISA 220.7) 37. Qualitycontrolprocedures should cover: Direction: Assistants to whom work is delegated need appropriate direction. Supervision: covering the followingfunctionsduring the audit: (a) monitor the progress of the audit, (b) become informed of and address significant PAGE 70 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT accounting and auditing issues, and (c) resolve any differences of professional judgment between personnel and consider the level of consultation that is appropriate. Review: The work performed by each assistant needs to be reviewed by personnel of atleastequalcompetence. (ISA 220.8-220.17) Assessment of Public Sector Auditing Standards and Practices 38. Results from the audits should hold the executive bodies to account for their fiscal and expenditure policies and their implementation. Planning 39. The planning process Yes, but not in all cases. Generally, previous The new audit methodology should collect information audit reports give a picture of this. On manual should introduce about the audited entity and special issues, new data is collected more comprehensive planning its organization in order to requirements based on the identify important aspects specific objectives of the audits. of the environment in which Generally the planning for the audited entity operates, compliance audit that is focused develop an understanding on assessing regularity needs of the accountability to be more systematic when relationships, determine conclusions are drawn about the whether appropriate action relative frequency of errors or the has been taken on previously correctness of an overall figure. reported audit findings and recommendations, assess risk, and determine materiality. (IFAC ISA 300.6-300.9) The planning process should Yes,anauditbriefingsessionisarrangedand identify the scope of the here scope and objectives are specified. audit, and specify the audit objectives and the tests necessary to meet them. (ISA 300.10-300.12) The planning process should Normally, in most Government offices review the internal audit of internal audit is absent the audited entity and its work program, identify key C O U N T R Y R E P O R T PAGE 71 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT management systems and controls, and carry out a preliminary assessment to identify both their strengths andweaknesses,anddetermine the approach to be adopted in the audit. (ISA 300.9) The planning process should Yes,itisamust.Thisgivesabetterposition highlight special problems for the audit team. foreseen when planning the audit. (ISA 300.10) The planning process should Yes, the number of audit team members, prepareabudgetandaschedule the duration of the audit, and areas to be for the audit, and provide for covered are declared in office order. appropriate documentation of the audit plan and for the proposed fieldwork. (ISA 300.10) The planning process should Yes, this is done. identify staff requirements and a team for the audit. (ISA 300.11) The planning process should Normally, it is not done. But in case of familiarize the audited entity special audit, discussion is held with about the scope, objectives audited entity. and the assessment criteria of the audit and discuss with them as necessary. (ISA 300.7) Supervision 40. The process of supervision Yes, there is an inspection check list and it There is a need for more guidance shouldensurethatthemembers helps the audit team on the audit testing to be of the audit team have a clear undertaken and the functions and consistent understanding of supervision. Working papers of the audit plan. (INTOSAI need to be more structured. Auditing Standards 3.2.3a) 41. The process of supervision Inspection officers review the activities of should ensure that the audit is the audit team and make comments to carried out in accordance with ensure that audit is done as per auditing the auditing standards and standards. But inadequacies do exist. practices of the SAI. (INTOSAI Auditing Standards 3.0.3b) PAGE 72 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT 42. Theprocessofsupervision Yes, this is done. should ensure that the audit planandactionstepsspecified inthatplanarefollowedunless a variation is authorized. (INTOSAI Auditing Standards 3.0.3c) 43. The process of Yes, this is done. supervision should ensure that working papers contain evidence adequately supporting all conclusions, recommendations and opinions. (INTOSAI Auditing Standards 3.0.3d) 44. Theprocessofsupervision Yes, when there is any deviation, the should ensure that the auditor inspecting officer gives directions but this achieves the stated audit is not always the case. objectives. (INTOSAI Auditing Standards 3.0.3e) 45. The process of Audit report is finalized after all individual supervision should ensure unit audit is completed that the audit report includes the audit conclusions, recommendations and opinions, as appropriate. (INTOSAI Auditing Standards 3.0.3f) 46. The process of Audit opinions are not usually formed. The supervision should ensure reports are reviewed. that the audit report includes the audit conclusions, recommendations and opinions, as appropriate. (INTOSAI Auditing Standards 3.0.3f) Internal Controls 47. The auditor should obtain Not always. Normally previous audit Development of an internal an understanding of the experience gives the idea. In special cases, control environment is hampered entity and its environment, it is done by a lack of understanding including its internal control, of the concept of internal sufficient to identify and controls, absence of training and C O U N T R Y R E P O R T PAGE 73 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT assess the risks of material ineffective organization. Finance misstatement of the financial Department has issued