Report No. 39175-BD Bangladesh Public Sector Accounting and Auditing A Comparison to International Standards Country Report March 2007 Financial Management Unit South Asia Region Document of the World Bank Abbreviations and Acronyms ASOSAI Asian Organizationof SupremeAudit Institutions CAG ComptrollerandAuditor General CAO Chief Accounts Officer CGA ControllerGeneralofAccounts CFO ChiefFinancialOfficer CIPFA CharteredInstituteof PublicFinanceandAccountancy, UnitedKingdom CONTASA ConvertibleTaka SpecialAccount DFID Departmentfor InternationalDevelopment,UK DOSA Dollar SpecialAccount FIMA FinancialManagementAcademy FMRP FinancialManagementReformProject FRC FinancialReportingCouncil FY FiscalYear GOB Government ofBangladesh IAASB InternationalAuditingandAssurance Standards Board IAS InternationalAccounting Standards ICAB Instituteof CharteredAccountants ofBangladesh ICMA Institute ofCost andManagementAccountants IES InternationalEducationStandardsfor ProfessionalAccountants IFAC InternationalFederationofAccountants IFAC-PSC InternationalFederationofAccountants -Public Sector Committee IFRS InternationalFinancialReportingStandard INTOSAI InternationalOrganizationof SupremeAudit Institutions IPSASB InternationalPublicSector Accounting Standards Board(of IFAC) IPSAS InternationalPublicSector Accounting Standard(of IFAC) ISA InternationalStandardonAuditing MOF Ministry of Finance PAC PublicAccounts Committee PEFA PublicExpenditureandFinancialAccountability PFM PublicFinancialManagement SAFE SpecialAccountForeignExchange SA1 SupremeAudit Institution SOE State-OwnedEnterprise ROSC Reporton Observance of Standardsand Codes TOR Terms of Reference UNDP UnitedNations DevelopmentProgram 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 o f 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 reviewthe 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 andAuditor General RezauddinM.Chowdhury, Controller Generalof Accounts (retired on May 3,2006) SalauddinAhmed Chowdhury, DirectorGeneral, FinancialManagementAcademy Arastoo Khan, Joint Secretary (Budget) MOF and ProjectDirector,FMRP Chowdhury SalehAhmed, DirectorGeneral, Monitoring Cell, Finance Division Al-Mamoon Md. Sanaul Huq, DirectorGeneral, MissionAudit Directorate(CGA from May 4, 2006) Md. Abul Kashem, Director General, Directorateof Local GovernmentAudit Md.NurunNabi Khan, Director General, Directorateof CommercialAudit MohammedMoslemUddin, Director General, ForeignAided ProjectAudit Directorate Md. Abdul BasetKhan, Director General, RailwayAudit Directorate Gour Chandra Roy, Director General, Directorate of Civil Audit Md. Zakir Hossain, DirectorGeneral, Defence Audit Directorate MohammadMuslim Chowdhury, DeputySecretary, Debt Management,Ministry of Finance Abdus Samad, Additional Controller Generalof Accounts Niaz Rahman, Director IT, C&AG's office MikeFrazer, Team Leader,FinancialManagementReformProject(FMRP) Claude Lalonde, ComponentLeader FMRP Audit Component The review was conducted through a participatory process that involved these stakeholders whose responsesto 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 in Bangladesh. The Controller General of Accounts agreed with the need for the gradual adoption o f IPSAS and provided corrective comments for adoption. The various detailed comments provided by the agencies have been incorporated into 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. Two experienced local consultants were heavily involved in the assessment: Nasim Hyder, a former Senior 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 membersofthe Task Team responsible for writing this reportwere TaskTeam P. K.Subramanian, LeadFinancialManagementSpecialist BurhanuddinAhmed, Senior FinancialManagementSpecialist RonaldPoints, LeadConsultant, Accounting MichaelJacobs, LeadConsultant, Auditing Advisors SimonBradbury,Manager, Loans Department, WorldBank David Goldsworthy, Operations Manager, InternationalTechnicalCooperation Program, UK NationalAudit Office NoelHepworth,CharteredInstituteof PublicFinanceandAccountancy, London Abdul MudabbirKhan, FiscalAffairs Department, InternationalMonetaryFund IanMackintosh,Chairman, UK AccountingStandardsBoard N.R. Rayulu, Additional Comptroller & Auditor General (InternationalRelations), Office of the CAG of India; Nominee of Asian Organization of Supreme Audit Institutions (ASOSAI) Paul Sutcliffe, Technical Director, InternationalPublic Sector Accounting Standards Board, InternationalFederation ofAccountants DevelopmentPartner Collaborators DavidBiggs, FinancialManagementAdvisor, UK Departmentfor InternationalDevelopment DavidGray, GovernanceAdvisor, UK Department for InternationalDevelopment KathleenMoktan, Asian Development Bank .. 11 CONTENTS ExecutiveSummary ............................................................................... v IINTRODUCTION 13 I1PUBLICSECTORACCOUNTING .. ............................................................................ ............................................. 15 A InstitutionalFramework . ................................................................................... 15 (I)AccountingLaws andRegulations .................................................................................. 15 (2) EducationandTraining ................................................................................................ .................................................................................... 16 (3) Code of Conduct 17 (4) PublicSectorAccountantArrangements ........................................................ 18 B Accounting Standards as Practiced . ............................................... 18 (I)SettingPublic SectorAccounting Standards................................................................... (2) Financial Reports in State-Owned Enterprises.,............................................................. 18 20 I11PUBLICSECTORAUDITING . ................................................... 21 A InstitutionalFrameworkfor Public Sector Auditing . 21 (1)InstitutionalFramework ................................................................................... ..................................... 21 (2) SettingAuditingStandards 22 (3) EnsuringIndependence .................................................................................... .............................................................................. 23 (4) Qualificationsand Skills of the Auditors 24 (5) Training .............................................................................................................. ........................................................ 24 (6) Auditor Competence ............................................................................................. ......................................................................................... 25 (7) QualityAssurance 25 B Auditing Standards as Practiced . .................................................... 25 (1)AuditPlanning ................................................................................................... 26 (2) Audit Supervision .............................................................................................. 26 (3) ReviewingInternalManagementControlProcedures 26 (4) Audit Evidence ................................................................................................... .................................. 27 (5) AnalyzingFinancialStatements ....................................................................... 27 (6) Reportingon FinancialStatements 27 (7) Reportingon Fraud ........................................................................................... ................................................................. 29 (8) Reportingon Compliance ................................................................................. 29 I V ACTION PLANS . ........................................................................... 31 Annex A Methodologyof the Assessment . ........................................ 37 Annex B Accounting and Auditing Standards . ................................ 39 InternationalPublic Sector AccountingStandards ............................................. 40 InternationalEducationStandards ....................................................................... InternationalFinancialReportingandInternationalAccountingStandards 41 INTOSAICode of Ethics andAuditingStandards .............................................. ..40 42 InternationalStandardson Auditing.................................................................... 44 Annex C BangladeshAuditing and Accounting Legislation . Annex D Benefitsof Accrual Accounting Annex E Selection and Trainingfor Accountants and Auditors 51 .. ....................................................48 45 SupplementaryTable of Standardsand Gaps .................................. 54 iv PUBLIC SECTOR ACCOUNTING AND AUDITING A COMPARISON TO INTERNATIONAL STANDARDS Executive Summary 1. This assessment o f 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 o f 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 o f 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 o f international standards for accounting and auditing provides the basis for competent financial reporting and transparency. The International Public Sector Accounting Standards Board (IPSASB) o f the International Federation o f Accountants (IFAC) has developed a core set o f 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 o f independent international financial reporting standards for governments and others in public sector organizations. The study has taken the international standards as axiomatic with any acceptable options incorporated in the standards. The study has not assessed whether Bangladesh should adopt a limited version o f the standards, as the processes o f developing those standards have already considered any acceptable options, but they do not override authoritative national standards issued by governments, regulatory or professional accounting bodies. Application o f 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 o f reforms directed at promoting social and economic development. The IPSASB has also developed guidance on the transition from cash- to accrual-based reporting. The traditional emphasis on cash accounting has been found inadequate through failure to recognize true costs, and all assets and liabilities. Cash accounting can too easily neglect asset management, accumulating arrears, future liabilities (e.g. pensions), and contingent liabilities (e.g., guarantees). 3. Annex A explains the methodology used for the assessment. The actions that need to be taken as recommended by this assessment are summarized below. 