Report No. 26092-ET Ethiopia Country Financial Accountability Assessment (In Two Volumes) Volume II: Detailed Reports September 4, 2003 A Collaborative Exercise By the Federal Government of Ethiopia and a Multi­Donor Task Team Document of the World Bank AbbreviationsandAcronyms ACCA Associationof CharteredCertifiedAccountants(ofthe United Kingdom) ACSI AmharaCreditand SavingsInstitutions ASC Audit ServicesCorporation BDA Budget,Disbursements and Accounting System BoFED Bureau of Financeand EconomicDevelopment (Region) BIS BudgetInformationSystem CBE CommercialBank of Ethiopia CBO Community Based Organisations CIDA CanadianInternationalDevelopment Agency CFAA CountryFinancialAccountabilityAssessment CPAR CountryProcurementAssessment Report (a World Bank document) CRDA ChristianRelief and Development Association CSRP Civil ServiceReform Programme DFID Departmentfor InternationalDevelopment(of the UnitedKingdom) DPPC DisasterPreventionand Preparedness Commission DSA DecentralisationSupportActivity(part of EMCP) EAFA EthiopianAccountancy and FinanceAssociation EFY EthiopianFinancialYear EC EuropeanCommission EU EuropeanUnion EMCP ExpenditureManagement and Control Programme(partof CSRP) EPAAA EthiopianProfessionalAssociationof Accountantsand Auditors FED Financeand EconomicDevelopment FGE Federal Government of Ethiopia GAAP GenerallyAccepted AccountingPrinciples GoA Government of Amhara GoE Government of Ethiopia GTZ DeutscheGesellschaftfur TechnischeZusammenarbeit HIPC HighlyIndebtedPoor Countries HRM Human ResourceManagement IAS InternationalAccountingStandards IDA InternationalDevelopmentAssociation IFMS Integrated FinancialManagement System IFAWSC InternationalFederationof Accountants/Public SectorCommittee IIA Instituteof Internal Auditors IMF InternationalMonetary Fund INTOSAI InternationalOrganisationof SupremeAudit Institutions IT InformationTechnology MCB Ministryof CapacityBuilding MEDaC Ministryof EconomicDevelopmentand Co-operation(now part of MoFED) MoE Ministryof Education MoF Ministryof Finance (nowpart of MoFED) MoFED Ministryof Financeand EconomicDevelopment MoH Ministry of Health MTFF MediumTermFiscalFramework NBE National Bank of Ethiopia NGO Non-GovernmentalOrganisation NCBP National CapacityBuilding Programme ODA Official Development Assistance OECD/DAC Organizationfor EconomicCooperationand DevelopmentlDevelopmentAssistanceCommittee OFAG Office of the Federal AuditorGeneral OFED Office of Financeand Economic Development (woredalevel) PER Public ExpenditureReview PC Personal Computer PEM PublicExpenditureManagement PESA PublicEnterpriseSupervisingAuthority PRGF PovertyReductionand GrowthFacility PRSP PovertyReductionStrategyPaper PSP Performanceand ServiceDelivery ImprovementProgramme RAG Regional AuditorGeneral (Head of Bureau of Audit) REST Relief Societyof Tigray RFAA Regional FinancialAccountabilityAssessment RMI Regional Management Institute SIDA Swedish InternationalDevelopmentAgency SNNPR SouthernNations,Nationalities and PeoplesRegion TPLF TigrayPeople's LiberationFront UNDP UnitedNations DevelopmentProgramme UNICEF United NationsChildren'sFund USAID United States Agency for InternationalDevelopment TABLE OF CONTENTS FOREWORD 3 1 PUBLICSECTORBUDGETING . ........................................................................................................................... ...................................................................................... 4 EXECUTIST SUMMARY ........................................................................................... 4 1.1 ASSESSMENTOFPRESENTPOSITION .................................................................. 8 1.2 ASSESSMENTOFANY PLANNEDACTIVITIES .................................................. 14 1.3 CONCLUSIONSAND RECOMMENDATIONS ...................................................... 15 2 ACCOUNTINGAND FINANCIAL REPORTING . ....................................................... 19 EXECUTIVESUMMARY ......................................................................................... 19 2.1 ASSESSMENTOFPRESENTPOSITION ................................................................ 21 2.2 ASSESSMENTOFPLANSFORTHENEXTTHREEYEARS ............................... 26 2.3 CONCLUSIONS AND RECOMMENDATIONS ...................................................... 3 INTERNAL CONTROLS.INTERNAL AUDIT. RECORDSSTORAGE AND IT 28 . ...26 EXECUTIVESUMMARY ......................................................................................... 28 3.1 31 3.2 37 3.3 CONCLUSIONS AND RECOMMENDATIONS...................................................... ASSESSMENTOFPLANSFORNEXTTHREEYEARS........................................ ASSESSMENTOFPRESENTPOSITION................................................................ 41 4 PUBLICSECTORAUDITING . ........................................................................................ 43 EXECUTIVESUMMARY......................................................................................... 43 4.1 44 EXTERNALAUDIT ................................................................................................... INTRODUCTION....................................................................................................... 4.2 44 4.3 INTERNALAUDIT .................................................................................................... 48 5 LEGISLATIVE OVERSIGHT . ......................................................................................... 50 5.1 50 FEDERALETHICSAND ANTI-CORRUPTIONCOMMISSION........................... PARLIAMENTARY OVERSIGHT............................................................................ 5.2 52 5.3 PUBLICACCESS TO INFORMATION.................................................................... 54 6 AMHARA REGION . .......................................................................................................... 56 EXECUTIVESUMMARY ......................................................................................... 56 6.1 6.2 PLANNINGAND BUDGETING............................................................................... INTRODUCTION....................................................................................................... 60 61 6.3 65 6.4 ACCOUNTINGAND FINANCIALREPORTING.................................................... BUDGETEXECUTION............................................................................................. 66 6.5 67 6.6 EXTERNALAUDIT AND PUBLICACCOUNTABILITY...................................... INTERNALCONTROLSAND INTERNALAUDIT ............................................... 68 6.7 70 6.8 RISKASSESSMENTAND RECOMMENDATIONS............................................... STRENGTHS.WEAKNESSES AND CHALLENGES............................................. 73 7 TIGRAY REGION . ............................................................................................................ 74 EXECUTIVESUMMARY ......................................................................................... 74 7.1 LEGALFRAMEWORKAND INSTITUTIONAL ARRANGEMENTS...................76 INTRODUCTION....................................................................................................... 7.2 77 7.3 PAYMENTSAND EXPENDITUREMANAGEMENT............................................ PLANNINGAND BUDGETING............................................................................... 80 7.4 84 7.5 INTERNALCONTROLSAND RECORDMANAGEMENT.INCLUDINGIT......86 ACCOUNTINGAND FINANCIALREPORTING.................................................... 