Report No. 39176-LK Sri Lanka 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 ADB Asian DevelopmentBank AG Auditor General CAO ChiefAccountingOfficer CFO ChiefFinancialOfficer CIPFA CharteredInstituteofPublicFinanceandAccountancy, UnitedKingdom DFID Department for InternationalDevelopment DG DirectorGeneral IAASB InternationalAuditing andAssurance StandardsBoard ICASL Instituteof CharteredAccountants of Sri Lanka IAS InternationalAccountingStandard IES InternationalEducation Standardsfor ProfessionalAccountants IFAC InternationalFederationofAccountants IFRS InternationalFinancialReportingStandard INGAF Instituteof GovernmentAccounts andFinance INTOSAI InternationalOrganization of SupremeAudit Institutions IPFDA InstituteofPublicFinanceandDevelopmentAccountancy (Sri Lanka) IPSAS InternationalPublic SectorAccountingStandards(of IFAC) IPSASB InternationalPublic SectorAccountingStandardsBoard ISA InternationalStandardfor Auditing MOF Ministry of Finance MOF&P Ministry ofFinanceandPlanning PEFA Public Expenditure andFinancialAccountability PFM PublicFinancialManagement PSC PublicSector Committee SA1 SupremeAudit Institution SLIDA Sri LankaInstituteof DevelopmentAdministration SOE State-OwnedEnterprise WB WorldBank iii Acknowledgments This assessment o f accounting and auditing standards and practices inthe public sector review was carried out in active collaboration with the Government o f Sri Lanka and various stakeholders, particularly the Auditor General and his staff; and the Director General, Department o f State Accounts, Ministry o f Finance and Planning, and his staff. A workshop was held in Colombo on August 18, 2006 by the Government o f Sri Lanka and the participating donors, to review the draft report and decide on the steps to be taken inthis regard. Inparticular, the following individuals and their departments provided time and expertise to this assessment: Mr.S. C. Mayudunne, Auditor General (retired August 2006) Mr.W. D.Hemaratne, Acting Auditor General(August-October, 2006) Mr. P. A. Pematilaka, Director General, State Accounts, Ministry of Finance (Auditor General since October, 2006) Mr.V. Kanagasabapathy, Director General, Department of Public Enterprises, Ministry o f Finance (retired October, 2006, Financial Management Advisor to the Ministry of Finance since October 2006) Mr.Ajith Rathnayake, Director General, Sri Lanka Accounting and Auditing Standards Monitoring Board Mr.W. M.Wijepala, DeputyAuditor General, Auditor General's Department. Mr.H.A.S. Samaweera, DeputyAuditor General, Auditor General's Department. Mr. D. Widanagamachi, Director, Accounting Services, State Accounts, Ministry of Finance (Acting Director General, State Accounts since October, 2006) Mr.P. Fernando, Director, Systems and Training, MinistryofFinance Mr.Tennekoon, Director, Sri LankaInstituteofDevelopment Administration Mr.R.M.J.. Ratnayake, Audit Superintendent, CeylonPetroleum Corporation Mr.W. P. C. Wickramaratne, Audit Superintendent, NationalWater Supply andDrainage Board Mr.P. B. Munasinghe, Director Establishment, Instituteof Chartered Accountants of Sri Lanka Mr.S. Sockalingam, Technical Director, Institute ofChartered Accountants ofSri Lanka Mr. Danushka De Silva, Technical Manager, Institute of Chartered Accountants of Sri Lanka Mr.Regis Chapman, USTreasury ResidentBudgetAdvisor Mr.Kandasamy, Advisor to Auditor General Mr.Ruwanchandra, Consultant, Sri LankaInstituteofDevelopmentAdministration The review was conducted through a participatory process that involved these stakeholders. The provision o f several responses to the diagnostic questionnaires by senior members o f the Department o f State Accounts and the Auditor General's Department was especially useful for the study. Two highly experienced local consultants were heavily involved in the study: Uditha Palihakarra, with a strong commercial sector background, was formerly CEO o f the SME Bank of Sri Lanka, and President o f the Institute o f Chartered Accountants o f Sri Lanka; Dyananda Wijesekara, with a government background, is Director, Finance and Administration, Techno Management Consultants; he was earlier employed as a senior-level government accountant in Sri Lanka and in several other countries. iv The World Bank's Task Team for the assessment is responsible for the content of this report. Review commentswere obtained from advisors and development partners and the country team. Task Team Mr.PK Subramanian(Lead FinancialManagement Specialist) Ms.Jiwanka Wickramasinghe (Financial Management Specialist) Mr.RonaldPoints(Lead Consultant, Accounting) Mr.MichaelJacobs (Lead Consultant, Auditing) Advisors Mr.SimonBradbury, Manager, LoanDepartment, WorldBank Mr. David Goldsworthy, Operations Manager, International Technical Cooperation Program, UK NationalAudit Office Mr.NoelHepworth, CharteredInstitute ofPublic Finance andAccountancy, London Mr.Abdul MudabbirKhan, FiscalAffairs Department, InternationalMonetary Fund Mr.IanMackintosh, Chairman, UKAccounting StandardsBoard Nominee of Asian Organization of Supreme Audit Institutions (ASOSAI) - Mr. N.R. Rayulu, Additional Comptroller & Auditor General (International Relations), Office of the CAG of India Mr. Paul Sutcliffe, Technical Director, International Public Sector Accounting Standards Board, InternationalFederation o f Accountants DevelopmentPartner Collaborators Mr.DavidBiggs, FinancialManagement Advisor, UKDepartment for InternationalDevelopment Ms.Kathleen Moktan, Asian Development Bank V ExecutiveSummary ................................................................................... I.Introduction ..............................................................................................vlu...1 CONTENTS I1 Public Sector Accounting . . ....................................................................... 3 A InstitutionalFramework .......................................................................................... 3 (1)Accounting Laws and Regulations.................................................................... (2) Education and Training.................................................................................... 33 (3) Code of Conduct................................................................................................ 4 (4) Public Sector Accountant Arrangements .......................................................... 5 B AccountingStandardsas Practiced . ......................................................................... (1) Setting Public Sector Accounting Standards..................................................... 55 (2) Presenting Financial Reports............................................................................ 5 I11 PublicSector Auditing 7 A InstitutionalFramework for Public Sector Auditing .. ........................................................................... ............................................ (I)Institutional Framework.................................................................................... 77 (2) Setting Auditing Standards................................................................................ 8 (3) Code of Ethics ................................................................................................... 9 (4) Accountability in the SupremeAudit Institution ............................................... 9 (5) Independence..................................................................................................... 9 (6) Qualijkations and Skillsfor the Auditors.................................................... (7) Training............................................................................................................. 9 (8) Audit Competence........................................................................................... 10 10 B Auditing Standards as Practiced . (9) Quality Assurance........................................................................................... ........................................................................... 10 (I)Audit Planning................................................................................................. 11 (2) Audit Supervision ............................................................................................ 11 (3) Reviewing Internal Controls ........................................................................... 11 (4) Reviewing Compliance.................................................................................... 11 (5) Audit Evidence................................................................................................. 12 (6) Analyzing the Financial Statements................................................................ 12 (7) Preparing Audit Opinions............................................................................... 12 (8) Reporting on Fraud......................................................................................... 13 (9) Reporting on Compliance................................................................................ 13 I V Action Plans . 14 Annex A Methodologyof the Assessment 18 Annex B Accounting and Auditing Standards .. .......................................................................................... ................................................ ....................................... 20 International Public SectorAccountingStandards 21 International Education Standards .............................................................................. ..................................................... 21 International Financial Reporting Standardsand International Accounting Standards ....................................................................................................................... 22 INTOSAI Codeof Ethics andAuditing Standards ........................................................................... ...................................................... 23 International Standardson Auditing 25 vi Annex C Sri LankanAccountingLegislation 26 Annex D Sri LankanAudit Legislation 28 Annex E Benefits of AccrualAccounting .. . .................................................... .......................................... ................................................. 31 Supplementary Detailed Table of Accounting and Auditing Standards Issues IPublicSectorAccounting . ........................................................................ A Assessment of the NationalPublicSector AccountingEnvironment 35 B Assessment of NationalPublic Sector AccountingStandards ............................ .................35 38 I1 PublicSector Auditing .C. ...Assessmentof Accountingand Auditingin State-OwnedEnterprises .........................................................................................41 40 A Assessment of the Public Sector AuditingEnvironment 41 B Assessment of Public Sector Auditing Standardsand Practices . ..................................... ........................ 55 vii EXECUTIVESUMMARY 1. This assessment of public sector accounting and auditing is generally meant to assist with the implementation o f more effective Public Financial Management (PFM) through better quality accounting and public audit processes in Sri Lanka. It is intended to provide greater stimulus for more cost-effective outcomes o f government spending. The specific objectives are (a) to provide the country's accounting and audit authorities and other interested stakeholders with a common strongly founded knowledge as to where local practices stand in accordance with the internationally developed standards o f financial reporting and audit; (b) to assess the prevailing variances; (c) to chart paths to reduce those variances; 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) besides a comprehensive IPSAS on the cash basis o f accounting. IPSAS establish an authoritative set of independent international financial reporting standards for governments and others in public sector organizations. The study has taken the international standards as axiomatic with any acceptable options incorporated in the standards. The study has not assessed whether or not the country should adopt a limited version o f the standards, as the processes o f developing the standards have already considered any acceptable options in their text, but they do not override authoritative national standards issued by governments, regulatory or professional accounting bodies. Application of IPSAS by national authorities will support developments in public sector financial reporting directed at improving decision making, financial management, and accountability, and it will be an integral element o f reforms directed at promoting social and economic development. The IPSASB has also developed guidelines on the transition from cash- to accrual-based reporting.' The traditional emphasis on cash accounting has been found inadequate through failure to recognize true costs, and all assets, and liabilities. Cash accounting can too easily neglect asset management, accumulating arrears, future liabilities (e.g., pensions), and contingent liabilities (e.g., guarantees). 