4. BangladeshShould Adopt InternationalPublic Sector Accounting Standards. Along with the adoption o f IPSAS, the Cash Basis IPSAS accounting standard should be applied first, with subsequent gradual implementation o f the accrual IPSAS. The International Federation o f Accountants issues the IPSAS. Annex B gives a general description o f IFAC and a listing o f the IPSAS. At the present 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 o f 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 o f 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 inTable ES1. Table ES1 Summary of Accounting Standards Issues inBangladesh Standard Current status Action to move towards the international standard 1. Does the Public Sector No. There is an accountscode. Ministry of Finance (MOF) has AccountingLaw adopt issuedan order requestingthe IPSAS? Controller General of Accounts (CGA) to do the needfulto prepare GOB financial statements in accordancewith IPSAS Cash Basis. The first set of IPSAS-based statements for the core ministries (excludingspecialized organizations) will be producedfor (fiscal year) FY07-08. The first set of IPSAS-based statements for the specialized organizations will be producedfor FY09-10.Action will be takenby early2007 to form a committee includingthe CAG, CGA, MOF, and Professional Accounting Institutes, to work on an action planto adopt accrual accounting in an appropriate timeframe as well as the legal formalitiesto be compliedwith. 2. I s the educationand No Training in Accounts is MOF in consultationwith CGA and training of accountantsin providedby FIMA. CAG is to set up an Education accordwith IES? StandardsWorking Committee (including relevant service cadres, academiciansand professional accounting institutions)to chalk out the education andtraining requirement for public sector accountantsand auditors. Action is to be taken by MOF by March2007 together with a Terms of Reference (TOR) for the Committee. 3. Does the ICAB Code of Partially. CAG Code i s consistent The IFAC Code shouldbe a basis for Ethics match international with the InternationalOrganization a code specificallysuitedto public standards? of Supreme Audit Institutions sector accountants.The CGA is to (INTOSAI) Code. form a committee by March2007 to examine this. 4. I s there a body to There is no dedicatedbody. CGA CAG, CGA and ICAB are to use the prescribepublic sector does this but not as a Standards same committee establishedfor accountingstandards? Board. CAG is responsiblefor accounting standardsfor this vi Standard Current status Action to move towards the international standard prescribingthe form and manner of purpose. Audit Committees inpublic maintainingthe public accounts. sector entitiesshould assure compliance. The FinancialReporting Council should monitor state-owned enterprises. 5. Are the financial No. The Cash Basis IPSAS for The CGA component ofthe statementsin accordwith financial statementsis not FinancialManagementReform the IPSASstandard? followed. Projectcan take care of this matter. As the Govt. movestowards adoption of the IPSAS Cash Basis standards, the cash flow statement will be consistent with the standards. The concept of CFO managingthe financial managementfunctionin each government entity will be examinedby MOF. MOF to come up with apolicy paper on implementationby June 2007. The FMRP might be able to provide assistance after completionofthe logical frameworktasks ofthe project.A study is neededfor the applicationof Internationalstandards for the departmental accounts and their integrationinto the civil accounts inaccordancewith IPSAS. 6. I s the statement of cash No. This informationis currently As the Governmentmovestowards receipts and payments in presentedin formats inconsistent adoption of the IPSAS Cash Basis IPSAS form? with the IPSAS. standards,the cash flow statement will be consistent with the IPSAS forms. 7.Are accounting policies No. Statements of accounting There is a needto state the and explanatory notes policy are not providedinthe accounting policy and the basis on required? budget or accountsdocuments. which the accounts are prepared.The current notes will be reviewedand made consistent with IPSASas implementationproceeds. 8. Are other disclosures in Partly. Financialstatementsare It would be necessary to reducethe accordwith IPSAS? not available within 6 months of reportinglag; andto disclose some the reportingperiod; some items further information.Needto comply are not disclosed, and presentation with the disclosure aspects of the does not meet some transparency treatment of foreign currency. This requirements. will be reviewedand made consistent with IPSAS as implementation proceeds. A study o fhow to incorporate DOSA, CONTASA, SAFE and IMPRESTsystemprojectaccountsis neededfor their integrationinto the civil accounts in accordancewith IPSASandto enable effective auditing. 9. Doesthe government No. MOF has issuedan order requesting issue a consolidated the CGA to do the needfulto ureDare vii Standard Current status Action to move towards the international standard financialstatement which GOB financial statements in consolidates all controlled accordance with the IPSASCash entities? Basis. The first set o f IPSAS-based statements for the core ministries (excludingspecialized organizations) will be producedfor FY07-08. The first set of IPSAS-based statements for the specialized organizations will be producedfor FY09-10. A committee will be formedby March2007 including CAG, CGA, MOF, and Professional AccountingInstitutes,to work on an actionplanto adopt accrual accounting as well as the legal formalitiesto be complied with. 6. There is a need to adopt the IFAC-issuedInternationalStandards on Auditing(ISA) in additionto 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 o f INTOSAI and a listing of the INTOSAI and IFAC auditing standards). Application o f 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 o f financing and personnel policies will be neededand this will require a new National Audit Act. There is a need to improve audit impact. Audit recommendations and observations go unheeded in far too many instances. The application of the 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 o f auditing issues are shown in Table ES2. Table ES2 Summary of Auditing StandardIssuesin Bangladesh Standard Current status Action to move toward international standards 1. I s the SA1statutory Partially. Some additionalpowers A draft of a new audit law is framework in accord with needto be establishedby expectedfrom the CAG by early the needs o fthe INTOSAI legislationas set out below. 2007. Auditing Standards? 2. I s there a body to Not an exclusive one. The CAG The CAG and ICAB are to form a ... Vlll Standard Current status Action to move toward international standards prescribepublic sector does this rather than a prescribed consultativecommittee to provide auditingstandards? body. guidance on issues relatingto the implementationof auditing standards. 3. Have INTOSAIand The CAG has adoptedthe The consultativecommittee will be IFAC audit standards INTOSAIAuditing Standards. usedto consider ISA and develop been adopted? formal implementationnotes for guidance.' The CAG has notedthat INTOSAIhas adoptedthe ISAsand will follow this inBangladesh. 4. Has a code of ethics Yes equivalent to the INTOSAIstandardsbeen adopted? 5. I s the accountability Yes. process inthe SA1in accordwith INTOSAI Auditing Standards? 6. Doesthe SA1legal No. The SA1needs improved The NationalAudit Law should framework meet the legislation,especially for its matchinternationalmodels.2CAG INTOSAIAuditing personnel policies, funding should note that INTOSAIhas Standards for arrangements,reportingprocesses, adoptedthe ISAs and will follow this independenceand offence clauses, and the procedures inBangladesh powers? for appointingan Auditor General. 7. Does educationand No. Staffneeds more professional Recruitmentshould require an trainingof auditors accord training. The current recruitment accounting degree for auditors. with INTOSAIand IES? criteriafor the financial auditors in Training programs should leadto the CAG Office do not give professionalcertification.The CAG sufficientattention to accounting i s to set up an EducationStandards qualifications and as a result there Working Committee (including is too muchpressureon relevant service cadres, academicians government training institutionsto and professionalaccounting provide specialist knowledge. institutions) to chalk out the education and training requirement for public sector auditors. This will be done by June 2007 together with Terms o fReference. - 8. I s the SA1equipped No. Improvedmethodologies are The SA1needs improved with the audit methods inprocessofdevelopment.There technologies for audit office andtechnologiesto meet i s a lack o f appropriate technology managementas well as audit the INTOSAI standards? to support a management processes and reporting.The reform informationsystem for the SAL program for the CAG that is being providedunderthe Financial ManagementReformProgram will support the necessary improvements inthis area, andthe items 9 through 18 below. 9. Doesthe SA1have the Partly. Implementationis a A Quality Assurance Functionis 1Bangladesh should nominate individuals to the Reference Panel of the INTOSAI Working Group on FinancialAudit Guidelines, which is a subcommitteeofthe INTOSAIAuditing StandardsCommittee. Guidance is provided by A Model National Audit Office Act, The Association of Chartered Certified Accountants, UK, 2004. ix Standard Current status Action to move toward international standards quality assurance problem. being establishedunder F M W to programs to meet provide improved researchfacilities. international standards? 10. Does the processto Partly. Improved methodologies Systems-based audit techniquesare plan the audits meet are inprocess of development. being developedunder F M W which international standards? will enable the CAG to audit ministries as entities. Training is being piloted from June 2006. Auditors will be trained inpreparing planning files that meet INTOSAI standards by June 2007. 11. Does the process to No. Working paper systems and The systems-basedaudit techniques supervisethe audits meet audit methodologiesdo not being developedunder FMRP will do international standards? currently enable effective this. supervision. Improved methodologiesare inprocess of development. 12. Does the process to No. Improved methodologiesare The systems basedaudit techniques evaluate the reliability of inprocess of development. being developedunder FMRP will do internal control meet this. international standards? 13. Does the process used Partly. The testing for compliance The systems-basedaudit techniques in audits to assess should be more statistically based. being developedunder F M W will do compliance with laws Improved methodologiesare in this. meet international process of development. standards? 14. Does the audit Partly. The evidenceneeds to be The audit work i s to be re-ordered process, usedto obtain better organized. under FMRP aroundan evidence evidence for supporting based opinion in line with INTOSAI conclusions, meet Certification audit standards. international standards? 15 Does the audit analyze No. Current financial accounts are The FMRP opinion related audit the financial statements to not ina form to allow this. methodology will be implemented establishwhether and completed by July 2007 around acceptable accounting evidencebasedopinion. standards for financial reporting and disclosure are complied with? 16. Does the auditor No. The CAG signs the accounts The F M W will have developed preparean audit opinion but does not provide an opinion in processes for the CAG to audit on the financial the form required. The audit ministries as entities and express an statements ina form that methodology needsto change so as audit opinion as required by the accords with international to support an opinion that meets INTOSAI standardsby July 2007. standards? international standards and provide specific assuranceaboutthe adequacy ofthe accounts. The audit work must be plannedto meet the confidence level that is implicit inthe audit opinion, and which underpinsthe level and extent of audit testing required in order to express that opinion. 