85 7.6 7.7 EXTERNALAUDIT ................................................................................................... 88 7.8 STRENGTHSAND WEAKNESSES ......................................................................... 89 1 7.9 RISKS .......................................................................................................................... 7.10 ASSESSMENTOF ACTIVITIES/PLANS OVERNEXT THREEYEARS ..............90 93 7.11 CONCLUSIONSAND RECOMMENDATIONS...................................................... 95 8 SOMALI REGION . ............................................................................................................ 99 EXECUTIVESUMMARY ......................................................................................... 99 8.1 101 ASSESSMENT OF PRESENTPOSITION.............................................................. BACKGROUND....................................................................................................... 8.2 102 8.3 BUDGETING............................................................................................................ 103 8.4 BUDGET EXECUTION AND MONITORING....................................................... 105 8.5 ACCOUNTING GUIDELINES AND STANDARDS.............................................. 105 8.6 INTERNALCONTROLSAND INTERNALAUDIT ............................................. 107 8.7 RISK ASSESSMENT................................................................................................ EXTERNALAUDIT ................................................................................................. 107 8.8 108 8.9 CONCLUSIONSAND RECOMMENDATIONS .................................................... 110 9 SNNP REGION . ................................................................................................................ 115 115 ASSESSMENT OFPRESENTPOSITION.............................................................. EXECUTIVESUMMARY ....................................................................................... 9.1 118 9.2 121 BUDGET EXECUTION ........................................................................................... BUDGET PREPARATION....................................................................................... 9.3 123 9.4 124 INTERNALCONTROLSAND INTERNALAUDIT ............................................. ACCOUNTING AND FINANCIAL REPORTING.................................................. 9.5 127 9.6 HUMANRESOURCEIMPLICATIONS ................................................................. EXTERNALAUDIT AND PUBLIC ACCOUNTABILITY.................................... 129 9.7 130 9.8 STRENGTHS AND WEAKNESSES ....................................................................... 132 9.9 RISKS........................................................................................................................ 134 9.10 SUMMARY OFFUTUREPLANS........................................................................... 137 9.11 CONCLUSIONS AND RECOMMENDATIONS .................................................... 139 PRIVATE SECTOR ........................................................................................................... 148 EXECUTIVE SUMMARY 148 10 INTRODUCTION ................................................................................................... ..................................................................................... 149 11 PRIVATE SECTOR ACCOUNTING AND AUDITING PRACTICES .................................. 151 12 CORPORATE GOVERNANCE AND FINANCIAL ACCOUNTABILITY ............................ 157 13 NGO'S~BO'S .............................................................................................................. 160 14 EDUCATIONAND TRAINING ...................................................................................... 163 ANNEX A: BIBLIOGRAPHY ........................................................................................... 166 ANNEX B :LIST OFPEOPLEMET AND CONTACTED ........................................... 170 2 ETHIOPIA COUNTRY FINANCIAL ACCOUNTABILITY ASSESSMENT Foreword Volume 2 of the Country Financial Accountability Assessment i s a consolidated version o f each of the individual detailed reports prepared by the sub-teams involved in the assessment. The contents of each main section in this volume i s presented as submitted to the relevant donor; only the text format and layout have been changed to introduce uniformity to the overall presentation. The CFAA team wish to sincerely thank all persons, particularly the Government Counterpart Team whose active contribution and support in the preparation of this report was very much appreciated. The team would also like to thank all of the departments of Federal and Regional Government and other institutions consulted during the exercise for their contribution to the preparation of this report. 3 1. PUBLICSECTORBUDGETING EXECUTIVESUMMARY 1. Public Sector Budgeting (PSB) i s one of ten key areas identified by the World Bank as appropriate for review across the public and private sectors as part of a Country Financial Accountability Assessment (CFAA). Inthis context the PSB element of the CFAA focuses on an assessment of current budget preparation and implementation arrangements, including the legislative framework, the budget calendar, budget formats, the impact of recent institutional changes, and areas where further development work i s needed. It also forms conclusions and makes recommendations for future development including areas where donor support through technical assistanceis required. 2. There is considerable material on PSB in Ethiopia generated by past reviews, studies and capacity building programs. T h i s information i s not duplicated within the report. Reference is made as necessary to previous work and comments provided on developments that have occurred since the production of the CFAA Inventory Report by the European Union in July 2002l. 3. There i s a general consensus among donors that a strong discipline i s in place throughout the budgeting and accounting systems, from Federal to local level. It is considered that the diversion of funds i s not a cause for concern. 4. A significant amount of work has been undertaken at the Federal level on the budget and accounts systems within the context of the Civil Service Reform Program. This work has been driven over the last five years by USAID with the technical assistance of Harvard University. Significant progress has been made in important areas, culminating in the production of the Ethiopian Financial Year (EFY) 94 (2001-2002) budget. Reform i s now being rolled out gradually to Regions and Woredas. Unfortunately, the EFY 95 (2002-2003) budget failed to meet the standards set for EFY 94 (2001-2002). This represents a considerable retrograde step, causing doubt about the sustainability of budget reform at the Federal level. 5. Some progress has been achieved in bringing together the capital and recurrent budgets. Two different ministries working to differing timetables and in differing formats previously prepared these. The Ministry of Finance (MoF) prepared the recurrent budget; the Ministry of Economic Development and Cooperation (MEDaC) prepared the capital budget. These two ministries merged in October 2001; however this merger took place too late for a convergence of functions during the 2002/03 budget preparation process. 