revised statements whether due to internal controls guidance in fraud or error, and sufficient July 2005 for PAOs to develop to design and perform further internal management controls. audit procedures. (ISA 315.2) In developing these controls the PAO should be assisted by the After obtaining an In special cases, it is done CFO who should pay special understanding of the attention to the objectives that accounting and internal the control is to serve. The controlprocedures,theauditor auditors currently do not test should obtain a sufficient the system; they test whether a understanding of control particular transaction is wrong activities to assess the risks of in some respect and then pursue material misstatement at the issues about the transaction assertion level and to design rather than examining how the further audit procedures control procedures failed. responsive to assessed risks. (ISA 315.90) A new audit methodology is needed, based on the audit risk The auditor should document Yes, this is done. model and testing procedures in the audit working papers: through statistically reliable (a) conclusions reached about sample selection of transactions. susceptibility to material misstatement due to error or fraud; (b) the understanding obtained of the entity's accounting and internal control procedures; and (b) the assessment of control risk. (ISA 315.122-123) The auditor should perform Yes, normally substantive tests of details tests of controls to obtain is carried out, but these are intended to sufficient appropriate audit check the transaction, not the system of evidence that the controls internal control. were operating effectively at relevant times during the period under audit. (ISA 330.23) When the auditor cannot Yes, this is done. obtain sufficient appropriate audit evidence as to a material financial statement assertion, the auditor should express a qualified opinion or a disclaimer of opinion. (ISA 330.72) PAGE 74 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT The auditor should make Yes, management letter is issued to the management aware in auditees. This is later than desirable as writing, as soon as practical management should be made aware of and at an appropriate level deficiencies as they are found. of responsibility, of material weaknesses in the design or operation of the accounting and internal control procedures, which have come to the auditor's attention. (ISA 315.12) Compliance with Laws 48. Theauditorshouldobtain Yes, this is done. There needs to be a corporate a general understanding governance system under of the legal and regulatory which an annual financial framework applicable to the report is tested by auditors and entity and the industry and the financial report includes how the entity is complying management assertions about with that framework. (ISA controls. 250.15) The audits should sample for The auditor should perform Yes, this is done. errors, to assess whether the testing and other procedures total expenditure is materially to help identify instances of in compliance.. Transactions noncompliance with those that are incorrect can still be laws and regulations where reported for correction but an noncompliance should be overall opinion on the untested considered when preparing transactions can also be given, financial statements. (ISA based on inference. 250.18-250.19) Generally, management is Not in depth. Normally, in special issue- responsible for establishing based audit, it is done an effective system of internal controls to ensure compliance with laws and regulations. In designingstepsandprocedures to test or assess compliance, the auditor should evaluate the entity's internal controls and assess the risk that the control structure might not prevent or detect non- compliance.Theseevaluations should be used to report to management on defects in C O U N T R Y R E P O R T PAGE 75 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT the system of internal controls and the steps that should be taken to improve the system. (ISA 250.17) The auditor should obtain No. This is relevant when there is a written representations that corporategovernancesystemunderwhich management has disclosed to an annual financial report is tested by the auditor all known actual or auditors and the financial report includes possible noncompliance with management assertions about controls. laws and regulations whose effects should be considered when preparing financial statements. (ISA 250.23) The SAI should use regularity This is the main function of the audits but audit to make sure that the the method does not accumulate errors State budget and accounts are to assess whether the total expenditure complete and valid. The audit is materially in compliance. Transactions procedure may result, in the that are incorrect are reported for absence of irregularity, in the correction. No overall opinion on the granting of a "discharge". If untested transactions is given. nototherprocessesareneeded to resolve irregularities. Evidence 49. When obtaining audit Yes, but inadequacies exist. Testing is The audit methodology and evidence from tests of not done in a manner based on the audit necessary supporting working control, the auditor should risk model as per ISA 330 `The Auditor's papers should be more consider the sufficiency and Procedures in Response to Assessed precisely defined in a manual appropriateness of the audit Risks'. of procedures. Audit evidence evidence to support the is poorly documented, filed and assessed level of control risk. referenced. (ISA 500.10) When obtaining audit evidence from substantive procedures,theauditorshould consider the sufficiency and appropriateness of audit evidence from such procedures together with any evidence from tests of control to support financial statement