17. Does the Partlv. Audits focus on examininn The F M W will arrange for audit X Standard Current status Action to move toward international standards considerationof fraud and transactions for discrepanciesand work to report on propriety and error inan audit of regulatory breaches but not ina effectivenessof public expenditure. financial statements sufficiently systematic way. Forensic audit training is needed. accordwith international standards? 18. I s the process for Partly. Governancerequirements UnderF M W there is a goal for taking action on audit are inadequate.For State Owned Ministriesrespondingto audit reports recommendations Enterprises(SOEs), there are more promptly with corrective sufficiently effective to major delays inissuing audit measures implemented. Better meet international reports, long standingunresolved quality reports are to be produced standards? audit queries, and generallack of with more meaningful observations responseto audits. There is by June 2007. dissatisfaction with the audit reports going to the PAC. CAG reports couldbe improved interms of communicating clear objectives, addressingmore relevant problems, makingmore effective recommendationsand involving more extensive audit work. 8. PublicFinancialManagement(PFM)should be improvedthrough 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 i s reliable. Current enforcement o f adequate compliance with financial regulations in the general budget sector and corporate governance inthe public enterprise sector falls well short o f satisfactory standards. The P F M Indicators Review conducted by the World Bank showed the need for a fully coordinated reform strategy for the full cycle o f PFM, from budget formulation to legislative scrutiny and remedial action. The Financial Management Reform Program reported that: The ongoing financial management reforms and broader public sector reforms in Bangladesh have received strong support and advocacy from the Finance Division o f the Ministry o f Finance arising from a need to improve macroeconomic management and budget planning and execution, as well as a desire to move from detailed scrutiny o f ministries' spending activities to an emerging focus on performance and other budgetary reforms. This i s intended to lead to an increased delegation o f authority to line ministries and a greater focus on public expenditure outcomes and value for money. Accountability, based on the formal adoption o f 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 implementedto support a comprehensive P F M reform program. 9. Improve accounting and auditing skills. Improvements in compliance with international standards needs properly trained staff. Current programs are providing some support xi for this. However, significant structural changes in recruitment and training arrangements are essential to move toward adequate standards. 10. Prepare a PFM survey. The preparation of a PFM indicators survey provides the basis for monitoring progress in adoptin and applying international standards. The World Bank has prepared an update as of June 2005 and occasional updates will enable progress to be assisted if 8 required by the Government o f Bangladesh. Bangladesh Review of Institutional Arrangements for Public Expenditure, Financial Management and Procurement, World Bank, Dhaka,June 2005. xii 1. INTRODUCTION 1. The purpose o f this assessment o f public sector accounting and auditing is primarily to help implement more effective Public Financial Management (PFM) in Bangladesh, through better quality accounting and public audit processes and at the same time, to create greater stimulus for more cost effective outcomes o fthe government's spending. The main objectives in this regard are (a) to provide the country's accounting and audit authorities and other interested stakeholders with a common, well-founded knowledge regarding the status o f local practices as against the international standards o f financial reporting and auditing; (b) to assess the prevailing variances; (c) to chalk out ways o f improving their accordance with international standards; and (d) to provide a continuingbasis for measuring improvements. 2. As part o f the general support program in South Asia for assessment and improvement of public sector accounting and auditing, the World Bank with the cooperation o f member governments i s conducting a Review o f Public Sector Accounting and Auditing Practices in member countries. In conducting this assessment, diagnostic questionnaires were developed with appropriate references to the P F M Performance Measurement Framework4designed 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 usingPFM 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 o f Supreme Audit Institutions (INTOSAI) and International Federation o f 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 o f processes and products. 4. Historically, the system o f maintenance o f public accounts in Bangladesh, dates back to the mid-1800s, the days o f British-occupied India. Since its independence in 1971, Bangladesh has started a series o f 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 o f 4 The PFM Performance Measurement Framework has been developed as a contribution to the collective efforts of many stakeholdersto assess and develop essentialPFM systems, by providing a common pool of information for measurement and monitoring of PFM performance progress, and a common platform for dialogue. The PEFA Program is a partnership among the World Bank, the European Commission, the UK Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministryof Foreign Affairs, the RoyalNorwegian Ministryof Foreign Affairs, the International Monetary Fund, and the Strategic Partnership with Africa. A Steering Committee, comprising members of these agencies, manages the Program. A Secretariatis locatedat the World Bank in Washington, DC. the UnitedKingdomDepartment for InternationalDevelopment (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, includingthe Financial Management Reform Program that started in April 2003 with the following aims: To strengthen auditingpracticeand informationfor improvedparliamentaryscrutiny of public financialmanagement; To enhance aggregate fiscal management and to develop the regulatory framework for financial and performancemanagement; To enhance resource allocation, utilization and financial management, resource management, andperformancemanagementcapacity in lineministries; To enhance financialmanagementreportingsystems; To build the capacity of the Financial Management Academy (FIMA) as a sustainablecenter of excellencefor financialmanagementtraining ingovernance. 6. The five-year Financial Management Reform Program is funded by the DFID and the RoyalNetherlands Government. Its logical framework will assist Bangladesh in adopting IPSAS and INTOSAIAuditing Standards inthe followingways: Financialmanagementreportingcapacity will be strengthened in line ministries and CGA. 0 A plan will be implemented for cash-based financial reporting in conformity with internationalstandards with disclosureon accrual elements. 0 Audit work will be re-orderedaround evidence-based opinion in line with INTOSAI Auditing Standards. 0 The CAGwill audit ministriesas entitiesand express an audit opinionas required by the INTOSAIAuditing Standards. The systems-basedauditmanualwill enable the CAGto auditministriesas entities. 7. There needsto be a more comprehensiveplan for Bangladeshto adopt the Cash Basis IPSAS as part of a longer-termprogram to adopt accrual-basedreportingfor 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-levelINTOSAIAuditing Standards in the day-to-day auditingwork. 14 II. PUBLIC SECTOR ACCOUNTING A. Institutional Framework 8. The institutional framework should include adherence to International Accounting Standards (IAS) and the use o f qualified accounting staff to provide timely, relevant, and reliable financial information that i s 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 o f information on the current arrangements, and the apparent gaps in the present accounting laws and regulations o f Bangladesh; education and training of public sector accountants; application o f a code o f conduct; and numbers and characteristics o f public sector accountants. (1) Accounting Laws and Regulations 9. Bangladeshaccounting laws and regulationsshould make mention of International Accounting Standards. Current regulations are prescriptive about the maintenance and compilation o f accounts, but there is no current prescriptionfor the adoption o f 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 substantial accounting deficiencies and major difficulties in rectifying the problems identified. Many audit 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 o f 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 fund-would be a major step toward effective financial management in the public sector. 11. Bangladeshshould adopt the Cash Basis IPSAS. Bangladesh has not adopted the cash basis IPSAS but discussions with relevant authorities have indicated 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 under the cash basis o f accounting, the International Federation of Accountants (IFAC) Public Sector Committee now called the International Public Sector Accounting Standards Board (IPSASB) recognizes the right o f governments and national standard setters to establish guidelines and accounting standards for financial reporting. The IPSASB considers that the Cash Basis IPSAS i s an important step forward in improving the consistency and comparability o f financial reporting and encourages its adoption. As a first step, 15 the CGA has advised that the data is available to present a summary o f the annual accounts inthe form o f 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 inthe 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 patha6The requirements o f Section 7 o f the C A G (Additional Functions) Act for an annual general financial statement do not meet the requirements o f IPSAS and the legal accountability requirements are impaired. An extract o f the C A G (Additional Functions) Act is given in Annex C. 13. The Government of Bangladesh can be assisted in moving in an appropriate timeframefrom the Cash Basis IPSAS to the Accrual IPSAS by utilizingan IFAC study on the transitionalpathto accrualIPSAS.' The study has four main parts: Introduction: Chapters 1-3 address general planning and project management issues. General Financial Reporting Issues: Chapters 4 and 5 deal with the selection, development, and approval o f accounting policies and issues associated with the definition and identification o f reporting entities. Financial Elements: Chapters 6-8 outline the broad steps required for the identification, recognition, measurement, and disclosure o f assets, liabilities, revenues, and expenses. The broad approaches discussed could be adapted and applied to particular items. SpeciJic Topics: Chapters 9-15 highlight implementation issues associated with four specific accrual IPSAS, and provide guidance in relation to a selection o f topics not addressed, or only partially addressed, 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, 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 o f the selection and training processes are discussed in Annex E. 15. A more focused recruitmentprocessdesigned to meet the separate knowledge needs of the CAG and the CGA would be more efficientand more effective. The current practices o f Quality and timeliness of annual financial statements is performance indicator No. 25 in the PFM performance measurementframework supportedby the Bank and other development agencies. Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities, International Federationof Accountants Public Sector Committee Study 14, December 2003. 16 general recruitment to different cadres are not conducive to the development of professional services. Expertrecruitmentpractices are common in developed SupremeAudit Institutions(SAI) and can readily be adopted by a more independently structured Bangladesh Supreme Audit Institution.This would needthe Accounts andAudit Cadre andthe Subordinate Accounts Service to be considered separately within or outside the Bangladesh Civil Service. The CGA notedthat 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 professionalbody. This will require a long term programof training. It also requiresrecruitment 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 FinancialManagementAcademy (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 providedby CIPFA; but the qualification would be providedfrom the outsetjointly with the local institution, perhaps FIMA. The learning materials take into account internationalaudit and accountingstandards as requiredfor 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 provisionofthe skills developmentprogram. 17. A phasedand progressiveeducation programcombinedwith practicalexperienceis needed.Following the CIPFA program, a certificate couldbe offeredon partial completionofthe program, with a diploma being awarded on its full completion. The students would enter with varied levels of experience. Some students would be newly appointed staff with a suitable educational achievement; 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 approachesshould be used. Before students are awarded the diploma (but not the certificate)they would be required to complete specified work experience and earn workplace accreditation for demonstratedappliedskills 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 a code for accountants based on the fundamental principles of the IFAC-issuedCode of Conduct for ProfessionalAccounts needsto be implementedand observed. There should be arrangements to ensure that accountants confirm on a regular basis that they are operating in accordance with the code. 17 (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 responsibleCFO 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 computerizationprogramand 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 indue 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 internationalstandards. (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 prescribingthe 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 identifiesthe current position and the steps required ifthe Cash Basis IPSAS are to be adopted. Table 1 Required Steps for Adopting Cash Basis IPSAS I Requirements I Current defciencies I Activity required to adopt Cash Basis 1 ZPSAS The Bangladeshreportingstructure A statement ofcashreceiptandpayment statements focuses onconsolidatedfind and as per the CashBasis IPSAScanbe presentedinthe public accounts andthe CashBasis preparedusingexistinginformationfrom IPSAS IPSASfor financial statements is not the accountingrecords.Also, for each followed. entity (Le. ministryanddepartment),an additionalstatement inaccordwiththe CashBasisIPSAScanbeprepared.This wouldrequiresome restructuringofthe 18 Requirements Current deficiencies Activity required to adopt Cash Basis IPSAS CGA computerized reporting formats. Informationto All this information is available on This work requires restructuring ofthe IPSAS instatement the governmentreporting system, but CGA computerized reporting formats. of cash receipts and i s in formats inconsistentwith payments IPSAS. Accounting Statements of accounting policy are There is aneedto state the accounting policies and not provided inthe budget or policy and the basis on which the explanatory notes accountsdocuments. accounts are prepared. General Financial statements are not available It would be necessaryto reducethe considerations within 6 months ofthe reporting reporting lag; and to disclose further Reporting period period, cashbalances that are information. Adequacy of available for use and cash balances information about that are subject to external the entity restrictions and undrawn borrowing Presentationof facilities are not disclosed, and comparative presentationdoes not meet certain information transparency requirements. Correction of The nature of errors, the amount of Further training and better supervisionof errors disclosed the correction, andthe fact that accounts officer would be neededto Nature of error comparative information has been correctly classify expenditures and Amount of restatedor that it is impracticable to disclosureof errors and restatementof correction do so, is not disclosed. comparative information where Comparative practicable. information restated Consolidated The governmentbudget sector is a A statement of cash receipt and payment financial reporting entity, as well as an as per the Cash Basis IPSAS can be statements economic entity. prepared.Further steps will be neededto include controlled entities as per IPSAS and as per Section 7 of the CAG (Additional Functions) Act. Treatment of The government largely follows Need to comply with the disclosure foreign currency IPSAS except for the disclosure aspects ofthe treatment of foreign cashreceipts, aspects. currency. payments, and balances treated in compliance with IPSAS Effective date of The government has not formulated a Need for the CAG to formally adopt Part Iand migrationpath andtimeline for IPSAS and for the CGA to preparean transitional achieving cashbasis IPSAS, Part I, implementation plan and timeline, setting provision compliance. out specific steps to be taken including compliance. disclosure, if necessary, of application of the transitional provision(i. full e. compliance achievedwithin 3 years) for reporting periods beginning on a date within 3 years of first adoption of IPSAS. 19 (2) Financial Reports in State-Owned Enterprises 23. Audit reports from a sample of state-ownedenterpriseswere examinedfor the purposeof 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 accountswere examined: Year endfor State-owned enterprise independent audit BangladeshChemical IndustriesCorporation(BCIC) 2004 ChittagongUrea FertilizerLimited (Unit of BCIC) 2004 BangladeshSugar andFoodIndustriesCorporation 199718 BangladeshOil, Gas & MineralCorporation(Petrobangla) - entity 2004 BangladeshOil, Gas & MineralCorporation-consolidated 2004 Titas Gas Transmission & DistributionCompanyLtd. (unit of Petrobangla) 2004 BangladeshPetroleumCorporation(BPC) 200112 EasternRefinervLimited (Unit ofBPC) 2004 DhakaWater Supply and SewerageAuthority 2004 BangladeshPower Development Board 2003 ChittagongPortAuthority 200112 Agrani Bank 199910 BangladeshBiman 2001I2 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 shouldbe improvedfor SOE reporting. 25. The proposed Financial Reporting Council (FRC) should include commercial government authorities in its scope. These accounts were reported upon by independent charteredaccountingfirms andthen reviewedby the CAG. The Governmentauditreports did not mentionthat the annual accounts were qualified by the independent auditors.It was not apparent that accounts were made public. Action is neededto 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 stipulatedperiod consistent with that of listed enterprises. The FRC proposed by the Bank's Report on Observanceof Standards and Codes of Accounting and Auditing (ROSC Accounting& Auditing) would be ableto monitorthese matters. 20 111. PUBLIC SECTOR AUDITING A. Institutional Framework for Public Sector Auditing 26. Effective scrutiny by the legislature to ensure effective implementation of fiscal and expenditurepoliciesneeds comprehensive and competent externalaudits that are underpinned by InternationalStandards on Auditing.' 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.Improvingthe way the SA1functionsis integralto providinginformationfor improving the overall PFM system. All of these requirements are supported by the INTOSAI and IFAC standards.These shouldbeutilizedby the ComptrollerandAuditor General. 27. The diagnostic questionnairescollectedinformationdescribingcurrent arrangementsand the apparent gaps inthe country for the followingareas: Institutionalframeworkfor the supreme audit institution, Process for settingauditingstandards, Use of code of ethics or conduct, Arrangements to ensureaccountabilityinthe supreme audit institution, Arrangementsto ensure independence, Arrangementsto ensureadequate skills and qualificationsfor the auditors, Arrangement for providingtraining, Arrangements to ensurea desiredlevelof competencefor the auditors, Arrangements for quality assurance. Those areas with significant scope for improvementare discussedbelow. (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 the Comptroller and Auditor General. Annex C gives the relevant extracts from Part VI11 of the Constitutionrelatingto 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 Generalis appointedby the Presidentfor a term of five years or untilthe appointeeattainsthe age *Scope, quality, and follow-up of external audit is performance indicator No. 26 inthe PFMperformance measurementframework supportedby the Bankand other development agencies. 21 of sixty-five, whichever is earlier. The Bangladesh Supreme Audit Institution is seeking to enhance its independence by havingimprovedlegislativeauthority for its personnel policies and funding arrangements. Both of these measures would significantly enhance independence. The Bangladesh Supreme Audit Institutionis currently under-resourced for conductingthe level and extent of auditingto meet its statutory obligations.Although the diagnostic questionnairedid not assess this issue, any resource problems will only be exacerbated as the Bangladesh Supreme Audit Institutionendeavors 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 auditingprocessescan alleviatethe 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 effectiveaudit. Current legislationis inadequateto respond to significant lack of cooperation. A cultureof impunity must be strictly guardedagainst. (2) Setting Auditing Standards 30. The new NationalAudit Act should adopt InternationalStandards on Auditing.The CAG has adopted INTOSAI Auditing Standards. These standards are too general for adequate guidance. The InternationalStandards on Auditingare neededfor effectiveguidance for the audit staff to improve the audit work. The IFAC InternationalAudit and Assurance Standards Board (IAASB) is progressivelyrolling out InternationalStandards on Auditing. INTOSAI is moving from maintainingits own auditingstandards toward supporting IAASB in the development of its auditing standards, especially so that the IAASB Auditing Standards appropriately reflect the interests ofthe internationalpublic sector auditcommunity. 