3. Annex A explains the methodology used for the study. Annex B provides a summary o f accounting and auditing standards referred to in this study. Annex C and D provide Sri Lanka accounting and auditing legislation, respectively. Lastly, Annex E includes a description o f the benefits o f accrual accounting. The desired lines o f action to be taken as indicated by this assessment are summarized below. 4. The plans to build on the current reporting under IPSAS through a path to implementationof the accrual IPSAS should be supported. An implementation program for progressive adoption o f accrual reporting is underway. The IPSASB encourages governments to progress to the accrual basis of accounting and to harmonize national requirements with the IPSAS and Sri Lanka is progressing very well on this path. 'Transition to the Accrual Basis of Accounting: Guidance for Governments and Government Entities, IFAC Public Sector Committee, December2003. viii 5. The Table o f Standards and Gaps appended at the end o f this report provides a matrix detailing the current standards, the present position, and options for improvements. A summary o f these accounting issues is shown in Table ES1. Table ES1 SU mary of AccountingStandardsIss !s in Sri Lanka Standard Current status Action to move towards the international standard 1. Hasthe Public Sector Not formally. Since 2002, the A new law is not required at this Accounting Law adopted FinanceDepartmenthas been time. Financial Regulationswill be IPSAS? preparing annualaccounts appropriately amendedto adopt increasingly inaccordancewith the IPSAS. The Departmentof Public Cash Basis IPSAS. In2005, Finance ofthe Ministry of Finance& additional disclosureswere made Planning(MOF&P) is to take the as a first step towards presenting initiative by early 2007 in the account on an accrualbasis. consultation with all stakeholders. However there is no current prescription by law for the adoption of IPSAS. 2. Does educationand Substantially,but not formally. A proposal for WB funding for training of accountants Governmentaccountants are collaboration with CIPFA is in accord with IES? required to hold a university progressand is currently under degree in accountingor equivalent. considerationby the Ministry of Further training is also provided Finance (MOF). Implementation is but not instrict accordance with likely during 2007. the IES. Director General (DG) State Accounts is to arrange to prepare a proposalto explore changes to the efficiency bar examinations in serviceprogressionwith aview to including knowledge of IPSAS. DG State Accounts will also consider actions for the inclusion of IPSAS in the curriculum ofuniversities and INGAFBLIDA to meet IES. Progress is expectedduring 2007. 3. Does the Code of No. There is a Civil Service Code A specific code based on IFAC or the Ethicsmatch international but this is not specific to ICASL for use by public sector standards? accounting. accountants. A Public Sector Committee (PSC) could explorethe possibilities during early 2007. 4. I s there abody to No. ICASLprovides standards for By mid2007, DG StateA/Cs to prescribepublic sector commercial accounting. initiate aproposal for settingup a accounting standards? Public Sector Committeeto establish standards for the government sector. 5. Are the financial Governmentaccounts are DG State A/Cs is to take steps to statements in accordwith substantially inaccordwith Cash arrange compliance with IPSAS for internationalstandards? Basis IPSAS. State-Owned the core Governmentand non- Enterprise(SOE) accounts follow commercial SOEs during 2007. IFRS but the accounts are usually World Bank (WB) is to discuss the qualified by the auditors on serious supportrequired with DG StateA/Cs grounds. by mid2007. 6. I s the statement of Cash Yes, except that third party The 2005 accounts showed Receipts and Payments in paymentsare not shown statements of financial performance, IPSAS form? separately. cash flows, financial position, ix Standard Current status Action to move towardsthe international standard 7. Are accountingpolicies Yes contingent liabilities, accounting and explanatorynotes policies and notes to the accounts. reauired? The transition path now underway 8. Are other disclosures in Yes will make the improvementsthat are accordwith IPSAS? needed. The World Bank arranged a workshop on IPSAS on October 27, 2006. 9. Does the government No. Only the Central Government Further steps will be neededto issue a consolidated Sector is covered.Public include controlled entities and WB is financial statement which enterprises, SOE and statutory to discuss the support requiredwith consolidatesall controlled boardsare not included inthe DG State A/Cs by mid2007. entities? accounts. 6. There is a need to adopt the WAC-issued InternationalStandards on Auditing (ISA) in addition to the INTOSAI Auditing Standards already adopted, and auditing manuals and procedures should meet these standards. Currently the INTOSAI Auditing Standards have not formally been adopted although there is a willingness to follow their prescriptions. New and amended laws should mandate the adoption o f international standards. Audit recommendations and observations go unheeded in far too many instances. The implementation o f the Cabinet Decisions on a National Audit Act and the implementation o f the Institutional Development Plan for the Auditor General's Department should introduce modern audit methodologies and a modern audit organization. 7. The Table of Standards and Gaps at the end o f this report shows each component o f the standards, the present position, and the options for improvements that would bring Sri Lanka into closer conformance with international standards. A summary o f these auditing issues is shown in Table ES2. Summary Standard Current status Action to move towards international standards 1. I s the SA1statutoryframework Partly. There is constitutional A draft audit act has beenprepared inaccordwiththe needsofthe and is awaiting approval.A INTOSAIAuditing Standards? decisionis inprospectbeforethe end of 2007. 2. I s there abody to prescribe The AG and the DG State A/Cs public sector auditing standards? will coordinatethe proposalfor settingup ofa PSC with the ICASL to establishstandards for the government sector by mid 2007. 3. Have INTOSAIand IFAC audit Yes, but there is no documentthat No action requireduntil the Audit standards been adopted? lists out the public sector audit Act is passed. standards. X Standard Current status Action to move towards international standards 4. Has acode of ethics equivalent No. The Code of Conduct for The proposedIDP likely to be to the INTOSAIstandards been Public Sector Accountants i s implementedduring 2007 will adopted? mainly basedon the Establishment adopt acode of ethics equivalent to Code for Public Servants. the INTOSAICode. 5. I s the accountability process in Yes the SA1in accordwith INTOSAI Auditing Standards? 6. Does the SA1legal framework No. For example, greater The draft act addresses most ofthe meet the INTOSAIstandards for independence is neededinthe eight core INTOSAIprinciples of independenceand powers? areas of administration and independence. resources. 7. Does educationandtraining of Not sufficiently. Peer reviews of A proposal for hnding CIPFA auditors accordwith INTOSAI and the AG Departmenthave shown collaboration is under discussion IES standards? severalinadequacies. between MOF and the WB. The Institutional DevelopmentPlan (IDP) implementation will address skills analysis during 2007 and 2008. 8. I s the SA1equippedwith the No. The current audit methods are audit methods and technologiesto attunedto budgetcompliance meet the INTOSAIAuditing checking. Major changes to audit Standards? methodsare neededto support certification audit. Greater The Institutional Development technology is needed. Planpreparedby the UK and The 9. Does the SA1have the quality No NetherlandsSAIs will correctthese assurance programsto meet the deficiencies and implementationof internationalstandards? the IDP is under discussionwith 10. Doesthe processto planthe Partly. Audit planning is not the WB. Action is likely during audits meet international sufficiently tailored to the audit 2007. standards? client. 11. Does the processto supervise No. Working paper systems are the auditsmeet international insufficientto support proper standards? supervision. 12. Does the processto evaluate No. The orientation is to identify the reliability of internal control deficient transactions rather than meet international standards? verify the systems of control. 13. Does the processusedinaudits Yes to assess compliance with laws meet international standards? 14. Does the audit process usedto No. Working paper systems are obtainevidence to support insufficient. conclusionsmeet the international standards? 15. Does the audit analyze the Yes financial statements to establish whether acceptable accounting standardsfor financial reporting and disclosureare complied with? xi Standard Current status Action to move towards international standards ~ 16. Does the auditor preparean Yes audit opinion on the financial statements in a form that conforms to international standards? 17. Does the considerationof fraud Yes and error inan audit of financial statements conform to international standards? 18. I s the process for taking action No. There is an inadequate system An appropriatesystem needs to be on audit recommendations for response. set up. sufficiently effective to meet internationalstandards? 8. Public Financial Management (PFM) should be improved through a more ambitious and comprehensive reform program. Rapid progress is being made toward adoption o f accrual reporting along IPSAS lines. 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, stating that the system is working properly and that the information is reliable. Current enforcement o f adequate compliance with Financial Regulations in the general budget sector and corporate governance in the public enterprise sector falls short o f satisfactory standards. Use o f the PFM performance measurement framework developed by the Public Expenditure and FinancialAccountability (PEFA)2 program will be a good basis to develop and measure progress in the full cycle o f PFM reform from budget formulation to legislative scrutiny and remedial action. 9. Improvement of accountingand auditingskills. Improved compliance with international standards requires properly trained staff. Basic accounting and auditing skills are good but post graduate skills are required that suit Sri Lankan conditions. The proposed improvement o f accountancy training institutions through the adoption o f the Diplomas and Certificates issued by the Chartered Institute o f Public Finance and Accountancy in the United Kingdom should be used to strengthen public sector accounting and auditing skills. 10. The preparation of a PFM indicators survey that provides the basis for monitoring progress in adopting and applying international standards. Improvement o f audit impact should be monitored through the progress o f the institutional strengthening proposed for the Office o f the Auditor General over the next few years. 