6. There are two important issues which underpin all comments made below. Firstly, the failure of the EFY 95 budget process casts doubt on the commitment to and sense of ownership of the budget reform process within the Ministry of Finance and Economic Development (MoFED). As a result, there is an urgent need to redefine responsibilities and competences in the budget preparation process. As part of this, re-organisation should be undertaken where this i s considered appropriate. The second issue concerns the lack of skills and staff within key budget departments, which results in a shortfall in capacity to maintain reform. The budgeting and accounting departments are about 50% below staff complement, and only aproportion of those in position have the requisite skills. 'ReferenceAnnex ~ A: Bibliography 4 Legislative Framework 7. The legislative framework governing public expenditure management i s established within Proclamation 57/1996 of the Federal Government on Financial Administration, and Regulation 1711997 of the Council of Ministers. The consensus view obtained as part of the CFAA indicatedthat the legislation was broadly sound. Chart of Accounts 8. Introduced for E M 2001/02, this constitutes a set of expenditure and revenue codes that applies right across recurrent and capital budgets. The Chart will eventually apply down through the Regions as the decentralisation processrolls out. It i s being introducedinthe first Region inthe current year. New Budget Calendar 9. The Budget Calendar introduced in 2001 establishes clearly the time frame for development and approval of the consolidated budget, including the level of Regional subsidies. Responsibilities at each stage of the process are also defined. However, the new BudgetCalendar is largely untestedand may contain unrealistic time frames given the needto obtain budget information from Woreda and Zone levels, up through the Regional governments, for inclusion inthe central budget presentedto Parliament. Budget ConsolidatiodComprehensiveness 10. The Federal budget only includes information on the total level of subsidy granted to each government and this i s due to the substantial autonomy granted to Regional governments. Currently, the legislature receives no information on either the planned split between recurrent and capital expenditure at the Regional level nor on the sectoral breakdown although two separate budget consolidations are made by the Fiscal Policy Department (FPD) and circulated within MoFED and to external creditors. Despite this valuable exercise carried out by the FDP, the concept of budget consolidation remains confused within the MoFED itself. In addition, the FPD needs to know the exact level of details needed in a consolidated budget acceptable to donors. Moreover, it also needs to concentrate its resources to draft a consolidated budget in a timely manner and acceptableto all parties. 11. There are also a number of off-budget funds that operate outside the main budget structure. The EFY 94 budget for the first time contained an annex for the Food Aid Budget, but no annexes were contained inthe EFY 95 budget. Medium Term Financial Planning 12. Progress has been achieved towards medium term financial planning by the design and elaboration of a Public Investment Program (PIP), covering capital expenditure over a three-year period. A Public Expenditure Program (PEP) covering capital and recurrent expenditures for a three-year period has been designed but it has not yet been elaborated. A sectoral PEP exercise for health i s carried out at the Ministryof Health. Risks 13. The main risk assessed by the mission i s a weak ownership, possibly caused by insufficientpolitical commitment, at the highest level of the MoFED for the reform of the Federal budget as well as for the decentralisation process.This risk appears to be transitory. 5 14. Other risks related to the first one are those resulting from deficiencies in the organisational structure of the MoFED (after the merger of the two ministries) and serious staffing problems within key departments. Incomplete understanding of the decentralisation reforms, of the specific role of the MoFED and on how to handle the budget reforms i s also a riskthat needsto bementioned. 15. Another specific risk related to the main one refers to the budget process. The reforms in public budgeting that culminated with the elaboration of a new Federal and high- quality budget in EFY 94 (2001-2002) was unfortunately not sustained for the EFY 95 (2002- 2003) budget; there i s a risk for this situation to occur again. This will depend on the political commitment at the highest level within MoFED. Notwithstanding this risk, the mission believes however that the budget reforms at the Federal level cannot be interrupted forever and the process of reform in this area i s irreversible. The risk i s therefore regarded as transitory. 16. The uncertainty with regard to PIP and PEP within MoFED (no clear responsibilities for these activities, late production of PIP) should also be seen as a risk. This is again related to the main risk mentioned above. Conclusionsand Recommendations 17. Since 1997, considerable progress has been made in the rationalisation and strengthening of budgeting processes at the Federal level. This culminated with the elaboration of a comprehensive and high-quality budget for EFY 94 (2001-2002), with the design of both the PIP and the PEP and with the preparation of PIE' on a yearly basis. Further development i s planned, including the introduction in 2003 of an Integrated Financial Management System (IFMS). In considering the introduction of Direct Budget Support (DBS) in the near future, Federal budgeting achievements need to be balanced against remaining weaknesses and the time frame for addressing them. At least another two to three years work may be required to embed changed processes at the centre of government. The standardof production of the EFY 95 (2002-2003) was disappointing considering the progress made for the EFY 94 (2001-2002) budget. In addition, the last PIP was not elaborated on time and was developed almost independently from the budget process. If reforms are to have a significant impact, they must be matched by sustainability, which should be underpinned by commitment and ownership within MoFED. 18. The following recommendations reflect the growing needto improve the transparency and accountability of public sector budgeting in general. 0 The MoFED needs to clearly re-define its responsibilities and competences; it also needs some serious reorganisation in order to demonstrate ownership of and commitment to the budgetary reformprocess; Staffing issuesshould be addressedtogether with the reorganisation of the MoFED. 19. The technical comments, which follow, are dependent on implementation of the above recommendations. 