3 1. InternationalStandards on Auditing represent best internationalpractices for the auditing profession, particularly in areas of fundamental auditingpracticesuch as: auditevidence, documentation, auditmateriality, fraud, auditerrors, auditopinions, auditplanning, controlenvironment assessments,and supervisingthe work of audit staff. 32. The Comptroller and Auditor General has decided that Bangladesh can benefit from adoptingthe INTOSAIAuditing Standards as the core of its own auditingstandards, as these are internationallyrecognized, credibleandreadilyavailable.However, it is generally recognizedthat MTOSAI Auditing Standards need the underpinningsupport of the more detailed International Standards on Auditing. With the decision by INTOSAIto 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). 22 (3) Enswing Independence 33. A new National Audit Act is needed to provide effective independence. Some of the core principles of SA1 independence that were set out by INTOSAI are only partially, if at all, met by the current legislativeand administrativeframework: financial and managerial autonomy and the availability of appropriate human, material, andmonetary resources; independence of the SA1Heads, includingsecurity of tenure and legal immunity in the normaldischarge oftheir duties; sufficiently broad mandate and full discretion in the discharge o f SA1functions; and the freedom to decide on the content and timing of their reports, and to publish and disseminatethem; and existence of effectivefollow-up mechanisms on SA1recommendations. 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 o f the Finance Division of the Ministry of Finance, which controls the appointment, promotion,and disciplinary action for the CAGemployees.The CAG independence as upheld inthe Constitutionhas beenjeopardizedby 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 o f Finance, like other ministries.The more preferablearrangement, is for budget approval to involve a Parliamentary Committee consideringthe CAG budget and audit plans prior to approval by the Parliament. 35. A more open appointmentprocessfor the postof Comptrollerand Auditor General, which addresses term of service and ranking status, is preferred by modern audit legislation.The Comptrollerand Auditor General is appointed from among senior officers of the Audit and Accounts Cadre. The Comptrollerand 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 professionallyqualified 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, includingCanada, this positionis of an equivalentrank to that of a ministeror a federaljustice. Modellegislationfor an audit office preparedinthe UnitedKingdom recommendsthe same status of chiefju~tice.~ 36. Legislationshould provide an environment in which resources are adequate for the full regularity and performanceaudit mandate. The Comptrollerand 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 financialtransactions o f 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 authorizingfunctions and funding. The scope 9A Model National Audit Office Act. The Association o f Chartered Certified Accountants, London, 2004. 23 o f the C A G audit is narrowly focused. Supreme audit institutions normally conduct audits on the overall financial management performance issues o f 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 hisher authorized staff may provide comments and interviews to the press or other media on the subject of any published audit reports."" This communication may need to be in Bangla, the national language. 38. Improved PAC and departmentaladministrative processes are needed for following up audit reports." 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. Better protocols may be useful between the Comptroller and Auditor General and departments 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 inthe 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 o f improving auditors' competence.'2 (5) Training 40. The CAG Office should operate a continuingprofessionaldevelopmentprogram for the professional personnel.Improved facilities are needed and the adequacy o f proposals in the Financial Management Reform Project should be reviewed. loA ModelNationalAudit Office Act. The Association of CharteredCertifiedAccountants, London, 2004. 11Legislative scrutiny of external audit reports is performance indicator No. 28 in the PFM performance measurement framework supportedby the Bank and other development agencies. l2Chowdhury, Innes, Kouhy. 2005. "The Public Sector Audit ExpectationsGap in Bangladesh.Managerial Auditing Journal Vol. 20 No. 8, page 900. 24 (6) Auditor Competence 41. I t is necessary to strengthenthe technical and professionalcompetence 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 Office has historically concentrated mainly on the compliance audits needed to support proper execution 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 needsto create a core group of professionalaccountants for the certificationof public accounts. Substantially enhanced technology support is needed both in hardware and softwareterms. Attention needsto be paidto ethicalbehavior. A 2005 study of PAC expectations found that PAC members saw room for improvement in the ethical standards of the CAG auditor^.'^ (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, and other requirementsofthe audit standards. The Bangladesh 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 needsto be in place and operating effectively.Such a scheme should ensurethat audit reports are systematicallyreviewed 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 throughthe useof external reviewers. B. Auditing Standards as Practiced 43. The diagnostic questionnaires have collectedinformationabout the current arrangements for the audit methodology andthe apparent gaps inthe country inthe following areas: auditplanning, 0 audit supervision, 0 reviewinginternalcontrols, 0 reviewingcompliancewith laws, 0 ensuringadequateauditevidence is collected, l3Chowdhury,Innes, Kouhy.2005. "The Public Sector Audit ExpectationsGap inBangladesh.Managerial Auditing Journal Vol. 20 No. 8, page 900. 25 0 analyzingwhether the financialstatements accordwith accountingstandards, preparingaudit opinions, reportingon fraud, and 0 reportingon compliance. Out ofthis exercise came recommendedactivitiesthat will help bring localstandards in linewith internationalstandards. (I)Audit Planning 44. In the final results of an audit, the company's chiefexecutive should be accountable for the fiscal and expenditure policies and their implementation. Consultations between the auditor and the senior management o f 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 implementationof audit findings. Moreconsultationis needed. 45. The new audit methodology manualshould introducemorecomprehensive 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 oferrors or the correctnessof an overall figure for expenditure. (2) Audit Supervision 46. A more comprehensively structuredworking papersystem is needed for the audit to attain the normalaudit objectives regardingthe validity of transactions. Current supervision is hamperedby inadequateworkingpaper systems and an outdatedaudit methodology. (3) Reviewing Internal Management Control Procedures 47. Introducea modernaudit manualthat includesthe audit risk model.Bangladeshhas 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 adequateaudit methodology.This manifests itself in a number of ways: It is not clear what kind of audit opinion is being sought. There is insufficientassessmentof 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 levelthat is implicit in the audit opinion andthat underpinsthe leveland extent of audit testingrequired inorder to expressthat opinion. 48. An audit methodology should clearlyoutline the following points: the audit confidence level; 0 the requirementsfor auditplanning, audit work papers, and audit reporting; how audit materialityis determinedand what is an acceptable level of audit risk and confidence; 0 how to develop anappropriate mix of audit work to address the audit risks. 26 The audit should be completed by a process which provides a method for summarizing audit errors and evaluatingthem against audit materiality. (4) Audit Evidence 49. The audit methodology and necessary supporting working papers should be more precisely defined in a manualof 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 Financia1Statements 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 o f financial statements rather than solely an identification o f the deficiencies found in the transactions scrutinized. Audit reports currently reflect the scope o f the work undertaken in the audit. The audit report is heavily compliance based, identifying regulatory breaches in the compilation o f 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 o f 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 5 1. Audits of State-owned enterprises need to improve their impact. Independent chartered accounting firms examined the audit reports o f 9 state-owned enterprises and reviewed the audit reports o f the Commercial Audit (CA) Department o f the C A G 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 200112 January 2004 Energy and MR Division 2000/1 April 2003 Finance Division 199910 January 2002 Civil Aviation & Tourism 200011 April 2003 Long outstandingaudit objections 27 The reports belowreferto unresolvedauditobjections, datingas far back as 1973-74 inthe case of FinanceDivision. Audit objections Ministry Period Total Resolved Unresolved Industries 1971172to 351 7 344 2000101 EnergyandMRDivision 1985186to 82 1 81 199912000 FinanceDivision 1973174to 367 04 363 1998199 Civil Aviation & Tourism 1981182to 83 0 83 199912000 Latepreparation of independent audited accounts The relevant Ordinanceor Memorandumand Articles of Associationsets 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 Number of CA audit reports required reports not received EnergyandMRDivision 62 27 FinanceDivision 36 31 Lack of response by auditeedministries SOEs do not respondto the audit queries. Needfor technically qualijied audit staff All the SOEs are of a specialized nature and the quality of the audit work would be considerably improved if technicallyqualifiedpersonnel were made part of the audit team, or providetrainingto the CAGauditors.The latter approachwould also requirethe CAGauditors to be groupedby industryspecialization. 0 Needfor more revenue audit The CAG audit is limited to expenditures and does not include audit of the sales and revenue cycle. Giventhe importance of the revenue cycle of the public utilities revenue should be inthe scope of auditwork. 