'The PEFA Program is a partnership among the European Commission, the UK Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the Strategic Partnership with Africa, IMF, and the World Bank,. A Steering Committee, comprising members of these agencies, manages the Program. A Secretariat is located in the World Bank in Washington, DC. xii 1. INTRODUCTION 1. The basic purport o f this assessment of public sector accounting and auditing is to facilitate more efficient Public Financial Management (PFM) through better quality accounting and public audit processes in Sri Lanka. Moreover, a greater stimulus is expected to be created for more cost-effective outcomes o f government spending. The main objectives o f this effort are to: (a) provide Sri Lanka's accounting and audit authorities and other interested stakeholders, with a common strongly founded knowledge regarding the status o f local practices in accordance with the internationally developed standards o f financial reporting and audit; (b) assess the prevailing variances; (c) chart paths to reduce the variances; and (d) provide an ongoing basis for measuring improvements. 2. Information on national standards and practices for accounting, financial reporting, and auditing in the government budget sector and in the state-owned enterprise sector were collected from diagnostic questionnaires that were completed in conjunction with country authorities. The diagnostic questionnaires incorporated 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). The responses to these questionnaires have been further explored through discussions conducted by a World Bank team with the country authorities. These discussions included examination o f accounts and audit reports and working papers to explore the quality o f the processes and the products. Annex A further explains the methodology used for the study. 3. The analysis in this report has been conducted in the light o f a concurrent public sector fiscal reform program supported by the Asian Development Bank (ADB) and the World Bank. Detailed studies o f accounting and auditing have been conducted by ADB (Diagnostic Study o f Accounting and Auditing Practices in Sri Lanka, 2002) and the World Bank (Country Financial Accountability Assessment, 2004). In addition, the United Kingdom and The Netherlands Audit Offices collaborated in producing the 2003 Institutional Development Plan for the Auditor General's Department. 4. These studies have examined the system o f maintenance o f public accounts in Sri Lanka ingreat detail. They show that the FinancialRegulations (1992), which are the main authority for public financial management in the general government sector, focus only on the input aspect o f expenditure control. They are issued by the executive branch (not by the legislature) and do not have the force o f law. The studies found that there i s a significant and long-standing practice o f non-compliance with the Financial Regulations, in form and in sprit. The result is that government financial statements presenting the financial condition o f the State (the State Accounts) have not been available on a timely basis and are not comprehensive. In addition, the numbers are not completely reliable because o f reconciliation and other problems. Reliability o f financial data and timeliness o f financial reporting have improved considerably in the presentation o f financial statements for 2005. More needs to be done to develop performance budgets. 5. The Government o f Sri Lanka has been making progress in improving the current state o f affairs. The Financial Regulations are being transformed into a set o f nine guidelines (on 1 planning, budgeting, foreign aid, revenue management, government accounting, procurement, fixed asset management, stores management and internal auditing) as part of simplifying the procedures and systems shifting focus more on outputs. This study found that so far, only one guideline hadbeenimplemented. The State Accounts havebeenproduced in accordancewith the Cash Basis InternationalPublic Sector Accounting Standards (IPSAS) and are intended to make the transitionto the accrual basis or reportingin accordance with IPSAS. A significantgap inthe public financial accountability framework has beenthe lack of a mechanism for monitoringand reviewingoutputs and outcomes of governmentexpenditure. This requirementwill become more stringent with accruals, and the process must be tightened. A proposed Public Finance Bill (incorporatingreferences to the financial guidelines), which has been drafted, lays a firmer legal basis for improvingperformanceand financial accountability. But, action on the same has been deferred. Public sector auditinghas been improvingwith wider coverage of public sector bodies and reporting that is more focused on material issues and general areas of control that need improving. What does not appear to have been improving has been the response to these identifieddeficiencies. 6. Annex B provides a summary of accounting and auditing standards referredto in this study. Annex C and D provide accounting and auditing legislation, respectively.And Annex E includes a descriptionof the benefits of accrual accounting. The Table of Standards and Gaps at the end of the report summarizes each component of the current accounting and auditing standards,the presentposition, andthe options for improvementsthat would bring Sri Lanka into closer conformancewith internationalstandards. 2 II. PUBLICSECTORACCOUNTING A. InstitutionalFramework 7. The institutional framework should include adherence to IFAC-issued International Accounting Standards ( U S ) and qualified accounting staff to provide the timely, relevant, and reliable financial information needed to support all fiscal and budget management, decision making, and reporting processes. The diagnostic questionnaires that were used 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 Sri Lanka; education and training o f public sector accountants; application o f a code o f conduct; and numbers and characteristics o f public sector accountants. (1) Accounting Laws and Regulations 8. The accounting laws and regulations are prescriptive about the maintenance and compilation of accounts, but make no mention of InternationalAccounting Standards. Sri Lankan government organizations can be categorized into (a) ministries, departments, and constitutional bodies, including the Auditor General's Department; (b) non-revenue-earning statutory bodies and public enterprises; and (c) revenue-earning statutory bodies and public enterprises. The Sri Lankan Accounting and Auditing Standards Act (No. 15) 1995 requires that the latter group reports in accordance with Sri Lanka Accounting Standards. Categories (a) and (b) are required to report in accordance with the Financial Regulations (1992) issued by the Public Finance Department o f the Ministry o f Finance. These groups need to prepare cash-based budgets and financial reports. The Financial Regulations do not prescribe accounting standards in this re~pect.~The Government is considering introducing accrual budgeting and accounting as part o f the Public Expenditure Management Reform Program. There is no current prescription by law for the adoption o f IPSAS. Since 2002, the State Accounts Department has been preparing annual accounts according to the Cash Basis IPSAS, and the Auditor General has been certifying those accounts. Also, the formats for presenting financial statements for 2005 has been improved taking into account the good practice examples adopted by other countries. There i s an intention to progressively move toward accrual accounting usingIPSAS. 9. Enacting the proposed Public Finance Bill can provide a firm basis for more effective enforcement and clarify the financial accountabilities of responsible parties. There i s a need for a better framework o f financial accountability through a modern financial reporting framework. Producing annual audited accounts for each government department will provide a basis for holding senior managers accountable for their operations and use o f budget funds. The Auditor General will need to specify the steps that departments should take to correct any accounting effects that lead to audit qualifications to the annual accounts. (2) Education and Training 10. Government accountants are recruited on the basis of the results of a competitive examination for which a university degree in accounting or equivalent is required. This DiagnosticStudy ofAccountingandAuditingPracticesin Sri Lanka, ADB, 2002. 3 qualification provides a solid basis for an effective accounting service but needs to be followed up with further training in the core competencies needed for public sector accounting and reporting. 11. There is a need for constant upgradingof training for government accountants in the requirements of the FinancialRegulationsand in the standards for preparingfinancial statements. Continuedtrainingafter inductiontends to depend uponrequestsrather than through a plannedcontinued skills maintenance program. Currently government accountantstake a 30- week inductiontraining course that provides PFM foundation, but does not provide exposure to or traininginaccountingstandards. 12. Current training institutions provide a foundation for an international standard public sector accountancy qualification. The Institute of Public Finance and Development Accountancy (IPFDA) was inaugurated in 1980 as a professional organizationfor public sector accountants and auditors in Sri Lanka. The objective of IPFDA is to improve public sector financial management systems in the field of budgeting, accounting, reporting, and auditing through the professional development of its membership. The Instituteof GovernmentAccounts and Finance (INGAF) was established in 1999 with the sponsorship of the Asian Development Bank. An arm of the Ministry of Finance, INGAF trains public sector accountingpersonnel, for the purpose of improvingthe financial management skills of public sector accountants and to develop computerizedintegratedgovernmentaccounting. 13. A training program that meets the International Education Standards (IES) for ProfessionalAccountants is needed for the public sector accountants and auditors. Plansto adopt the public sector program of the Chartered Institute of Public Finance and Accountancy (CIPFA) in United Kingdom for Sri Lankan conditions would provide the path for sustained, improved training. The plan is to use existing Sri Lankan training institutions (IPFDA and INGAF) that would be merged, upgraded, and monitored to international standards. The newly merged institutionwould be in a position to affiliate with IFAC after 10 years. The teaching institutionwould use the present CIPFA internationalcertificate and diploma scheme as a basis for Sri Lankanqualifications. The CIPFA learningmaterialstake into account internationalaudit and accounting standards as required for adoption by public sector organizations. The modules cover the following elements: 0 Financialreporting 0 Accountingfor decision making 0 Audit Iand I1 0 Financialmanagement 0 Law andtaxation 0 Informationsystems management 0 Management (3) Code of Conduct 14. The Code of Ethicsis embeddedwithin the EstablishmentCode for Public Servants and is less prescriptivethan the standard code for professional accountants. The general knowledge of the requirements of the Establishment Code is poor.A code of ethics is neededto improve financial compliance. The cultural support that a strongly directed Code of Ethics can createwould be helpfulin improvingpublicfinancialmanagement. 