0 For the next preparation process of the budget EFY 1996 (2003-2004), it i s essential at a minimumto get back to the EFY 1994 (2001-2002) budget status. That means elaborate the budget through the BIS system, using account codes and including an annex on food aid; 6 The drafting o f a consolidated budget, for the past year and the budget year, including to represent a & objective. The drafting and publication o f the consolidated budget should the extent possible data from approved budgets at Federal and Regional levels, should be an annual exercise to be carried out and finalised by December 31 at the latest; The yearly exercise to prepare and finalise the consolidated budget should take into consideration the plans o f &l the extra budgetary operations (if possible at all levels of government but at least at the Federal and Regional levels). In addition to the above, it should be emphasized that the consolidated budget should clearly reflect all planned food aid flows. Planned activities o f the Disaster Prevention and Preparedness Fund (DPPF) need to be integrated in budget planning or management and the operations o f the Ethiopian Social Rehabilitation and Development Fund (ESRDF) and its activities should be reflected in the consolidated budget as well; 0 Once drafted, the consolidated and comprehensive budget should be available to the Council o f People's Representatives (and the Federal Council), to all public and private entities or individuals and to the donors. Responsibilities for the above within MoFED should clearly be stated; 0 MoFED should examine the two PIP and PEP exercises and decide where it wants to go. Basically, MoFED needs at least to clarify the status of PIP and PEP, the departments in charge and the exact plan for carrying out related PIP and PEP activities in the future. MoFED should also explore the possibility o f a forecast exercise for a three-year period that would indicate subsidies for the Regions and that would be broken down by Region. The exercise would need to indicate the sectoral allocation provided that MoFED receives the three-year aid forecast from donors; 0 MoFED should take a close look at the proposed financial calendar and responsibilities and particularly at the activities (and related timing) o f the Planning Cycle. Availability of information on revenues (domestic and extemal) needs also to be looked at. There should be a strict adherence to the deadline for notifying the subsidies to the Regions in order for them to adhere to their budget preparation process. The calendar should not be set in statute untilused and tested; 0 Donors should continue coordinating their activities and to forward three-year aid forecasts to the authorities and to do so on time. This information i s indispensable for the budget preparation process ingeneral; 0 Technical assistance i s needed to reorganise the MoFED and/or advise on the staffing needs. In addition, technical assistance i s needed for the consolidation exercise o f the budgets, to clarify the concept and to establish the level o f details needed in a consolidated budget. Moreover, technical assistance i s also needed for the PEP. Technical assistance should be provided at an early stage, keeping in mind that its success is dependent on assumption o f responsibility at high level within the MoFED. In fact, technical assistance will only be really effective if clear messages o f ownership o f the reforms are sent from the highest levels o f the MoFED. 7 1.1 ASSESSMENTOFPRESENTPOSITION Background 1.1.1 This review was conducted between 14and 30 September2002 as part of aCFAA for Ethiopia commissioned by the World Bank, and undertakenin collaboration with other donor partners. These were the European Union (EU), the British Department for Intemational Development (DFID), Ireland Aid, and the governments of Norway, the Netherlands and Sweden. This report covers the element of the CFAA allocated to the EU, Public Sector Budgeting (PSB). 1.1.2. The EU prepared terms of Reference for the PSB element in the spring of 2002. A co-ordinated Terms of Reference (TOR)for the complete CFAA was developed subsequently by the World Bank and handed to the CFAA team at the commencement of the project in Addis Ababa. The essential content with regards to work on the PSB is largely consistent between the two TORS.Nonetheless, the agreement of the EC Delegationin Addis Ababa has been obtained that work on the PSB element shall be conducted in accordancewith the World Bank TORinorder to maintain the cohesion of the exercise. 1.1.3. The EU team were in country for 7 days between 14 and 21 September. The remainder of the allocated time was spent on report preparation. Objectivesand Scope 1.1.4. The two main purposes of the CFAA are Fiduciary Risk Management and Development Strategy. These require identification of the strengths and weaknesses of Ethiopia's accountability arrangements including confirmation that appropriate checks and balances exist over the use of public funds. An important outcome i s to enable a common understanding by Ethiopia and development partners of current financial accountability arrangements as a basis for designing and implementing capacity buildingprograms aimed at strengthening those arrangements. 1.1.5. In this context the PSB element of the CFAA focuses on an assessment of current budget preparation and implementation arrangements, including the legislative framework, the budget calendar, budget formats, the impact of recent institutional changes, and areas where further development work i s needed. ProcessFollowed 1.1.6. Much work has been undertaken on PSB over recent years. There i s therefore a considerable amount of information available. This report does not seek to reiterate previous knowledge, which i s extensive. Instead it focuses on recent developments (principally since July 2002 when the Inventory Report was produced by ADE under EC financing)z, and assesses their significance in the context of a move to DBS by donors. As part of the review process, relevant historic and current reports and papers were analysed. These are also contained in the bibliography at the end of the report. 1.1.7. A series of meetings were held with relevant officials in Ethiopian ministries, with USAID conceming the development of new government accounting arrangements, with Ireland Aid in respect of the impact of central developments on Regional govemment, and with the EC Delegation. In addition, meetings and conversations were held with the USAID lead consultant and his deputy on budgetingprocessesinEthiopia. 2 Ref. to Annex A: Bibliography. 8 1.1.8. The World Bank provided a questionnaire for use in the review of PSB. This was used as guidance during the review of documents and in meetings. It was not followed strictly as it was a standard format that assumed minimal information was available on PSB. This i s not the case inEthiopia. Relationships 1.1.9. PSB reform i s part of the Civil Service ReformProgram. Considerable work has been undertaken at the Federal level of government on the development of budgeting and accounting systems. The Government of Ethiopia i s firmly committed to decentralisation and i s rolling out the reform process to Regional governments and within them to Zones and Woredas. The roll out i s being undertaken in phases with the intention of enabling Regional governments to absorb change in a structured manner. Comment i s provided in the CFAA report on the degree of success to date of this policy. Four Regional governments from a total of nine are involvedinthe first phase. 1.1.10. From a Federal viewpoint it seems essential to the roll out process that PSB reforms are firmly embedded at the centre of government, being understood and applied by responsible ministries and their officials. The Regional governments and their sub- organisations will look to the centre for coherent guidance and support. The extent to which this is the positionis covered below inthe section on Strengths and Weaknesses. RecentWork 1.1.11. The Inventory Study to the CFAA (July 2002) contains a list of projects and reports relevant to PSB produced up until April 2002. The Inventory Study itself forms part of the new body of information since then as it pulls together the different initiatives and data produced by donors and the Government of Ethiopia. 