assertions. (ISA 500.12) 50. When inventory isField visit and physical verification is done material to the financial in special cases. PAGE 76 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT statements, the auditor should obtain sufficient appropriate audit evidence regarding its existence and condition by attendance at physical inventory counting. (ISA 500.5) When in substantial doubt Yes, this is done. as to a material financial statement assertion, the auditor should express a qualified opinion or a disclaimer of opinion. (ISA 500.18) Analysis of Financial Statements 51. In regularity (financial) This is done but inadequacies exist. Thereisaneedtore-rienttesting audit, and in other types to undertake full financial attest of audit when applicable, audits covering all financial the auditor should analyze assertions. A financial audit the financial statements to shouldresultinanauditopinion establish whether acceptable beingexpressedonthecomplete accounting standards for setoffinancialstatementsrather financial reporting and than solely an identification of disclosure are complied the deficiencies found in the with. (INTOSAI Auditing transactions scrutinized. Standards 3.6.1) Analysis of financial statements should be performed to such a degree that a rational basis is obtainedtoexpressanopinion on the financial statements. The auditor should ascertain whether: (a) financial statements are prepared in accordance with acceptable accounting standards; (b) financial statements are presented with due consideration to the circumstances of the audited entity; C O U N T R Y R E P O R T PAGE 77 P U B L I C S E C T O R A C C O U N T I N G A N D A U D I T I N G STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT (c) sufficient disclosures are presented about various elements of financial statements; and (d) the various elements of financial statements are properly evaluated, measured and presented. (ISA 200.2-200.12) Reporting on Financial Statements 52. The auditor should Yes but not in a proper form for the provide an opinion paragraph Bangladesh Financial Statements in the audit report. (ISA 700.4) There should be a reference Not done to the financial reporting framework used to prepare the financial statements (including identifying the country of origin of the financial reporting framework when the framework used is notInternationalAccounting Standards). (ISA 700.12-15) The opinion paragraph should contain an expression of opinion on the financial statements stating the auditor's opinion as to whether the financial statements give a true and fair view (or are presented fairly) in all material respects. (ISA 700.17) 53. The SAI should provide a This is done. detailedreportamplifyingthe opinion in circumstances in which it has been unable to give an unqualified opinion. Reports should be made where weaknesses exist in systems of financial control or accounting. (ISA 700.17) PAGE 78 C O U N T R Y R E P O R T A C O M P A R I S O N T O I N T E R N A T I O N A L S T A N D A R D S STANDARD PRESENT POSITION OPTIONS FOR IMPROVEMENT Reporting on Fraud 54. The SAI should report SAIBangladesh'smandateisfor`auditing Forensicaudittrainingisneeded. fraudulent practices or serious and reporting'. Findings are included in The SAI does not focus on fraud irregularitiesdiscoveredbythe CAG's report for discussion in the Public in a sufficiently systematic auditors. (INTOSAI Auditing Accounts Committee (PAC) meeting. way. The international auditing Standards 4.0.7) ISA 240 More needs to be done at the entity level standards provide guidance establishes standards and torespondtofindingsthatindicatefraud. for the auditor on tests for provides guidance on the This is more likely to reinforce the role of fraud. ISA 240 requires the auditor's responsibility to Audit Committees and place emphasis auditor to perform procedures consider fraud and error in an on management's responsibility for to obtain information that is audit of financial statements. maintaining internal control systems to used to identify the risks of The standard requires prevent and to deal with fraud when it is material misstatement due to that ­ when planning and discovered. fraud; and evaluate the design performing audit procedures of the entity's related controls, and evaluating and reporting including relevant control the results thereof ­ the activities, and determine auditor considers the risk of whether they have been material misstatements in the implemented. The standard also financial statements resulting requires the auditor to inform from fraud or error. management in the auditee and the Board, if there is one, of any frauds and the failure in internal control that led to the fraud. The auditor's report should identify the action that the entity is taking about the fraud. Reporting on Compliance 55. With regard to regularity Reports are prepared, but not in More issues-based auditing audits,doestheauditorprepare accordance with international standards. should be done. Under the a written report, which may They focus on excessive detail and presentprocesstheCAGsubmits either be a part of the report not systemic issues that need to be a yearly report to the President on the financial statements or addressed. and it is the Public Accounts a separate report, on the tests Committee of the Parliament of compliance with applicable which calls the auditee/Ministry laws and regulations? forrespondingtotheunresolved (INTOSAI Auditing Standards audit findings. To reduce the 4.0.7) number of unresolved audit objections to be submitted to the President it would be helpful if the CAG could work with the Establishment Division to identify measurable violations and introduce financial and administrative penalties. C O U N T R Y R E P O R T PAGE 79 ISBN 984-300-000567-2