4 15. A specific code based on IFAC or the Institute of Chartered Accountants of Sri Lanka (ICASL) should be prepared and adopted for use by public sector accountants. These two professional accounting bodies have codes which suit their specific institutional needs. The public sector codes would need to be directed to the needs o f the public sector. The IFAC- issued Code o f Ethics for Professional Accountants provides a useful basis for the public sector code. The proposed CIPFA training program would cover the training o f both accountants and auditors. The certificate and diploma scheme would initially be used, and then the full CIPFA professional qualification would be used, as adapted for Sri Lanka circumstances. With both qualifications, those who are accepted into CIPFA membership, whether as affiliates (for the diploma holders) or as qualified accountants (for those who complete requirements for the full professional qualification), would be required to abide by the CIPFA code o f discipline and ethics. This i s based on the IFAC Codes. (4) Public Sector Accountant Arrangements 16. For each public sector body that prepares annual accounts, there should be a professionally qualified chief financial officer (CFO) who is to be responsible for maintainingsystems of internalfinancial controls that manage risks, and for preparingthe accounts for signature by the chief accounting officer (CAO). Audits are not currently effective in ensuring that systems o f internal financial controls work well. The audit results are not being translated into effective remedial action. The CFO function needs to be upgraded in order to get this work done. B. Accounting Standards as Practiced 17. The diagnostic questionnaires have collected information on the current arrangements and the apparent gaps in Sri Lanka for setting public sector accounting standards, and for presenting financial reports. Out o f this exercise came recommended activities that will help bring local standards inline with international standards. (7) Setting Public Sector Accounting Standards 18. More formalized arrangements are needed for setting accounting standards for the public sector. For commercial accounting, the ICASL is empowered by law to establish accounting and auditing standards, and the relevant committees (such as the Public Sector Accounting Committee) usually adopt IFAC standards after a short period o f time for consideration. With IFAC promulgating IPSAS, it would be appropriate to amend the Sri Lanka Accounting and Auditing Standards Law (1995) to add responsibility for public sector standards. The Financial Regulations set out the detailed rules for the cash-based system o f accounts. These are currently intended to support the use o f Cash Basis IPSAS. (2) Presenting Financia1Reports 19. The accordance of the annual Sri Lanka consolidated financial statements with Cash Basis IPSAS, Part 1, is incomplete.Time tables are needed for consolidation o f controlled entities into the cash basis statements as per 1.6.5 o f the Cash Basis IPSAS (e.g. public enterprises), and for the transition path to the adoption o f accrual accounts based on IPSAS. 5 20. The enforcement procedures for the Financial Regulations are weak. Audits show substantial lack of compliance. The response to audit findings is inadequate. 21. Greatly increased attention needs to be given to corporate governance issues for state-owned enterprises (SOEs) where the Auditor General qualifies the annual accounts. The state-owned enterprises apply International Financial Reporting Standards (IFRS). They should also comply with governance requirements established by the Department of Public Enterprises and by the ICASL Code of Best Practice. However, in the year 2003, only 10 of the 178 SOE accounts received unqualified audit opinions. The Auditor General expressed a disclaimer on 29 public corporations and noted a lack of response to problems identified in earlier years. 22. In the event of continued failures in corporate governance, the actions taken with respect to directors of public corporations need to be reviewed. There is a clear problem in corporate governance where serious audit objections that lead to disclaimers on accounts are uncorrected. Long-standing receivables were noted as a particular problem. Failure by directors who are not meeting their responsibilities to deal with such issues leads to increased tax-payer burdens. 6 111. PUBLICSECTORAUDITING A. Institutional Framework for Public Sector Auditing 23. Effective scrutiny by the legislature through comprehensive, competent external audit underpinned by International Standards on Auditing (ISA) enables accountability for the implementation o f fiscal and expenditure policies. The environment for an effective supreme audit institution (SAI) requires a comprehensive approach to public financial management. Supreme audit institutions are not stand-alone institutions; they are part o f a PFM architecture that also includes budgeting, accounting, internal control, audit and legislative oversight, and government response. Improving the way the Sri Lanka Supreme Audit Institution functions is integral to providing information for improving the overall P F M system, but the action must take place within the executive branch under the watchful eyes o f the legislature and the public. A strong demand for good public sector external auditing i s necessary for the supreme audit institution to have any impact. This requires willingness o f the executive branch to accept and respond to external scrutiny over its management o f funds and to ensure that the relevant reform action is taken. It also requires public disclosure o f the audit reports to ensure public support for effective action. 24. The diagnostic questionnaires collected information describing the current arrangements in Sri Lanka and the apparent gaps inthe following areas: Institutional framework for the supreme audit institution Process for setting auditing standards Use o f Code o f Ethics or Codes o f Conduct Arrangements to ensure accountability in the supreme audit institution Arrangements to ensure independence Arrangements to ensure adequate skills and qualifications for the auditors Arrangement for providing training Arrangements to ensure a desired level o f competence for the auditors Arrangements for quality assurance (1) Institutional Framework 25. The appointment and powers of the Auditor General should be specified in a new NationalAudit Act. The Constitution and relevant laws4provide for the President to appoint the Auditor General with a mandate to audit all government bodies. In practice, commercial state- owned enterprises are audited by accounting firms and reviewed by the AG Department, but the provisions are not very specific about the type o f audit report required. The Auditor General does 4FinanceAct No. 38 of 1971, Ch. 252; Municipal Council Ordinance, Ch. 255; Urban Council Ordinance, Ch. 255; Pradesiya Sabha Act, No. 15 of 1987 (local government); and Lanka Accounting and Auditing Standards Act 1995. 7 not have the powers or the status to secure implementationof his recommendations, despite the severeproblems inpublic financial managementthat are identified inhis reports. 26. Negotiationswith donors over the implementationof the institutionalstrengthening program should be completed. In October 2005, the Government of Sri Lanka approved the drafting of a National Audit Bill and an Institutional Development Plan to modernize the AG Department. The Ministry of Finance is being asked to liaise with donors for the necessary funding. Further discussions are neededto decide the best way to manage the process, including the possibilitiesfor asector-wideapproachto the development. 27. A review of PFM high-level indicators should be conducted. Given the strong interdependenciesamongthe elementsofthe PFM system, coordinatedor integrated development programs would be important for successful implementation. Merely strengthening the AG Department will not work without the strengthening of internal controls and the legislative scrutiny processes. Inthis context, the use of indicatorsfor measuring PFM performancewould be very helpful. 28. The new National Audit Act should provide a broader base to undertake all forms of audit and an adequate offences clause to ensure cooperation. Forensic and performance audit are neededas part of a balancedaudit program. (2) SettingAuditing Standards 29. The NationalAudit Act should specify arrangementsto adopt INTOSAIand IAASB Auditing Standards. The INTOSAI Auditing Standards supported by the detailed IFAC-issued International Standards on Auditing underpin a modern audit process. The InternationalAudit and Assurance Standards Board (IAASB) is progressively rolling out international auditing standards. The INTOSAI is moving from maintaining its own auditing standards by seeking to support the IAASB's development of auditing standards. This is beingdone especially so that the IAASB audit standards appropriately reflect the interests of the internationalpublic sector audit community. The AG Department's current auditing approach is basedtogether with some public sector elaborationon the ICASL Auditing Standards; but no document sets out the public sector audit standards as such. Without a formal document, there is no authoritativeand credible basis for enforcement of standards. 30. The IFAC-issued International Standards on Auditing represent best international practices for the auditingprofession, particularly in such areas of fundamental auditingpractice as the following: audit evidence documentation audit materiality fraud audit errors audit opinions audit planning control environmentassessments supervisingthe work of audit staff 8 (3) Code of Ethics 31. The AG Department should adopt a specific Code of Ethics that is relevant to auditors. Along with INTOSAI's Lima Declaration of Guidelines on Auditing precept^,^ the INTOSAI Code of Ethics is considered an essential complement to the INTOSAI Auditing Standards. A Code of Ethics is considered as a statement of values and principles guiding the daily work of the auditors. The Sri Lanka Supreme Audit Institutionhas not adoptedthe IFAC- issuedCode of Ethicsfor ProfessionalAccountants or the INTOSAICode ofEthics. (4) Accountability in the Supreme Audit Institution 32. The Institutional DevelopmentPlan should pay particular attentionto achieving the 2003 peer review recommendations. A 2003 peer review by The Netherlands Supreme Audit Institution satisfied the requirement for competent assessment of the accountability of the Sri Lanka Supreme Audit Institution.Its recommendationsneed to be implementedto complete the accountabilityprocess. (5) Independence 33. The proposed National Audit Act is needed to provide effectiveindependence to the Auditor General. Five of the eight core principles of SA1independence that were set out by INTOSAIare only partially, ifat all, metby the current legislativeand administrativeframework. The five core principlesare: 0 The independenceof the SA1Heads includingsecurity of tenure and legal immunity inthe normaldischarge oftheir duties. 0 A sufficientlybroadmandateand full discretioninthe discharge of SA1functions. 0 The freedom to decide on the content and timing of SA1reports and to publish and disseminatethem. 0 The existence ofeffectivefollow-upmechanismson SA1recommendations. 0 Financial and managerial autonomy and the availability of appropriate human, material, andmonetaryresources. (6) Qualifications and Skills for the Auditors 34. The quality of accounting and auditing educational and training arrangements in the government's schools is not fully satisfactory. It does not meet the needs of modern accounting and financialmanagement. (7) Training 35. A better training institution that meets international standards should be introduced. The AG Department staff has good basic accounting qualifications.However, the 5LimaDeclarationofGuidelinesonAuditing Precepts,October 1977,INTOSAI 9 Institutional Development Plan highlights a dearth o f required auditing expertise. The proposed CIPFA training program would cover the training o f both accountants in the certificate and diploma scheme initially and then move to the full CIPFA professional qualification as adapted for Sri Lanka circumstances. 