1.1.12. A further significant document i s a report by the World Bank entitled "Project Appraisal Document on a Proposed Credit ... to the Federal Democratic Republic of Ethiopia for the Capacity Building for Decentralised Service Delivery Project". The project i s envisaged as the first phase of long-term support aimed at enhancing service delivery performance through a coordinated program of civil service reform, the restructuring and empowerment of local governments, and strengthening of the Ministry of Capacity Building. The document is focused on the objectives of the project and the environment in which it will take place. It includes an informed analysis of the progress achieved at the Federal level in implementing budgeting and accounting reform. 1.1.13. The International Monetary Fund (IMF) carried out work on fiscal reporting under decentralisation. An Aide MCmoire on this work was issued in July 2002. Authorities at the MoFED have constantly made reference to this work that was a matter of discussion in all the departments. 1.1.14. The principal work inthe area of PSB has been the Decentralisation Support Activity (DSA) covering budgeting and accounting. The DSA has been funded by USAID with the technical support of Harvard University. The outputs from this program are covered in the next report section. 9 Strengths 1.1.15. The following strengths were observed: Legislative Framework. The framework governing public expenditure management is established within Proclamation 57/1996 of the Federal Government on Financial Administration, and Regulation 17/1997 of the Council of Ministers. A feasibility study for the introduction of an Integrated FinancialManagement System (IFMS) undertaken by PriceWaterhouseCoopers on behalf of the EU early in 2002 expressed some unsubstantiated reservations concerning the legislation. Notwithstanding, the general feedback obtained as part of the CFAA indicated that the legislation was broadly sound, However, it was considered that core legislation on budgeting and accounting needed to be updated to incorporate a) recent changes in procedures such as the new Chart of Accounts and the Budget Calendar, b) issues connected with the decentralisation of budgetary management to the Regional governments, and c) to strengthen the role of the new Ministry of Finance and Economic Development (MoFED) in connection with it's responsibility for setting the rules, regulations and procedures for public sector fiscal management within Ethiopia. The Role of the Legislature. The Legislature has an appropriate role in the national budgetingprocess. A Recommended Budget is preparedby MoFED and forwarded to the Prime Minister's Office and the Council of Ministers for approval in early June. During the previous November, the formula to be applied in a particular year to the Regional Subsidy i s submitted to the Federal Council for discussion and approval. A draft Approved Budget i s submitted to Parliament for consideration and approval in mid-June. If approved, the Budget is appropriated by Parliament by early July and a Budget Proclamation i s issued. Chart of Accounts. An important outcome of the DSA project has been the introduction of a new Chart of Accounts. This constitutes a set of revenue and expenditure codes that applies consistently across recurrent and capital expenditure from the Federal to Regional levels of administration. This was introduced at the Federal level in EFY 2001/2002 and i s beingrolled out to the first four Regions. It was introducedin the SNNP Regionfor the current EFY (2002-2003). The Chart will eventually apply down through all the Regions as the decentralisation processrolls out. Budget Calendar. A further outcome of the DSA project was the introduction of a new indicative Budget Calendar. It defines the financial planning and budgeting cycles, establishes time frames, and specifies the stages in each cycle. Also defined are institutional responsibilities from the bottom (Woreda level) upwards. Budget Consolidation. At present, consolidation of budgets (Federal and lower levels of govemments) takes place in Ethiopia. This exercise i s co-ordinated by the Federal Fiscal Policy Department (FFPD) of the MoFED. Two separate consolidations are made and circulated within MoFED and to external creditors but are not presented to Parliament. With regard to the comprehensiveness of the budget, in EFY 94 (2001-2002), some progress has been achieved in incorporating off-budget funds in the main budget and, for the first time, the budget included an annex for the FoodAid. Notwithstanding, there are a number of off-budget funds that operate outside the main budget structure3. These funds 3 The Road Fund managed by the Road Fund Administration. Activities funded by the Road Fund are not reported to the Finance Bureaus or the FederalTreasury but are accounted for separately by road authorities and reported to the latter ; Funds from the Pension and Social Security Funds (from employees and employers) are held in the NationalBank of Ethiopia (NBE) 10 have their own budgeting and accounting processesand prepare their budgets to different timetables to that of the central budget. As far as donor funding is concerned, funds are directed through three channels. Channel 1 funds are managed through accounts held by MoFED and are incorporated into the budget process. Channel 2 funds are managed through deposit funds held by ministries and Regional governments, and are fully captured by the central budgeting process. The extent of inclusion of Channel 1 and Channel 2 funds in the budgeting process is described by the IMFas impressive. Channel 3 funds are directly paid to projects and by- pass central and Regional govemment financial control processes. This i s not however an issue unique to Ethiopia. After a design period of four years, the reform was implemented during the fifth year for the Federal budget EFY 94 (2001-2002). Changes in both the structure and processesof the budget had been introduced, including in the areas o f classification and budget formats. The approved budget includes budget codes for the class of accounts and an annex on food aid. The preparation process for this budget ran through the Budget Information System (BIS). The budget document is a very comprehensive document reflecting the reform. With the assistance of the DSA project, progress was made within the Ministry of Economic Development towards medium term financial planning by designing a Public Investment Program (PIP), covering capital expenditure over a three-year period. The last PIP exercise has been carried out this year after the budget was prepared. A Public Expenditure Program (PEP) covering recurrent and capital expenditure for a three-year period was also designed with DSA funded technical assistance. To date no PEP exercise has been carried out. However such an exercise i s carried out at the Ministry of Health for the health sector. In addition to these achievements, there is a general consensus among donors that the diversion of funds i s not a cause for concern. This represents a sound ethical platform on which reform and development can bebased and on which they may continueto occur. Weaknesses 1.1.16. Detailedbelow are some of the identified weaknesses: The new Ministry of Finance and Economic Development (MoFED) and the Budget Preparation Process4. Compared to the previous one (EFT 94; 2001-2002), the EFY 95 Federal budget (2002-2003) was significantly different. The budget codes were taken out and there was no longer an annex on food aid. In addition, the level of details was separately from budget funds and are managed by the board of the Pension and Social Security Authority. The Fuel Price Stabilization Fund is managed directly by Treasury separately from budget funds; Privatization Fund revenues @ut not liabilities) are managed through this fund, which is held alongsidebudget funds in the NBE ;Dividends from public enterprises flow to the IndustrialDevelopmentFund and are also held alongsidebudget funds within the NBE; The majority of food aid flows through the Disaster PreventionandPreparednessFundwhich is managed by the DisasterPreventionand Preparedness Commission (DPPC). The fund is managed outside the budget accounts in NBE; Ethiopian Social Rehabilitation and DevelopmentFundis managedoutsidethe budget accounts inNBE. 