28 52. The requirementsof ISA 700, TheAuditor's Reports on Financial Statements,for the form of the audit opinion should be adopted in full. The audit scope and audit opinion paragraphsfor the ConsolidatedFinancialStatements2004 do not containthe degree of detailset 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 materialmisstatement. The scope statement notes the limitationsof staff, other resources, andtime available. This would normally be readby a user of the accounts as an indicationthat the audit opinionon the accounts is thereby qualifiedalthough this is not clearly statedinthe opinionparagraph. (7) Reporting on Fraud 53. There is a need for forensic audit training. Muchof the audit reportingseems to relate to fraudulent behavior.The Bangladesh Supreme Audit Institutiondoes not focus on fraud in a sufficiently systematic way. The InternationalStandards on Auditing provide guidance for the auditor on tests for fraud. ISA 240, TheAuditor's Responsibility to Consider Fraud and Error in an Audit of Financial Statements, requires the auditor to perform procedures to obtain informationthat is usedto identify the risks of materialmisstatement due to fraud. In addition, it requires the auditor to evaluate the design of the entity's related controls, including relevant controlactivities, and determinewhether they have been implemented. The ISA 240 also requires the auditor to inform the auditee's management and it's Boardof 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 membersagreedthat the audits did not confirmthat nomaterialfraud exist^'^ (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 Committeeand 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 unresolvedaudit objectionsto be submittedto the President, it would be helpfulifthe CAG could work with the Establishment Division to identify measurable violations and introduce financial and administrativepenalties 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 involvingmore 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 duringthe year andonly bringto 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 l4Chowdhury,Innes,Kouhy.2005, "The Public Sector Audit ExpectationsGap inBangladesh.Managerial Auditing Journal Vol. 20 No. 8. 29 cases when rules have not been followed correctly, to suggestingways in which control systems can be affordablystrengthened, thus reducingthe risks oferrors -accidental or deliberate. 30 m -0 d , 8 v) 82B2 9 -r$ Z 0 I Z 0 M M sw d m -0 8 rc 0 U 0 Annex A. Methodology of the Assessment As part o f 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 o f member governments, i s conducting a Review o f Public Sector Accounting and Auditing Practices in member countries. The development o f the PFM Performance Measurement FrameworkI8by the Public Expenditure and Financial Accountability (PEFA) ProgramIg 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 usedto 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 o f Ethics for Professional Accountants. 2. Public sector accounting practices for the general budget sector if using the cash basis o f accounting-compared with the requirements of the Cash Basis International Public Sector Accounting Standards (IPSAS). 3. Public sector accounting practices for the general budget sector if using the accrual basis o f accounting-compared with the IPSAS requirements that govern accrual reporting for the public sector. 4. Public sector auditing environment compared with the provisions o f the INTOSAI Code o f Ethics and the INTOSAI general standards. 5. Public sector auditing practices compared to the requirements o f the INTOSAI field standards and reporting standards, and the IFAC International Standards on Auditing. 6. Accounting and auditing practices for state-owned enterprises-compared with the requirements o f the International Financial Reporting Standards (IFRS) and International Standards on Auditingthat govern commercial reporting. The responses to the diagnostic questionnaires, prepared by the relevant country authorities with the help of in-country experts retained by the World Bank, are supplemented by a due diligence review conducted by members o f a World Bank task team. Various documents are examined as part o f the review, including relevant laws, codes o f conduct, national accounting and auditing standards, accountant selection and promotion processes, training 18The PFM Performance Measurement Framework has been developed as a contribution to the collective efforts of many stakeholdersto assess and develop essentialPFM systems, by providing a common pool of information for measurement and monitoringof PFM performanceprogress, and a commonplatform for dialogue. The PEFA Program i s a partnership among the World Bank, the European Commission, the UK's Department for International Development, the Swiss State Secretariatfor Economic Affairs, the French Ministryof Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the International Monetary Fund and the Strategic Partnershipwith Africa. A Steering Committee, comprising members of these agencies, manages the Program. A Secretariatis locatedinthe World Bank in Washington, DC. ANNEXB needs assessments, accountancy training course outlines, curricula and accreditationmethods, sample accounts,and sample auditreportsandworkingpaper sets. A country report on the assessment is prepared for each country and reviewedby an expert panel of advisors before examination by the World Bank country team. The draft is then shared with the Government for response before finalization. Discussions will also be held with the relevant stakeholders to devise an implementationplanto address the way forward with a view to minimizing deviations from internationalstandards. 38 Annex B. Accounting and Auditing Standards This contains a summary o f the frameworks that have been used for the public sector accounting and auditingassessment. These have been compiled by the International Accounting Standards Board (IASB), the International Federation of Accountants (IFAC) and the International Organization o f Supreme Audit Institutions (INTOSAI) which are cooperating in setting international standards for accounting and auditing. The IASB i s an independent, privately funded accounting standard-setter based in London, UK. The Board members come from nine countries and have a variety of functional backgrounds. In the public interest, IASB is committed to developing a set o f 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 o f 163 member bodies, mainly the national professional accountancy bodies o f 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 o f general purpose financial statements. These are the International Public Sector Accounting Standards (IPSAS). The full text o f Standards and Exposure Drafts currently on issue i s available at http://www.ifac.ora/publicsector. The first 20 IPSAS are based on IAS to the extent appropriate for the public sector. IFAC also has established the International Auditing and Assurance Standards Board (IAASB) to prepare and promulgate International Standards on Auditing (ISA) and i s now working incooperation with INTOSAIon preparingpublic sector guidance on the use of ISA. INTOSAI includes the Auditors General from almost all national government audit departments around the world and has its Secretariat in the Vienna offices of the Auditor General o f Austria. Its Auditing Standards Committee, chaired by the Auditor General of Sweden, produces the INTOSAI Code o f Ethics and Auditing Standards, a set o f standards at a higher and more generic level than the IFAC-issued ISA. The Auditing Standards Committee i s working with the IAASB to prepare practice notes explaining the application o f each ISA inthe public sector.20 The various standards are listed on the following pages. 20Working Group on Financial Audit Guidelines, INTOSAI Auditing Standards Committee, Swedish National Audit Office, 2004. ANNEXB International Public Sector Accounting Standards IPSAS 1, Presentation of Financial Statements IPSAS2, CashFlow Statements IPSAS 3, Net Surplus or Deficit for the Period, Fundamental Errors and Changes in Accounting Policies IPSAS4, TheEffects of Changes in Foreign Exchange Rates IPSAS 5, Borrowing Costs IPSAS6, Consolidated Financial StatementsandAccountingfor Controlled Entities IPSAS7, Accountingfor Investments in Associates IPSAS 8,Financial Reporting of Interests in Joint Ventures IPSAS9, Revenuefrom Exchange Transactions IPSAS 10,Financial Reporting in Hyperinflationary Economies IPSAS 11,Construction Contracts IPSAS 12, Inventories IPSAS 13, Leases IPSAS 14, Events after the Reporting Date IPSAS 15, Financial Instruments: Disclosure and Presentation IPSAS 16, InvestmentProperty IPSAS 17, Property, Plant and Equipment IPSAS 18, SegmentReporting IPSAS 19, Provisions, Contingent Liabilities andAssets IPSAS20, RelatedParty Disclosures IPSAS21,Impairment of Non-cash Generating Assets CashBasis IPSAS, Financial Reporting under the CashBasis of Accounting International Education Standards IES 1,Entry Requirements to a Program of Professional Accounting Education IES2, Content of Professional Accounting Education Programs IES 3, Professional Skills IES 4, Professional ValuesEthics andAttitudes IES 5, Practical Experience Requirements IES 6,Assessment of Professional Capabilities and Competence IES7, Continuing Professional Development IES 8,CompetenceRequirementsfor Audit Professionals 40 ANNEXB International Financial Reporting and International Accounting Standards IFRS 1, First-time Adoption of InternationalFinancial Reporting Standards IFRS2, Share-basedPayment IFRS3, Business Combinations IFRS4, Insurance Contracts IFRS5, Non-current Assets Heldfor Sale and Discontinued Operations IAS 1, Presentation of Financial Statements IAS 2, Inventories IAS 7, CashFlow Statements IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors IAS 10, Events after the Balance Sheet Date IAS 11,Construction Contracts IAS 12, Income Taxes IAS 14, SegmentReporting IAS 16, Property, Plant and Equipment IAS 17, Leases IAS 18, Revenue IAS 19, Employee Benefits IAS20, Accountingfor Government Grants and Disclosure of GovernmentAssistance IAS21, TheEffects of Changes in Foreign Exchange Rates IAS23, Borrowing Costs IAS24, Related Party Disclosures IAS26, Accounting and Reporting by Retirement Benefit Plans IAS27, Consolidated and Separate Financial Statements IAS28, Investments in Associates IAS29, Financial Reporting in Hyperinflationary Economies IAS 30, Disclosures in the Financial Statementsof Banks and Similar Financial Institutions IAS 31, Interests in Joint Ventures IAS 32, Financial Instruments: Disclosure and Presentation see also: See also Financial Instruments - other issues IAS 33, Earningsper Share IAS 34, Interim Financial Reporting IAS 36, Impairment of Assets IAS 37, Provisions, Contingent Liabilities and ContingentAssets IAS 38, Intangible Assets IAS 39, Financial Instruments: Recognition and Measurement see also: See also Financial Instruments - other issues IAS40, Investment Property IAS41, Agriculture 41 ANNEXB INTOSAI Code of Ethics and Auditing Standards ICode of ethics Integrity. Auditors have a duty to adhere to high standards ofbehavior (e.g. honesty and candidness) inthe course oftheir work and intheir relationships with the staff of audited entities. Independence, objectivity and impartiality. The independence of auditors should not be impaired by personalor external interests.There is aneedfor objectivity and impartiality inthe work and the reports, which should be accurateand objective. Conclusions inopinions and reports should be basedexclusively on evidence obtained and assembled inaccordance with the SAI's auditing standards. Professional secrecy. Auditors should not disclose information obtained inthe auditing process to third partiesexcept for the purposesof meeting the SAI's statutory responsibilities. Competence. Auditors must not undertake work which they are not competent to perform. Basic postulatesfor the auditingstandards (a) The SA1should consider compliance with the INTOSAI auditing standards inall mattersthat 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 conductedby