36. A skills analysis program based on internationalstandards for competencies should be conducted. The AG Department does not have basic facilities for training, research, and development. A proper need-based approach is required to be implemented to support the introduction o f an audit methodology, and international accounting and auditing standards. The Institutional Development Plan needs to be used to strengthen the internal AG Department training facilities. (8) Audit Competence 37. Systems, methodologies, and facilities should be updated in accordance with the InstitutionalDevelopmentPlan to enable modernaudit to be undertaken by the staff. There is a need to develop specialist forensic audit and computerized audit capabilities. The audit orientation has to change from transaction to risk-based systems audit. It i s necessary to strengthen the technical and professional competence o f the AG Department and improve its operational capacity to produce and disseminate quality audit reports that meet international standards and serve the needs o f the stakeholders. The AG Department needs to improve training, and to build in-house capacity for financial performance, fraud, environmental and computerized audits. An audit management system is needed that is supported by an up-to-date software and hardware configuration. (9) Quality Assurance 38. T o improve quality assurance, the new Audit MethodologyManual, which would be prepared in accordance with the methods described in the Institutional DevelopmentPlan, is needed. There is no quality assurance program currently in use. Audit supervision is expected to ensure quality. However, current audits are not timely, many findings lack materiality; the audit programs, which focus on compliance and financial (attestation) audits, are not at par with the best o f international practices. Given the lack o f acceptance within the AG Department o f a previous manual prepared by consultants during the 1990s, it is crucial that the new manual be prepared by AG Department staff in consultation with experts and practitioners, with external consultants providing guidance, but not actually writing the manual. B. Auditing Standards as Practiced 39. The diagnostic questionnaires have been used to collect information about the current arrangements for the audit methodology and the apparent gaps inthe country for: 0 audit planning audit supervision 0 reviewing internal controls reviewing compliance with laws 0 ensuringthat adequate audit evidence is collected 10 0 analyzing whether the financial statements accord with accounting standards preparing audit opinions reporting on fraud, and 0 reporting on compliance Out o f this exercise came recommended activities that will help bring local standards in line with international standards. (1) Audit Planning 40. The new Audit Methodology Manual should introduce more comprehensive planning requirements based on the specific objectives of the audits. Audit planning is not sufficiently tailored to suit the needs o f the audit client. Recent modifications have sought to specifically identify those areas o f concentration, but this is still insufficient for meeting international standards of audit planning. Most of the audits are aimed at identifyingregulatory breaches. The reports o f these audits are o f minimal assurance value to either the preparers or users o f the financial reports, or wider stakeholders. Nor are they of much value to those responsible for managing systems o f internal control. Results from audits should hold the executive accountable for its fiscal and expenditure policies and their implementation. (2) Audit Supervision 41, A more comprehensivelystructured working paper system is neededfor the audit to attain the normalaudit objectives regardingthe validity of transactions. Current supervision i s hampered by inadequate working paper systems and a poor audit methodology. (3) Reviewing Internal Controls 42. The overall audit procedures need to be changed and supported by the new Audit MethodologyManual. The general budget sector audits examine transactions in accordance with the rules established by the Financial Regulations. They therefore report on where controls have not been applied. They do not approach the audit from the perspective of material misstatement o f an accounting figure, but rather the failure o f a transaction to comply with the rules. The effect o f this approach is that there is no pressure on the system to improve as all o f the effort goes into argument about the transaction, not the system o f control. The 2003 Auditor General Activity Report notes that past audit reports had been merely post-mortem examinations, often delayed from 5 to 15 years; and that by and large the issues were not significant. INTOSAI has issued a paper on internal control standards6 that provide a good international benchmark for assessing internal controls. (4) Reviewing Compliance 43. Introduce recommendationsto all audit reports, monitor the implementation of the recommendations,and report on the processin the Activity Report.The AG Department uses Guidelines for Internal Control Standards for the Public Sector, Internal Control Standards Committee, International Organization of Supreme Audit Institutions. 11 much o f its resources for compliance type o f audit work. An important issue is whether the audits are effective in dealing with instances o f non-compliance. In some South Asian countries, the audit reports log large numbers o ftransactions for pursuito f recovery. These cases continue to be monitored until the matter is resolved, either by the Public Accounts Committee or the Auditor General. In local government matters, the Auditor General does have the power to disallow items o f the accounts that are contrary to law and surcharge the responsible officer. The effectiveness o f the Public Accounts Committee needs improvement. Also, it i s necessary to implement stronger enforcement o f surcharge processes. The 2003 Auditor General Activity Report states that recoveries o f surcharges were small, with more than half the outstanding surcharges uncollected for more than 4 years. The same report recommends that for public corporations those responsible for irregularities should settle such losses. (5)Audit Evidence 44. The audit methodology and necessary supporting working papers should be more precisely defined in the new Audit Methodology Manual. Currently working papers are organized by report paragraphs rather than the audit plan. They cover the details o f the preparation and approval o f the text o f the audit paragraphs. 45. The AG Department should, as per ISA 600 (9,examine on a sample basis some of the working papers of the `qualified auditors' employed to audit government bodies. Most certification audit work is done by accounting firms on behalf o f the Auditor General, but these working papers are not reviewed by the AG Department. (6) Analyzing the Financial Statements 46. A revised audit methodology will improve the way in which the AG Department analyzes financial statements. The AG Department uses a checklist for analyzing financial statements. (7) Preparing Audit Opinions 47. The requirements of ISA 700, TheAuditor's Reportson Financial Statements, should be adopted in full. The audit scope and audit opinion paragraphs for the Consolidated Financial Statements 2004 do not contain the degree o f detail set by ISA 700 in paragraphs 12 to 15. This creates doubts about the auditing standards used for the work. It also makes uncertain whether the audit provides a reasonable basis for the opinion, and if the audit was planned and performed to obtain reasonable assurance that the financial statements are free o f material misstatement. The scope statement notes the limitations o f staff, other resources, and time available. This would normally be read by a user o f the accounts as an indication that the audit opinion on the accounts i s thereby qualified although this is not clearly stated in the opinion paragraph. 12 (8) Reporting on Fraud 48. Use of forensic audit methodswould reducefraud. Much o f the audit reporting seems to relate to fraudulent behavior. This orientation comes from the compliance testing approach. The use o f specific forensic audit methods would enhance the effectiveness o f the reporting on whether deficiencies arise from fraud rather than error or oversight. (9) Reporting on Compliance 49. Improve the effectiveness of the audit report by stronger enforcement of corporate governance requirements through the audit committees. The study reveals a number of weaknesses in the success of the present reporting system (e.g., lack o f depth, irrelevance, lack o f brevity, etc.) Although the Auditor General submits a supplementary report with respect to statutory boards and corporations, no serious attempt seems to have been made by the boards o f such institutions for improving controls and management o f resources. In general, arrangements to improve corporate governance ought to apply to the whole public sector, including state-owned enterprises. 13 I Iy 3 E L 3 0 Y ANNEXA. METHODOLOGYTHE ASSESSMENT OF As part ofthe general support program in South Asia for assessment and improvement of public sector accounting and auditing against international standards, the World Bank, with the cooperation o f member governments, i s conductingthe Review o f Public Sector Accounting and AuditingPractices inmember countries. The development o fthe PFMPerformance Measurement Framework' by the Public Expenditure and Financial Accountability (PEFA) Program" 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 reportingFM indicators. A set o f six questionnaires is usedto collect relevant informationon country practices: The public sector accounting environment-collecting basic information about financial laws and standards-setting arrangements, educational requirements for accountants compared with IFAC International Education Standards, ethical requirements compared with the IFAC Code o fEthics for Professional Accountants. Public sector accounting practices for the general budget sector if usingthe cash basis o f accounting-compared with the requirements o f the Cash Basis International Public Sector Accounting Standards (IPSAS). Public sector accounting practices for the general budget sector if using the accrual basis o f accounting-compared with the IPSAS requirements that govern accrual reporting for the public sector. Public sector auditing environment compared with the provisions o f the International Organization o f Supreme Audit Institutions (INTOSAI) Code o f Ethics and the INTOSAIgeneral standards. Public sector auditing practices compared with the requirements o f the INTOSAI field standards and reporting standards, and the IFAC International Standards on Auditing. Accounting and auditing practices for state-owned enterprises-compared with the requirements o f the International Financial Reporting Standards (IFRS) and International Standards on Auditing that govern commercial reporting. The responses to the diagnostic questionnaires, prepared by the relevant authorities inthe country, with the help, wherever necessary, o f in-country experts retained by the Bank, are supplemented by a due diligence review conducted by members o f a World Bank task team from the country. The PFM Performance Measurement Framework has been developed as a contribution to the collective efforts of many stakeholders to assess and develop essential PFM systems, by providing a common pool of information for measurementand monitoring of PFM performanceprogress, and creatinga common platform for dialogue. loThe PEFA Program is a partnership among the World Bank, the European Commission, the UK Department for InternationalDevelopment, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the International Monetary Fund and the Strategic Partnershipwith Africa. A Steering Committee, comprising members of these agencies, is managing the Program. A Secretariat has been set up and is located inthe World Bank in Washington, DC. 18 Various documents are examined as part o f the review including relevant laws, codes o f conduct, national accounting and auditing standards, accountant selection and promotion processes, training needs assessments, accountancy training course outlines, curricula and accreditation methods, sample accounts, and sample audit reports and working paper sets. A country report on the assessment is prepared for each country and reviewed by an expert panel o f advisors before examination by the World Bank country team. The draft is then shared with the Government for response before finalization. 