4 The Ministry of Finance (Mom and the Ministry of Economic Development and Cooperation (MEDaC) were merged in October 2001 inanew ministry called Ministry of FinanceandEconomic Development (MoFED). Previously, they had operated separately with the MoFresponsiblefor the recurrent budget and the MEDaC responsiblefor the capital budget. As a result, the twobudgets were preparedindifferent formats andto separate time scales.The merger was undertakeninorder to enable, among others, the convergence of the two budgets into a consistent whole, produced to the same time schedule and within the same format. The merger of MoF andMEDaCtook place too late (October 2001) for a convergence of functions during the 2002-2003 budget preparationprocess. Capital and recurrentbudgets were thereforeprepared separately, albeit to a common timetable and using a common Chart of Accounts. It is not clear from discussions what efforts are being made to achieve functional convergencein time for the 2003-2004budget preparationcycle. After the merger, there are now five (5) departments in charge of the budget. extremely limited. Moreover, the preparation process did not run through the Budget Information System (BIS). The EFY 95 budget expressed a serious deterioration in quality when compared to the previous one5 and representsbasically a step backward in the budget reform at the Federal level. During the preparation process of the E M 95 budget, unlike what happened the year before, the chief of party of the DSA project was not directly involved in the process. However, five (5) local computer experts, financed by the DSA project, were available for the preparation process. The mission's assessment i s that the deterioration in quality was certainly not due to a lack of technical assistance. The mission has looked further trying to find out why the EFY 95 budget was not comparable in quality to the EFY 94 budget. It appears that there are a variety of causes, the main one being a weak ownership at the highest level of the MoFED for the reform of the Federal budget as well as for the decentralisation process. This may be causedby low political commitment. In addition, the merger of the two ministries with its new five budget departments,becauseof the difficulty in coordinatingthe work of the departments, has for the time beingcomplicated the overall budget process. Moreover there are serious staffing problems6, many competent experts having left the MoFED, mainly after the merger to join the newly createdMinistry for Capacity Building. The mission has found that, within the MoFED, there is insufficient understanding on the decentralisation reforms as well as insufficient understanding on the specific role of this institution and on how to handle the budget reforms. Within the MoFED, the mission also noticed a lack of information on what is happening in the Regions. The mission observes that the budget preparation process has unfortunately not smoothed out enough, the result being that further time i s needed to embed the revised budgeting process at the Federal level. Budget Consolidation and Comprehensiveness. The Federal budget only includes information on the total level of subsidy granted to each government and this i s due to the substantial autonomy granted to Regional governments. Currently, the legislature receives no information on either the planned split between recurrent and capital expenditure at the Regional level nor on the sectoral breakdown although two separate budget consolidations are made by the Fiscal Policy Department (FPD) and circulated within MOFED and to external creditors. Despite this valuable exercise carried out by the FDP, the mission has noted that the concept of budget consolidation remains confused within the MoFED itself. In addition, the FTD needs to know the exact level of details needed in a consolidated budget acceptable to donors. Moreover, it also needs to concentrate its resources to draft a consolidated budget in a timely manner and acceptable to all parties. Extra budgetary operations are currently not taken into account in preparing the consolidated budget and these operations are hardly integrated with the planning process and budget presentations. 5 The paradox is that this component of the reform (budget preparationprocess) has successfullybeen rolled out to the SSNPR where for FY 95 (2002-2003)acomprehensivebudget (2700pages) has beenpreparedand ranthrough the BIS. 6 Frequent reference was made at meetings to the capacity and skills weaknesses in the budgeting and treasury departments of the MoFED. Staff shortages are in the order of 5070,and only a few staff possess the necessq accounting andbudgeting skills. It was stated at MoFED, that, inorder for budgetingreformto continue andbecomeestablished,donor assistancewas required in the recruitmentof neededstaff and intheir training. 7 The Ministry for Capacity Buildingwas createdin October 2001. 12 Medium Term Planning. Progress has been made with regard to the PIP exercise and with designing PEP, as mentioned above. Within MoFED, it i s however not clear which department i s in chargeof these activities and how these are foreseen for the future. Inthe decentralised system and in the case of Ethiopia, the existing forecasting tools still fail to indicate the amount of subsidies for the Regions (broken down by Region). Calendar. The mission was told that the last PIP was prepared after the Federal budget EFY 95 (2002-2003) was elaborated. The mission has not seen the last PIP.The latter is practically useless if not prepared during the first three or four months of the EFY. It appears also that the indicative planning cycle of the budget i s difficult to follow. As far as the timingof notification of the subsidies to the Regions i s concerned, the newly indicative calendar has not been respected. The calendar indicates January 9-16 for the notification. However, for the preparation of EFY 95 (2002-2003) budget, the Regions did not get an official notification of the subsidies untilMay, less than two months before the new EFY started. Before May and startinginDecember, there were many preliminary notifications and these varied upward and downward. Regional governments cannot finally decide on the final amount and composition of expenditure until their subsidies have been appropriated inthe Federal budget. Donor Aid. Frequent reference was made at meetings inrelation to the delay with which donors announced the amount of aid to the Ethiopian authorities. The mission was unable to assess how critical this delay might have been or is. The delay unfortunately exists by donors and this adds to the other existing constraints in budget preparation process mentioned above. The donor's meetings i s a good start for coordinating their activities and for contemplating three-year aid