the SAL The SA1 should determine the applicable standards for such work to ensurethat it i s of consistently high quality. '(b) The SA1should apply its ownjudgment to the diverse situationsthat arise inthe course of government auditing. (c) With increasedpublic consciousness, the demand for public accountability of persons or entities managingpublic resources has become increasingly evident so there is a needfor the accountability process to be inplace and operating effectively. (d) Development of adequate information, control, evaluation and reporting systems within the government will facilitate the accountability process. The Managementis responsiblefor correctness and sufficiency of the form and content ofthe financial reports and other information. (e) Appropriate authorities should ensure the promulgation of acceptableaccounting standards for financial reporting and disclosurerelevant to the needs ofthe government, and audited entities should develop specific and measurableobjectives and performancetargets. (f) Consistent application o f acceptableaccountingstandards should result in the fair presentationof the financial position and the results of operations. (g) The existenceof an adequate system of internal control minimizes the risk of errors and irregularities. It i s the responsibility of the audited entity to develop adequate internal control systems to protect its resources. It is also the obligation of the auditedentity to ensure that controls are inplace and functioning to help ensure that applicable statutes and regulations are complied with, and that probity and propriety are observedindecision-making, The auditor should submit proposalsand recommendationswhere controls are found to be inadequateor missing. (h) Legislative enactments would facilitate the co-operationofauditedentities inmaintaining andproviding access to all relevant data necessary for a comprehensiveassessment ofthe activities under audit. (i)AllauditactivitiesshouldbewithintheSAI'sauditmandate.* (h) Legislative enactments would facilitate the co-operationof auditedentities inmaintaining and providing access to all relevant data necessary for a comprehensive assessment of the activities under audit. (i) SAIsshouldwork towards improvingtechniquesfor auditingthe validity ofperformancemeasures. (k) SAIs should avoid conflict of interestbetweenthe auditor andthe auditedentity. * The f i l l scope of government auditing includes regularity andperformance audit. Regularity audit embraces: I Attestation of financial accountability of accountableentities, involving examination and evaluation of financial recordsand expressionof opinions on financial statements; I Attestation of financial accountability ofthe government administration as a whole; 1 Audit of financial systems and transactions including an evaluation of compliance with applicable statutes and regulations; 1 Audit of internal control and internal audit functions; 42 ANNEXB 1 Audit ofthe probity andproprietyof administrativedecisionstakenwithin the auditedentity; and 1 Reportingof any other mattersarisingfrom or relatingto the audit that the SA1considersshould be disclosed. Performance audit entails the audit of economy, efficiency and effectiveness and embraces: 1 Audit ofthe economy of administrativeactivities in accordance with soundadministrative principles andpractices, andmanagement policies; 1 Audit of the efficiencyofutilizationof human,financial and other resources,including examinationof informationsystems, performancemeasuresand monitoringarrangements,and proceduresfollowedby auditedentities for remedyingidentifieddeficiencies; and 1 Audit of the effectiveness ofperformanceinrelationto the achievementof the objectives ofthe auditedentity, andaudit ofthe actual impactof activities comparedwith the intendedimpact. Generalauditingstandards The auditor andthe SA1must be independent. The auditor andthe SA1must possessthe requiredcompetence. The auditor andthe SA1must exercise due care and concern in complying with the INTOSAIauditing standards. This embraces due care inplanning, specifying, gatheringand evaluatingevidence, and in reportingfindings, conclusions andrecommendations. The SA1shouldadopt policies andproceduresto recruitpersonnelwith suitable qualifications. The SA1shouldadopt policies andproceduresto develop andtrain SA1employeesto enable them to performtheir tasks effectively,andto definethe basis for the advancement o f auditors and other staff. The SA1shouldadopt policies andproceduresto preparemanuals andother written guidance instructions concerningthe conduct of audits. The SA1shouldadoptpolicies andproceduresto supportthe skills andexperience available within the SA1 and identifythe skills whichare absent; provide a gooddistributionof skillsto auditing tasks and assign a sufficient number of persons for the audit; andhave properplanningand supervisionto achieve its goals at the requiredlevelof due care andconcern. The SA1shouldadoptpolicies andproceduresto reviewthe efficiency andeffectiveness of the SAI's internalstandards andprocedures. Field standards (a) The auditor shouldplanthe audit in a manner that ensuresthat an audit o f highquality is carried out in an economic, efficientandeffective way and in a timely manner. (b) The work ofthe audit staffat each leveland audit phaseshouldbe properly supervisedduring the audit; anddocumentedwork shouldbe reviewedby a senior member of the audit staff. (c) The auditor, indeterminingthe extent and scope o f the audit, shouldstudy andevaluatethe reliability of internalcontrol. (d) Inconductingregularity(financial) audits, a test shouldbe made of compliancewith applicable laws andregulations.The auditor shoulddesignaudit steps andproceduresto provide reasonableassurance o f detectingerrors, irregularities, and illegalacts that could have a direct and materialeffect on the financial statementamounts or the results ofregularity audits. The auditor also should be aware ofthe possibilityof illegalacts that could have an indirect andmaterialeffect on the financial statements or resultsof regularityaudits. Reportingstandards (a) At the end o f each audit the auditor shouldprepare a written opinion or report, as appropriate, setting out the findings inan appropriate form; its contentshouldbe easy to understandand free from vagueness or ambiguity, include only informationwhich is supportedby competent and relevantaudit evidence, andbe independent, objective, fair andconstructive. (b) It is for the Auditor Generalto decide finally on the actionto be taken inrelationto fraudulent practices or serious irregularities discoveredby the auditors. 43 ANNEXB lnternational Standards on Auditing Framework: Audit Evidence: lnternational Frameworkfor Assurance 500 Audit Evidence Engagements 501Audit Evidence --Additional Considerationsfor Specific Items GeneralPrinciplesand Responsibilities: 505 External Confirmations 5 10 Initial Engagements -- Opening Balances 200 Objective and GeneralPrinciples Governing 520Analytical Procedures an Audit of Financial Statements 530 Audit Sampling and Other Means of Testing 2 10 Termsof Audit Engagements 540Audit of Accounting Estimates 220 Quality Controlfor Audits of Historical Information 545 Auditing Fair ValueMeasurements and Disclosures 230 Documentation 550 Related Parties 230RAudit Documentation 560 SubsequentEvents 240 TheAuditor's Responsibility to Consider Fraud in an Audit of Financial Statements 510 Going Concern 240A Fraud and Error 580 Management Representations 250 Consideration of Laws and Regulations in an Audit of Financial Statements Usingthe Work of Others: 260 Communications of Audit Matters with Those Charged with Governance 600 Using the Work of Another Auditor 610 Considering the Work of Internal Auditing RiskAssessmentand Responseto Assessed 620 Using the Work of an Expert Risks: Audit Conclusionsand Reporting: 300 Planning an Audit of Financial Statements 3 15 Understanding the Entity and Its I00 TheAuditor's Reports on Financial Statements Environment andAssessing the Risks of Material 700R TheIndependent Auditor's Report on a Misstatement CompleteSet of GeneralPurpose Financial 320 Audit Materiality Statements 330 TheAuditor's Procedures in Responseto I01 Modifications to the Independent Auditor's AssessedRisks Report 402 Audit Considerations Relating to Entities 7I 0 Comparatives Using Service Organizations 120 Other Information in Documents Containing Audited Financial Statements Specialized Areas: 800 TheAuditor's Report on Special Purpose Audit Engagements 44 Annex C. Bangladesh Auditing and Accounting Legislation (A) Auditing Legislation Extracts from Part VI11o f the Constitution o f Bangladesh relating to the Comptroller and Auditor General Section 1. Establishment of Office of the Auditor-General (1) There shall be a Comptroller and Auditor-General o f Bangladesh(hereinafter referred to as the Auditor-General) who shall be appointed by the President. (2) Subject to the provisions o f this Constitution and o f any law made by Parliament, the conditions o f service o f the Auditor-General shall be such as the President may, by order, determine. Section 2. Functions of the Auditor-General (1) The public accounts o f the Republic and o f all courts of law and all authorities and officers o f the Government shall be audited and reported on by the Auditor-General and for that purpose he or any person authorized by him inthat behalf shall have access to all records, books, vouchers, documents, cash, stamps, securities, stores or other government property inthe possession o f any person inthe service of the Republic. (2) Without prejudice to the provisions o f clause (l),it i s prescribed by law inthe case if of any body corporate directly established by law, the accounts o f that body corporate shall be auditedand 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 inclause (l),such law may prescribe, and until provision i s as made by law under this clause the President may, by order, make such provision. (4) The Auditor-General, inthe performance o f these functions under clause (l), notshall be subject to the direction or control o f any other personor authority. Section 3. Term of office of the Auditor-General (1) The Auditor-Generalshall, subject to the provisions o f this article, hold office for five years from the date on which he entered upon his office, or until he attains the age o f sixty-five years, whichever is earlier. (2) The Auditor-General shall not be removed from his office except in like manner and on the like ground as ajudge o fthe 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 o fthe Republic. ANNEXC Section 4. ActingAuditor-General At any time whenthe office o f Auditor-General is vacant, or the President is satisfied that the Auditor-General is unable to perform his functions on account o f absence, illness or any other cause, the President may appoint a person to act as Auditor-General and to perform the functions o f that office until an appointment i s made under article 127 or, as the case may be untilthe Auditor-General resumes the functions o f his office. Section 5. Form and manner of keepingpublic accounts The public accounts of the Republic shall be kept insuch form and insuch manner as the Auditor-General may, with the approval o f the President, prescribe. Section 6. Reportsof the Auditor-Generalto be laid beforeParliament The reports o f the Auditor-General relating to the Reports of public accounts o f the Republic shall be submitted to the President, who shall cause them to be laid before Parliament. 