19 ANNEXB. ACCOUNTING AUDITINGSTANDARDS AND This contains a summary of the frameworks that have been used for the public sector accounting and auditing assessment These have been compiled by the International Accounting Standards Board (IASB), the International Federation o f 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 is an independent, privately funded accounting standard-setter based in London, UK. The Board members come from nine countries and have a variety o f functional backgrounds. Inthe public interest, IASB i s 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 inNew York, USA and comprises 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 is available at http://www.ifac.ordpublicsector. The first 20 IPSAS are based on IAS to the extent appropriate for the public sector. IFAC also has established the International Auditing and Assurance Standards Board (IAASB) to prepareandpromulgate International Standards on Auditing (ISA) and is now working in cooperation with INTOSAIon preparingpublic sector guidance on the use o f 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 o f 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 is working with the IAASBto prepare practice notes explaining the application o f each ISA inthe public sector.l1 The various standards are listed on the following pages. 11 Working Group on Financial Audit Guidelines, INTOSAI Auditing Standards Committee, Swedish NationalAudit Office, 2004. 20 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 ForeignExchangeRates IPSAS 5, Borrowing Costs IPSAS 6, ConsolidatedFinancial StatementsandAccountingfor ControlledEntities IPSAS 7, Accountingfor Investments in Associates IPSAS 8, Financial Reporting of Interests in Joint Ventures IPSAS 9,Revenue@om 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, Segment Reporting IPSAS 19,Provisions, Contingent Liabilities andAssets IPSAS 20, RelatedParty Disclosures IPSAS 21, Impairment of Non-cash GeneratingAssets CashBasis IPSAS,Financial Reporting under the Cash Basis of Accounting International Education Standards IES 1,Entry Requirementsto aProgram of Professional Accounting Education IES 2, Content of Professional Accounting Education Programs IES 3, Professional Skills IES 4, Professional ValuesEthics andAttitudes IES 5, Practical Experience Requirements IES 6,Assessment of Professional Capabilities and Competence IES 7, Continuing Professional Development IES 8, CompetenceRequirementsfor Audit Professionals 21 International Financial Reporting Standards and International Accounting Standards IFRS 1, First-time Adoption of International Financial Reporting Standards IFRS 2, Share-basedPayment IFRS 3, Business Combinations IFRS 4, Insurance Contracts IFRS 5, Non-current Assets Heldfor Sale and Discontinued Operations IAS 1, Presentation of Financial Statements IAS 2, Inventories IAS 7, CashFlow Statements IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors IAS 10, Events after the Balance Sheet Date IAS 11, Construction Contracts IAS 12, Income Taxes IAS 14, Segment Reporting IAS 16, Property, Plant and Equipment IAS 17, Leases IAS 18, Revenue IAS 19, Employee BeneJits IAS 20, Accountingfor Government Grants an( Disclosure of Government Assistance IAS 21, TheEffects of Changes in Foreign Exchange Rates IAS 23, Borrowing Costs IAS 24, RelatedParty Disclosures IAS 26, Accounting and Reporting by RetirementBenefit Plans IAS 27, Consolidatedand SeparateFinancial Statements IAS 28, Investments in Associates IAS 29, Financial Reporting in Hyperinflationary Economies IAS 30, Disclosures in the Financial Statementsof Banks and Similar Financial Institutions IAS 31, Interests in Joint Ventures IAS 32, Financial Instruments: Disclosure and Presentation see also: See also Financial Instruments - other issues IAS 33, Earningsper Share IAS 34, Interim Financial Reporting IAS 36, Impairment of Assets IAS 37, Provisions, Contingent Liabilities and Contingent Assets IAS 38, Intangible Assets IAS 39, Financial Instruments: Recognition and Measurementsee also: See also Financial Instruments - other issues IAS 40, InvestmentProperty IAS 41, Agriculture 22 INTOSAI Code of Ethics and Auditing Standards Code of ethics Integrity. Auditors have a duty to adhere to high standards of behavior (e.g. honesty and candidness) in the course oftheir work and intheir relationshipswith the staff of audited entities. Independence, objectivity and impartiality. The independence of auditors should not be impaired by personalor external interests. There is aneedfor objectivity and impartiality inthe work andthe reports, which shouldbe accurate and objective. Conclusions inopinions and reports should be basedexclusively onevidence obtainedandassembledinaccordancewiththe SA1auditing standards. Professional secrecy. Auditors should not disclose information obtained in the auditing processto third parties except for the purposes of meetingthe SA1statutoryresponsibilities. Competence. Auditors must not undertakework which they are not competentto perform. Basicpostulatesfor the auditingstandards (a) The SA1should consider compliancewith the INTOSAIauditing standards inall mattersthat are deemedimportant/essential.Certain standards may not be applicable to some ofthe work done by SAIs, including those organizedas Courts of Account, nor to the non-audit work conductedby the SAI. The SA1should determinethe applicablestandards for such work to ensure that it is of consistentlyhigh 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 that there is aneedfor the accountability process to be inplace and operatingeffectively. (d) Developmentof adequate information, control, evaluationand reporting systems within the government will facilitate the accountability process. Managementis responsible for correctness and sufficiency of the form and content ofthe financial reports and other information. (e) Appropriate authorities should ensure the promulgation of acceptable accounting standards for financial reporting and disclosurerelevantto the needs of the government, and auditedentities should develop specific measurable objectives and performancetargets. (f)Consistentapplication of acceptable accountingstandards should result inthe fair presentationofthe financial position andthe results of operations. (g) The existence of an adequate system of internal control minimizes the risk of errors and irregularities. It i s the responsibility of the auditedentity to develop adequate internal control systems to protect its resources. It is also the obligation of the audited entity to ensure that controls are inplace and functioning to help ensure that applicablestatutes and regulationsare complied with, and that probity and propriety are observedindecision-making. The auditor should submit proposalsand recommendationswhere controls are foundto be inadequate or missing. (h) Legislative enactments would facilitate the co-operationofauditedentities inmaintaining andproviding access to all relevant data necessary for a comprehensive assessment ofthe activities under audit. (i)AllauditactivitiesshouldbewithintheSA1auditmandate.* u) Legislative enactments would facilitate the co-operationof auditedentities inmaintaining and providing access to all relevant datanecessary for a comprehensiveassessment ofthe activities under audit. (k) SAIs shouldwork toward improvingtechniques for auditing the validity ofperformancemeasures. (1) SAIs shouldavoid conflict of interestbetweenthe auditor and the auditedentity. * The ~~~ ~~ ~~~ full scope of government auditing includesregularity andperformance audit. Regularity audit embraces: i. Attestationoffmancialaccountabilityofaccountableentities,involvingexaminationand evaluation of financial records and expression of opinions on financial statements; ...ii. Attestation of financial accountability ofthe government administration as awhole; 111. Audit of financial systems and transactions including an evaluation of compliancewith applicable statutes and regulations; 23 iv. Audit of internal control and internal audit functions; v. Audit of the probity and propriety of administrative decisionstakenwithin the auditedentity; and vi. Reporting of any other matter(s) arising from or relating to the audit that shouldbe disclosed, accordingto the SAL Performance audit entails the audit of economy, efficiency and effectiveness, and embraces: vii. Audit of the economy of administrative activities inaccordance with sound administrative principles and practices, and managementpolicies; viii. Audit ofthe efficiency of utilization of human, financial and other resources, including examinationof information systems, performancemeasuresandmonitoringarrangements, and proceduresfollowed by auditedentities for remedying identified deficiencies; and ix. Audit ofthe effectiveness of performance inrelation to the achievementofthe objectives of the auditedentity, and audit ofthe actual impact of activities comparedwith the intendedimpact. General auditing standards The auditor andthe SA1must be independent. The auditor andthe SA1must possess the required competence. The auditor andthe SA1must exercise due care and concern incomplying with the INTOSAIauditing standards.This embraces due care inplanning, specifying, gatheringand evaluating evidence, and in reporting findings, conclusionsand recommendations. The SA1shouldadopt policies and proceduresto recruit personnelwith suitable qualifications. The SA1shouldadopt policies and proceduresto develop andtrain SA1employees to enable them to perform their tasks effectively, and to define the basis for the advancement of auditors and other staff. The SA1shouldadopt policies andproceduresto prepare manuals and other written guidance and instructionsconcerningthe conduct of audits. The SA1should adopt policies and proceduresto support the skills and experienceavailable within the SA1 and identify the skills which are absent; provide a good distribution of skills to auditing tasks and assign a sufficient number of persons for the audit; it must have proper planning and supervisionto achieve its goals at the required level of due care and concern. The SA1should adopt policies and proceduresto review the efficiency and effectiveness ofthe SA1internal standards and procedures. Fieldstandards (a) The auditor shouldplan the audit in amanner that ensures that an audit of high quality is carried out in an economic, efficient and effective way and in atimely manner. (b) The work ofthe audit staff at each level and audit phase shouldbe properly supervisedduring the audit; the documentedwork shouldbereviewedby a senior member ofthe audit staff. (c) The auditor, indetermining the extent and scope of the audit, shouldstudy and evaluatethe reliability of internal control. (d) Inconductingregularity (financial) audits, atest shouldbe made of compliancewith applicable laws and regulations.The auditor should designaudit steps and procedures to provide reasonable assurance of detectingerrors, irregularities, and illegal acts that could have a direct and material effect on the financial statement amounts or the resultsof regularity audits. The auditor also shouldbe aware of the possibility of illegal acts that could have an indirect and material effect on the financial statements or results ofregularity audits. Reportingstandards (a) At the end of each audit the auditor shouldprepare awritten opinion or report, as appropriate, setting out the findings inan appropriate form; its content shouldbe easy to understandand free from vagueness or ambiguity, it should include only information which is supportedby competentand relevantaudit evidence, and be independent, objective, fair and constructive. (b) It is for the Auditor Generalto decide finally on the action to be taken inrelation to fraudulent practices or serious irregularities discoveredby the auditors. 