forecast to forward to the authorities. Given the time constraint inbudget preparation, this information i s indispensable for the whole process. Risks 1.1.17. In the light of the above information it i s considered that the following risks exist to donor funds: The main risk assessed by the mission is a lack of ownership, perhaps caused by low political commitment. This i s at the highest level of the MoFED for the reform of the Federal budget as well as for the decentralisation process. Although the mission was not able to accurately assess the permanence of this risk, it would tend to believe that it is transitory because it had noticed a genuine commitment for the reforms at the technical levels where it interacted with various members of the ministerial staff. Other risks related to the first one are those resulting from the weak organisational structure of the MoFED (after the merger of the two ministries) and serious staffing problems within key departments. Incomplete understanding of the decentralisation reforms, of the specific role of the MoFED and on how to handle the budget reforms are also risks that need to be mentioned. Another specific risk related to the main one refers to the budget process: the reforms in public budgeting that culminated with the elaboration of a new Federal and high-quality budget in EFY 94 (2001-2002) were unfortunately not sustained for the EFY 95 (2002- 2003) budget; there i s a risk for this situation to occur again. This will depend on the political commitment at the highest level within MoFED. The mission does not have any element to establish whether the budget process at the Federal level for next EFY 96 (2003-2004) will be like the one in EFY 94 (2001-2002) or in E N 95 (2002-2003). In 13 addition, if a budget of poor quality is produced for EFY 1996 (2003-2004), the mission has no element to assess whether this will be the last year or not. Therefore the risk may continue for an indeterminate period. Notwithstanding, the mission believes that the budget reforms at the Federal level cannot be interrupted forever and the process of reform inthis area i s irreversible. The uncertainty with regard to PIP and PEP within MoFED (no clear responsibilities for these activities, late production of PIP) should also be seen as a risk.This i s again related to the main risk mentioned above. 1.2 ASSESSMENT OFANY PLANNEDACTIVITIES Strengthsand Weaknesses 1.2.1. The USAID DSAs project implemented by Harvard University started in 1997 with the detailed design of the reform. Changes in both the structure and processes of the budget have been introduced at the Federal level, as mentioned above, and culminated with the elaboration of a high-quality budget inEFT 94 (2001-2002). 1.2.2. Within the MoFED, there are currently activities related to the Public Investment Program (PIP) and to the Public Expenditure Program (PEP) are programmed to be carried out inthe course of EFY 95 (2002-2003): Public Investment Programme (PIP): As far as the PIP data base management system i s concerned, MoFED would like to strengthen and expand it. The authorities will look for technical assistance and funds to finance the data base management. In addition, the ownership of the data base management system will be transferred to MoFED and the existing system is expected to be revised, strengthened and expanded in conformity with the new MoFED structure. Moreover, the data base management system in the pilot executing agenciesi s also expectedbe strengthened and expanded inother agencies. Public Expenditure Program(PEP): For the PEP, the MoFED also intends to look for technical assistance for the implementation of a PEP project and move forward with this project 1.2.3. A Tax System Reform project will be implemented at the new Ministry of Revenues. It is worth mentioning this project because of the positive impact it is expected to have on the budget, its accountability and transparency. The project is expected to encourage capital investment and development, improve tax revenues and ensure equity and fairness in the tax system through a comprehensive overhaul of the current legislation; to develop a modem tax administration system capable of executing the government's revenue policy initiatives, and to effectively collect revenuesthat the economy generates.As the government envisagespolicies to reduce poverty by allocating more funds to social sector development includingeducation, health and roads, which require domestic resources mobilization, the tax system reform program measures by enhancing revenue i s expected to support the implementation of Poverty Reduction Strategy. 8 The DSA (DecentralisationSupport Activities) project is financedby USAID and implementedby HarvardUniversity 9 The revenuedepartment was moved from the MoFEDto anew Ministry of Revenues. 14 1.2.4. An Integrated Financial Management System (IFMS) supported by the European Union will be piloted in five institutions at the Federal level during the coming two yearsio. This projects aims at implementing (on a pilot basis) an IFMS covering the core budget and accounting functions of making payments, recording revenues, measuring these against budget and controlling the financial assets and liabilities. This upcoming pilot project builds on previous developments such as the Budget and Accounting components of the Expenditure Management and Control Program (EMCP) supported by the USAID DSA project; the Budget, Disbursement and Accounting (BDA) system that has been introduced at the level of the Federal government and all Regions; and the Budget Information System (BIS) at the Federal level. The BIS has been rolled out this year (EFY 95/2002-2003) to the SNNPR. It is anticipated that this processwill continue gradually to the other Regions. 1.2.5. The IFMS will be a response to major weaknesses regardingfinancial information, particularly the lack of integration of the various above-mentioned systems that produce financial information for the government. In fact, the Public Investment Programme (PIP), the Budget InformationSystem (BIS) and the Budget Disbursements and Accounting (BDA) are not integrated with each other. In addition, and this i s particularly the case for the PIP, the IFMS will address the inefficiency and inability to further development of the existing systems. Moreover, the on-going difficulties to incorporate the data flow from the debt management and payroll systemsinto the accounts will also be dealt with. Appraisal of ExistingPlans 1.2.6. Plans to develop PIP and PEP activities at the MOFED are important. The mission supports plans related to activities whose objectives are to further elaborate a neededmedium- term framework. The very chances of success of such plans are dependent however on assumption of responsibility at high level within MOFED. The mission also supports both the Tax System Reform Project and the IFMS. Detailed evaluation of the latter goes beyond the scopeof this report. 1.3 CONCLUSIONSAND RECOMMENDATIONS 1.3.1. Since 1997, considerable progress has been made in the rationalisation and strengthening of budgeting processes at the Federal level. This culminated with the elaboration of a comprehensive and high-quality budget for EFY 94 (2001-2002), with the designof both the PIP and the PEP and with the preparation of PIP on a yearly basis. Further development i s planned, including the introduction in 2003 of LFMS. In considering the introduction of DBS in the near future, Federal budgeting achievements need to be balanced against remaining weaknesses and the time frame for addressing them. At least another two to three years work may be requiredto embed changed processes at the centre of government. The standard of production of the EFY 95 (2002-2003) was disappointing considering the progress made for the EFY 94 (2001-2002) budget. In addition, the last PIP was not elaborated on time and was developed almost independently from the budget process. If reforms are to have a significant impact, they must be matched by sustainability, which should be underpinned by commitment and ownership within MoFED. 