46 ANNEXC (B) Accounting Legislation Extracts from C A G (Additional Functions) Act 1974, and Amendment Act 1975 Section 7. Keeping of Government accounts The Auditor General shall be responsible for keeping o fthe accounts o fthe 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 o f the President, determine. Section 9. Audit of accounts of statutory public authorities, etc ...the Auditor General may audit the accounts o f any statutory public authority, public enterprise and local authority Section 10. Preparation of general financial statement The Auditor General shall prepare annually, in such form as he may, with the concurrence o f the President, determine, and submit to the President, a general financial statement incorporating a summary o f the accounts o f the Government, statutory public authorities, public enterprises and local authorities for the last preceding year and the particulars o f 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 thisfunction Section 11. Making of rules The Auditor General may make rules and give directions in respect o f all matters pertaining to audit o f any accounts he i s requiredto audit. 47 Annex D. Benefits of Accrual Accounting Extract from Study No. 14 "Transition to the Accrual Basis o f Accounting: Guidance for Governments and Government Entities", IFAC Public Sector Committee, December 2003 "1.18 The PSC has commented extensively on the benefits 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 o f the benefits o f reporting on the accrual basis. 1.19 The information contained in reports prepared on an accrual basis i s useful both for accountability and decision-making. Financial reports prepared on an accrual basis allow users to: assess the accountability for all resources the entity controls and the deployment of those resources; assess the performance, financial position and cash flows o f the entity; and make decisions about providing resources to, or doing business with, the entity. 1.20 At a more detailed level, reporting on an accrual basis: shows how a government financed its activities and met its cash requirements; allows users to evaluate a government's ongoing ability to finance its activities and to meet its liabilities and commitments; shows the financial position o f a government and changes infinancial position; provides a government with the opportunity to demonstrate successful management of its resources; and i s useful in evaluating a government's performance in terms o f its service costs, efficiency and accomplishments. Financial Position 1.21 Accrual accounting provides information on an entity's overall financial position and current stock of assets and liabilities. Governments needthis information to: make decisions about the feasibility o ffinancing the services they wish to provide; demonstrate accountability to the public for their management of assets and liabilities recognizedinthe financial statements; plan for future fundingrequirements o f asset maintenance and replacement; plan for the repayment of, or satisfaction of, existing liabilities; and manage their cash position and financing requirements. 1-22 Accrual accounting requires organizations to maintain complete records o f assets and liabilities. It facilitates better management o f assets, including better maintenance, more appropriate replacement policies, identification and disposal o f surplus assets, and better management o f risks such as loss due to theft or damage. The identification o f ANNEXD assets and the recognition o f depreciation help managers to understand the impact o f using fixed assets in the delivery o f services, and encourage managers to consider alternative ways o f managing costs and delivering services. 1.23 Accrual accounting provides a consistent framework for the identification o f existing liabilities, and potential or contingent liabilities. The recognition o f obligations meetingthe definition o f a liability andthe criteria for recognition: compels governments to acknowledge and plan for the payment o f all recognized liabilities, notjust borrowings; provides information on the impact o f existing liabilities on future resources; means that it i s possible to allocate responsibility for the management o f all liabilities; and provides necessary input for governments to assess whether they can continue to provide current services and the extent to which they can afford new programs and services. 1.24 Accrual accounting highlights the impact o f financing decisions on net assetdequity and may lead governments to take a longer term view when making financing decisions than i s generally possible when relying on cash or modified cash reports. Information on net assetdequity also means that governments may be held accountable for the financial impact o f their decisions on both current and future net assetdequity. Changes in an entity's net assetdequity between two reporting dates reflect the increase or decrease in its wealth during the period, under the particular measurement principles adopted and disclosed inthe financial statements. Under the accrual basis o f accounting, the financial statements will include a Statement o f Financial Position which discloses information about assets and liabilities. Where assets and liabilities are not equal, a residual figure for net assetdequity will be reported. Where this figure i s positive it can be interpreted as the net resources that may be applied for the provision o f goods or services inthe future, and therefore the community's investment in the reporting entity. Where the figure i s negative, it may be viewed as the amount o f future taxation or other revenues which are already committed to paying o f f debt and other liabilities. Net assetdequity can comprise some or all o f the following components: contributed capital; accumulated surpluses and deficits; and reserves (for example revaluation reserve; foreign currency translation reserve). Financial Performance 1.25 Accrual accounting provides information on revenues and expenses, including the impact o f transactions where cash has not yet been received or paid. Accurate information on revenues i s essential for assessing the impact o f taxation and other revenues on the government's fiscal position, and in assessing the need for borrowing in the long term. Information on revenues helps both users and governments themselves to assess whether current revenues are sufficient to cover the costs o f current programs and services. 49 ANNEXD 1.26 Governments need information about expenses in order to assess their revenue requirements, the sustainability o f existing programs, and the likely cost of proposed activities and services. Accrual accounting provides governments with information on the full costs oftheir activities so that they can: consider the cost consequences o f particular policy objectives and the cost o f alternative mechanisms for meeting these objectives; decide whether to fund the production o f services within government sub-entities, or whether to purchase goods and services directly from non-government organizations; decide whether user fees should cover the costs associated with a service; and allocate responsibility for managing particular costs. 1.27 Accrual accounting can provide financial information on whether sub-entities are delivering specified services, and delivering them within agreed budgets. The same information, at a more detailed level, can also be used within sub-entities for the management o f activity and program costs. 1.28 Accrual accounting allows an individual entity to: record the total costs, including depreciation of physical assets and amortization of intangible assets, o f carrying out specific activities; recognize all employee-related costs and to compare the cost of various types o f employment or remuneration options; assess the most efficient way o f producing their goods and services and o f managing the resources over which they have been delegated authority; determinethe appropriateness of cost-recovery policies; and monitor actual costs against budgetedcosts. CashFlows 1.29 Accrual accounting provides comprehensive information on current cash flows and certain projected cash flows, including the cash flows associated with debtors and creditors. It can therefore lead to better cash management and may assist in the preparation o f more accurate cash budgets. 50 Annex E. Selection and Training for Accountants and Auditors 1. There are two categories o f 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 inthe Subordinate Accounts Service. Accounts and Audit Cadre 2. Cadre officers are recruited by the Public Service Commission and assigned inthe 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 o f the Ministry o f Finance which controls promotion and disciplinary action. Functionally the officers work under the CGA or the CAG. There i s frequent interchange o f officials betweenthe accounts department and the audit department. Thus the separation o f 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 inthe Bangladesh civil service training academy for six months ina foundation course after appointment. After the training, the cadre officers are assigned to the different cadres to join the training academy o f 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 duringtheir continued service. 4. The cadre officers inthe training academy go through the following courses: Accountancy, elementary to advance; Book-keeping, government accounting; Fundamentalrules o f government, civil service rules, treasury rules; Economics, budgeting, constitution; Computer knowledge; Auditing; PrCcis and drafting, report writing; Manuals, codes, rules of different audit directorates. 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 C A G 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 i s no provision for any higher level training course for them. The course durationranges 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 o f Cost and Management Accountants (ICMA). The CAGYunder Constitutional mandate, certifies the accounts o f the Republic, although no fully qualified Chartered Accountants are available in that department to certify the accounts, which, as per INTOSAI standards, is a must, Appointment o f Chartered Accountants to groom a core group o f professional accountants in-house has been discussed many times but never implemented due to funding constraints. 52 BANGLADESH PUBLIC SECTOR ACCOUNTING AND AUDITING A COMPARISON TO INTERNATIONAL STANDARDS SUPPLEMENTARY TABLE OF STANDARDS AND GAPS SOUTH ASIA REGIONFINANCIALMANAGEMENT UNIT THE WORLD BANK MARCH2007 SupplementaryTable of Standards and Gaps Independence Providedby the Legislation 64 Qualificationsand Skills ofthe Auditor 66 Training 67 Competence inAuditing 67 Qualityofthe Audits 68 Assessment of PublicSector Auditing Standards and Practices 68 Planning 69 Sunervision 70 InternalControls 71 Compliancewith Laws 72 Evidence 73 Analysis of FinancialStatements 73 Reportingon FinancialStatements 74 Reportingon Fraud 74 Reportingon Compliance 75 54 .Y 2l v) B3 C 0 zE B .d 5 d 0 0 hl 3 m- Y B Y E a 88 3 \o 20 U id ."% m 3 sW e L ."M C ."8C c) 2E> 0 3 B r--- 0 d E! .3 .3 32 Y d e, n x B z > 2a m .3 2 +m .- Y 0 b d d on I .-.-m c.'