24 International Standards on Auditing Audit Evidence: nternational Frameworkfor Assurance 500Audit Evidence hgagements 501Audit Evidence Additional Considerationsfor -- Specific Items zeneralPrinciples and Responsibilities: 505 External Confirmations 5 10Initial Engagements--Opening Balances !00 Objective and General Principles Governing 520 Analytical Procedures anAudit of Financial Statements 530 Audit Sampling and Other Means of Testing !10 TermsofAudit Engagements 540 Audit of Accounting Estimates !20 Quality Controlfor Audits of Historical Information 545 Auditing Fair ValueMeasurementsand Disclosures !30 Documentation 550 RelatedParties 230RAudit Documentation 560 Subsequent Events 240 TheAuditor's Responsibility to Consider Fraud in an Audit of Financial Statements 570 Going Concern 240A Fraud and Error 580 ManagementRepresentations 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 RiskAssessment and Responseto Assessed 620 Using the Work of an Expert Risks: Audit Conclusionsand Reporting: 300 Planning anAudit of Financial Statements 3 15 Understanding the Entity and Its 700 TheAuditor's Reports on Financial Statements Environment andAssessingthe Risks of Material 700R TheIndependentAuditor's Report on a Misstatement CompleteSet of General Purpose Financial 320Audit Materiality Statements 330 TheAuditor's Procedures in Response to 701 Modifications to the IndependentAuditor's Assessed Risks Report 402 Audit Considerations Relating to Entities I10Comparatives Using Service Organizations 120 Other Information in Documents Containing Audited Financial Statements SpecializedAreas: 800 TheAuditor's Report on Special PurposeAudit Engagements 25 ANNEXc.SRI LANKANACCOUNTINGLEGISLATION The FinanceAct (1971) and the FinancialRegulations (1992), issued by the Ministryo f Finance, require that ministries, departments, and constitutional bodies, such as the Auditor General's Office; and non revenue-earning statutory bodies and public enterprises report in accordance to this legislation. They prepare cash-based budgets and financial reports. The Financial Regulations do not prescribe accounting standards in this respect. The Sri Lanka Accounting and Auditing Standards Act (No. 15) 1995 requires that revenue-earning statutory bodies and public enterprises report in accordance with Sri Lanka Accounting Standards issued by the Institute o f Chartered Accountants o f Sri Lanka, and be subject to monitoring for compliance by the Sri Lanka Accounting and Auditing Standards Monitoring Board. FinancialRegulations Extracts F.R. 150. AppropriationAccounts. Part 1, GeneralEstimates. As soon as possible after the end of each financial year, accounting officers will arrange for Appropriation Accounts to be prepared for each programme o f expenditure under their control: one for projects classified under recurrent expenditure, and one for projects classified under capital expenditure. The Appropriation Account will follow the general details o f the Estimates and will indicate the financial provision in the Estimates (as altered subsequently by supplementary provision or virement, ifany), the actual expenditure, and the saving or excess under each ProgrammeProject. It will also contain the accounting officer's explanations o f the causes of any significant variations between total net provision and total expenditure under each object class, as well as notes o f any unusual payments. As a matter o faccounting convenience, expenditure sanctioned by Special Law should be included in the main body o f the Appropriation Account, together with a suitable footnote. The accounting officer for the programme will sign the Account in that capacity and will then submit the Account to the Chief Accounting Officer who will verify that it has been properly prepared, and that adequate explanations have been given o f variations between estimated and actual expenditure. The Chief Accounting Officer will then sign the Account and forward it to the Auditor General as soon as possible. The Auditor General, after examination and certification, will forward the Account to the Director General, Department o f State Accounts, Treasury for publication. F.R. 151. Revenue Accounts. As soon as possible after the end o f each financial year, each revenue accounting officer will prepare annually for publication a classified statement o f revenue for which he is responsible. This statement will provide the details o f the appropriate Heads, Sub-heads, Items, and Sub-items o f Revenue, the description o f such Revenue, the amount o f Revenue earned during each o f the three preceding financial years, the estimated Revenue o f the year for which the statement is prepared, the actual amount o f Revenue collected duringthat year, the excess or the shortfall o f actual collections as compared with the estimated Revenue, and the reasons for the excess or shortfall. This Revenue Account will be signed by the person in the capacity as revenue accounting officer and forwarded to the Auditor General for examination and certification. The Auditor General, after examination and certification, will forward the Accounts to the Director General, Department o f State Accounts, Treasury for publication. 26 F.R. 152. Committee on Public Accounts. The Committee on Public Accounts of Parliament has been set up by the following Standing Order: (1) There shall be a designated Committee on Public Accounts consisting o f twelve members nominated by the Committee o f Selection. (2) It shall be the duty of the Committee on Public Accounts to examine the accounts showing the appropriation o f the sums granted by Parliament to meet the public expenditure and such other accounts laid before Parliament as the Committee may think fit, along with the reports o f the Auditor General thereon, and the reports of the Auditor General on local authorities. (3) The Public Accounts Committee shall, from time to time, report to Parliament on the accounts examined, the finances, financial procedures, performance, and management generally o f any department and local authority, and on any matter arisingtherefrom. (4) The Public Accounts Committee may, when it considers necessary, appoint subcommittees o f its own members to examine and report to the full Committee on all accounts and the finances and management o f such departments and local authorities as the Committee may direct. (5) The Public Accounts Committee or any o f its subcommittees shall, for the performance o f its duties, have the power to summon before it and question any person and call for and examine any paper, book, record or other document and to have access to stores and property. Chief Accounting Officers and Accounting Officers must appear before the Public Accounts Committee, when required, and answer questions on all matters arising from the Accounts o f the Auditor General Report. The Chief Accounting Officers and Accounting Officers, who sign the Appropriation Accounts, are the persons answerable for the accounts. Yet for reasons o f administrative convenience, the Public Accounts Committee will usually examine in the first instance those officers holding the posts at the time the accounts were examined. A Chief Accounting Officer or Accounting Officer has the right, however, to consult the person who signed the Appropriation Account that is beingdiscussed. F.R. 153. Treasury Minutes. After the receipt o f the Report o f the Public Accounts Committee, the Treasury will issue, under the hand o f the Secretary to the Treasury, on the instructions o f the Minister o f Finance, the Minutes relating to the various matters dealt with in the Auditor General Report. It i s the duty o f all Chief Accounting Officers and Accounting Officers to study the Report and the Treasury Minutes thereon and be guided by them with regard to future financial operations. 27 ANNEXD. SRI LANKANAUDITLEGISLATION Extractsfrom ChapterXVIII of the Constitution of Sri Lanka Article 153 (1) There shall be an Auditor General who shall be appointed by the President and who shall holdoffice duringgoodbehaviour. (2) The salary of the Auditor General shall be determinedby Parliament, shall be charged on the ConsolidatedFund, and shall not bediminishedduringhis term of office. (3) The office of the Auditor Generalshall becomevacant: (a) upondeathofthe Auditor General; (b) uponresignationof Auditor Generalinwriting addressedto the President; (c) uponthe Auditor Generalattainingthe age of sixtyyears; (d) upon removalof Auditor General by the President on account of illhealth or physicalor mental infirmity; or (e) upon removal of the Auditor General by the President upon an address o f Parliament. (4) Whenever the Auditor General is unable to discharge the functions of his office, the Presidentmay appoint a personto act inthe place ofthe Auditor General. Article 154 (1) The Auditor General shall audit the accounts of all Departments of Government, the Offices of the Cabinet of Ministers, the Judicial Service Commission, the Public Service Commission, the Parliamentary Commissioner for Administration, the Secretary-General of Parliament and the Commissioner of Elections, local authorities, public corporations, and businessor other undertakingsvested inthe Governmentunder any written law. (2) Notwithstandingthe provisionsof paragraph(1) of this Article, the Minister in charge of any such public corporationor business or other undertakingmay, with the concurrence of the Minister in charge of the subject of Finance, and in consultation with the Auditor General, appoint a qualified auditor or auditorsto audit the accounts of suchpubliccorporationor business or other undertaking. Where such appointment has been made by the Minister, the Auditor General may, in writing, inform such auditor or auditors that he proposesto utilizetheir services for the performance and discharge of the Auditor General's duties and functions in relation to such public corporation, business, or other undertaking; and thereupon such auditor or auditors shall act underthe directionandcontrolofthe AuditorGeneral. (3) The Auditor General shall also perform and discharge such duties and functions as may be prescribedby Parliamentby law. (4) (a) The Auditor Generalmay, for the purpose of the performanceand discharge of his duties and functions, engage the services of a qualifiedauditor or auditors who shall act under his directionandcontrol. 28 (4) (b) Ifthe Auditor General is o f the opinion that it is necessary to obtain assistance in the examination o f any technical, professional, or scientific problem relevant to the audit, the Auditor General may engage the services of: (i)a person not beingan employee ofthe department, body or authority the accounts o f which are being audited, or (ii)anytechnicalorprofessionalorscientific institutionnotbeinganinstitution which has any interest inthe management o f the affairs o f such department, body or authority, and such person or institution shall act under direction and control o f the Auditor General. (5) (a) The Auditor-General or any person authorized by him shall, in the performance and discharge o f his duties and functions, be entitled: (i) haveaccesstoallbooks,records,returnsandotherdocuments; to (ii)tohaveaccesstostoresandotherproperty; and (iii) befurnishedwithsuchinformationandexplanationsasmaybenecessary to for the performance o f such duties and functions. (5) (b) Every qualified auditor appointed to audit the accounts o f any public corporation, or business or other undertaking, or any person authorized by such auditor shall be entitled to like access, information, and explanations in relation to such public corporation, or business or other undertaking. (6) The Auditor General shall, within ten months after the close o f each financial year, and as and when he deems it necessary, report to Parliament on the performance and discharge o f his duties and functions under the Constitution. (7) Every qualified auditor appointed under the provisions o f paragraph (2) o fthis Article shall submit his report to the Minister and also submit a copy thereof to the Auditor General. (8) Inthis Article, "qualified auditor" means: (a) an individual who, being a member o f the Institute o f Chartered Accountants o f Sri Lanka, or of any other Instituteestablished by law, possesses a certificate to practise as an Accountant issued by the Council o f such Institute ;or (b) a firm o f accountants each o f the resident partners of which, being a member of the Institute o f Chartered Accountants o f Sri Lanka or o f any other Institute established by law, possesses a certificate to practise as an Accountant issued by the Council o f such Institute. 29 Extractsfrom the FinancialRegulations Financial Regulation 154. Duties andfunctions of theAuditor General. The relevant Sections of Article 154 ofthe Constitutionset out the duties and functions of the Auditor Generalin so far as they relate to GovernmentDepartments. All ChiefAccountingOfficers and AccountingOfficers should ensurethat every assistance is given to the Auditor General, and Officers authorized by him in writing, for the performanceoftheir duties andfunctions. Financial Regulation 155.Audit Queries. The duties of audit are not exclusivelythe functionof the Auditor General. The Minister of Finance, to whom has been assigned the function of supervisingthe public administrationof the Islandon its financial side, has a rightto authorize an additional audit by any other person or organization that he may choose. Nevertheless, the functions of the Auditor General are imposed on him by the Constitution; and it is the duty of ChiefAccountingOfficersand AccountingOfficersthat letters and queries addressedto them by the Auditor General, or any officer authorized by him, is dealt with promptly and complete answers given. When a final reply cannot be given immediately, an interim report should be made. The Accounting Officer should inspect the Audit Query Register, referredto in Financial Regulation452( 1) on first assuming office, and at regular intervalsthereafter in order to ensure not only that audit queries are promptlyinvestigatedbut also that steps have beentakento correct any shortcomings which they reveal.The Chief AccountingOfficer will also personally inspect the Audit Query Register from time to time as part of his supervisory functions. It should be clearly noted that, notwithstandingthe examination of the accounts by the Auditor General, the responsibility for their accuracy and correctness rests entirely with the Accounting Officers concerned. 30 ANNEXE. BENEFITS ACCRUALACCOUNTING OF Extract from Study No. 14 "Transition to the Accrual Basis o f Accounting: Guidance for Governments and Government Entities," IFAC Public Sector Committee, December 2003. 1.18. The PSC has commented extensively on the benefits o f accrual accounting for governments and individual public sector entities in previous Studies (Studies 5, 6, 8, 9 10 and 11) and Occasional Papers (Papers 1, 3, 5, 6 and 7). In order to provide some context for readers who are not familiar with the Public Sector Committee's other publications, this section contains a summary o f the benefits o f reporting on the accrual basis. 1.19 The information contained in reports prepared on an accrual basis is useful both for accountability and decision-making. Financial reports prepared on an accrual basis allow users to: assess the accountability for all resources the entity controls and the deployment o f those resources; assess the performance, financial position and cash flows o f the entity; and make decisions about providing resources to, or doing business with, the entity. 1.20 At a more detailed level, reporting on an accrual basis: shows how a government financed its activities and met its cash requirements; allows users to evaluate a government's ongoing ability to finance its activities and to meet its liabilities and commitments; shows the financial position o f a government and changes in financial position; provides a government with the opportunity to demonstrate successful management o f its resources; and i s useful in evaluating a government's performance in terms o f its service costs, efficiency and accomplishments. Financial Position 1.21 Accrual accounting provides information on an entity's overall financial position and current stock o f assets and liabilities. Governments needthis information to: make decisions about the feasibility o f financing the services they wish to provide; demonstrate accountability to the public for their management o f assets and liabilities recognized inthe financial statements; plan for future funding requirements o f asset maintenance and replacement; plan for the repayment of, or satisfaction of, existing liabilities; and manage their cash position and financing requirements. 1.22 Accrual accounting requires organizations to maintain complete records o f assets and liabilities. It I 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 assets and the recognition o f depreciation help managers to understand the impact o f using fixed assets in the delivery o f services, and encourage managers to consider alternative ways o f managing costs and delivering services. 1-23 Accrual accounting provides a consistent framework for the identification o f existing liabilities, and potential or contingent liabilities. The recognition o f obligations meeting the definition o f a liability and the criteria for recognition: compels governments to acknowledge and plan for the payment o f all recognized liabilities, not just borrowings; 31 provides information on the impact o f existing liabilities on future resources; means that it is possible to allocate responsibilityfor 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 is 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 duringthe period, under the particular measurement principles adopted and disclosed in the financial statements. Under the accrual basis o f accounting, the financial statements will include a Statement o f Financial Position which discloses information about assets and liabilities. Where assets and liabilities are not equal, a residual figure for net assetdequity will be reported. Where this figure is positive, it can be interpreted as the net resources that may be applied for the provision o f goods or services in the future, and therefore the community's investment in the reporting entity. Where the figure is negative, it may be viewed as the amount o f future taxation or other revenues which are already committed to paying o f f debt and other liabilities.Net assetdequity can comprise some or all o f the following components: contributedcapital; 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 infomation on revenues is essential for assessing the impact o f taxation and other revenues on the government's fiscal position, and in assessing the need for borrowing in the long term. Information on revenues helps both users and governments themselves to assess whether current revenues are sufficient to cover the costs of current programs and services. 1.26 Governments need information about expenses in order to assess their revenue requirements, the sustainability o f existing programs, and the likely cost o f proposed activities and services. Accrual accounting provides governments with informationon the full costs o ftheir activities so that they can: consider the cost consequences o f particular policy objectives and the cost o f alternative mechanisms for meetingthese objectives; decide whether to fund the production o f services within government sub-entities, or whether to purchase goods and services directly from non-government organizations; decide whether user fees should cover the costs associated with a service; and allocate responsibility for managing particular costs. 1.27 Accrual accounting can provide financial information on whether sub-entities are delivering specified services, and delivering them within agreed budgets. The same information, at a more detailed level, can also be used within sub-entities for the management o f activity and program costs. 1.28 Accrual accounting allows an individual entity to: record the total costs, including depreciation o f physical assets and amortization o f intangible assets, o f carrying out specific activities; recognize all employee-related costs and to compare the cost o f various types o f employment or remuneration options; assess the most efficient way o f producing their goods and services and o f managing the resources over which they have been delegated authority; determine the appropriateness o f cost-recovery policies; and monitor actual costs against budgeted costs. 32 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 inthe preparation o f more accurate cash budgets. 33 SupplementaryTable of Standards and Gaps IPublicSectorAccounting........................................................................................................... . 35 A Assessment of the NationalPublic Sector AccountingEnvironment . 35 (1) The Accounting Law ............................................................................................. ...................... (2) Education and Training of Public Sector Accountants.......................................... 35 (3) Code of Ethics for Public Sector Accountants ...................................................... 36 37 B Assessment of NationalPublicSector AccountingStandards . (4) Public Sector Accountant Arrangements............................................................... 37 (1) Framework for the PreparationandPresentationof Financial Statements............38 .................................. 38 (2) Preparationand Presentationof Financial Statementson the CashBasis.............39 ..................................................................................................... .................... 40 I1 PublicSector Auditing .C. .Assessment of AccountingandAuditingin State-OwnedEnterprises 41 A Assessment of the PublicSector AuditingEnvironment .......................................... 41 41 (2) Setting Auditing Standards.................................................................................... (1) Statutory Framework ............................................................................................. 44 (3) Code of Ethics ....................................................................................................... 45 45 (5) Independenceprovided by the Legislation............................................................ (4) Accountability inthe SA1...................................................................................... 46 51 (7) Training ................................................................................................................. (6) Qualifications and Skills o fthe Auditor ................................................................ (8) Audit Competence................................................................................................. 52 52 53 B Assessment of PublicSectorAuditingStandardsandPractices . (9)Quality Assurance.................................................................................................. (1) Planning................................................................................................................. .............................. 55 55 (2) Supervision ............................................................................................................ 56 57 (5) Evidence ................................................................................................................ 60 (4) Compliance with Laws.......................................................................................... (3) Internal Controls .................................................................................................... 59 (6) Analysis o f Financial Statements .......................................................................... 60 (8) Reporting on Fraud................................................................................................ 63 (7) Reporting on Financial Statements........................................................................ 62 (9) Reporting on Compliance...................................................................................... 63 34 IA m 0 Y rc 0 -- Q 2 w 2 e e e e m S a2 E 0 c, E Ee .-2> wE .-.-'c1 .... . w e ab +d 0 . c, 0 9 a, t% .-E 0 n 3 5Q, * 0 CI E E tn tn Q, 2a v) I mGe, 39 %8 c Y m m t 2 4- v1 3 I Y8 I 0 4 I I a 3 Q a 0 d N .-0 VI Y a 1 .5 cr E 0 a Y) U *9e,u8 e, i?3 ru 0 2 3E 8L, 2& w w c v &g '-m 0 c m aga R E 0 tn c, a, Y vl 8 2 Y B rd s 0 rr 0 m m I I cc 0 E a, * 0 -5 C Y C 3 .e v) s ai wC a 0 a 8 .d" .e v) .-c ._m .ev) v) v) B v) f- B f- f- 5 0 * c, td Q) 6 E t- W Ln rt m I 0 w co N