10 The Ministry of Finance and Economic Development (MoFED), the Ministry of Education, the Ministry of Health, the Ethiopian Road Authority, the Federal Civil Service Commission. The pilot project i s expected to start not later than December 2002 and to terminate not later than December 2004. 15 1.3.2. The following recommendations reflect, among other things, the growing need to improve the transparency and accountability of public budgetingin general: 0 The MoFED needs to clearly re-define its responsibilities and competences; it also needs some serious reorganisation. Re-definition of responsibilities and competences and reorganisation are Qpriorities at this time and in the context of the CFAA (particularly for preparing the budget, for the consolidation exercise of the budget, for preparing the PIP and the PEP). These would be strong signals that MoFED fully owns the Expenditure Management and Control Program (EMCP). In addition, these would also indicate that the needed motivation and leadership for the reforms are truly there. 0 To a certain extent, the above are also pre-conditions for all the following recommendations to be implemented successfully. It is beyond the mandate of this mission to elaborate a reorganisation plan for the ministry. However, any reorganisation should focus on the priority activities of the ministry. The responsibilities for budget preparation should be clarified as well as the relationships with the Regions. Therefore, together with a clear definition of responsibilities and competences, the mission recommends among other things: 9 The consolidation of the five existing budget departments in one single department under one department chief. Benefits expected from such a consolidation are a better coordination of budgeting activities, a better use of competent staff and an increase in effectiveness of these activities; 9 The strengthening of the department dealing with Regional affairs, the objectives being a better interaction between the Federal and Regional governments and a better exchange of information on the implementation of the reform in the Regions including information onbudget preparation and execution. 0 The MoFED needs to address staffing issues and this is also a priority at this time and in the context of the CFAA. Staffing issues should go together with the reorganisation of the MoFED. It i s also beyond the mandate of this mission to elaborate a plan to deal with staffing issues. However, dealing with this issue should focus on placingheplacing competent staff in key departments and for an indefinite period of time. Therefore, the mission recommends among other things: 9 The newly ( to be created) budget department to be adequately staffed and for an indefinite period of time; 9 The department dealing with Regional affairs to be adequately staffed with experts well knowledgeable of issues on decentralisation. Existing and new staff should stay inplace for an indefinite period of time. 1.3.3. The following recommendations deal essentially with key technical issues and weaknesses that are to some extent a consequence of a lack of ownership for the reforms. Basically, their chances of success, if implemented, depend heavily on the implementation of the first two recommendations. Budget Preparation. For the next preparation process of the budget EFY 1996 (2003- 2004), it i s essential at a minimum to get back to the EFY 1994 (2001-2002) budget status. That means, elaborate the budget through the BIS system, usingaccount codes and including an annex on food aid. 16 Consolidated Budget. The drafting of a consolidated budget, for the past year and the budget year, including to the extent possible data from approved budgets at Federal and Regional levels, should represent a & objective. The mission recommends for the consolidated budget to show revenue by tax and non-tax revenue in standard format and expenditure (by sector and sub-sector if possible) by current (wage and non wage) and capital expenditureii. The mission also recommends for the drafting and publication of the consolidated budget to become an annual exercise to be carried out and finalised by December 31at the latest. consolidated budget should take into consideration the plans of all the extra budgetary Comprehensiveness of the Budget. The yearly exercise to prepare and finalise the operations (ifpossible at all levels of government but at least at the Federal and Regional levels)". The mission recommendsthat these operations become more integrated with the planning process and budget presentationssuch as: Inflows to the Road Fund, the Fuel Price Stabilization Fund, the Pension and Social Security Fund and to the Industrial Development Fund should be recorded as revenue (tax and non tax); Likewise, outflows from the same should be recorded as expenditures and according to budget classification. In addition to the above, the mission recommends for the consolidated budget to clearly reflect all planned food aid flows13.Inparticular: 9 All national food aid operations including those to be executedthrough the Regional food security bureaus should be reflectedinthe consolidated budget; 9 The planned activities of Disaster Prevention and PreparednessFund(DPPF) should be integrated inbudget planning or management; 9 The operations of the Ethiopian Social Rehabilitation and Development Fund (ESRDF)andits activities shouldbereflected inthe consolidated budget. Availability and Publicity of Budget Documents. Once drafted, the mission recommends for the consolidated and comprehensive budget to be available to the Council of People's Representatives (and the Federal Council), to all public and private entities or individuals and to the donors. The missions also recommends for the consolidated and comprehensive budget to include, at a minimum, information on the previous year's budget. In addition, it also recommends for the consolidated and comprehensive budget to also be published in the Poverty Reduction Strategy Paper (PRSP). 11 Infact, the finalisation of a consolidatedbudget (Federal andRegional) for boththe past year (2001-2002) and the budget year (2002-2003) -including all extra-budgetaryfunds and accounts - is a structural benchmark (to be met by September 30, 2002) under the second annual program supported by the IMF financed Poverty Reduction and Growth Facility (PRGF) as well as Heavily Indebted Poor Countries (HIPCs) agreement. The IMF does not however specify the level of details requestedin the consolidatedbudget.This is an issue ! In fact, if a great level of details is expected, the preparationof a consolidatedbudget may take longer than anticipated. l2Inmaking thebudgetmorecomprehensive and intaking into account extra-budgetaryoperations, it is recommendedthat principles of the IMF'sGovemmentFinanceStatistics (GFS) Manual (2001) be carefully followed. l3 Budget estimatesfor food aid flows shouldbe consistent with Balanceof Paymentsprojections of the samepreparedby the CentralBank of Ethiopia. 17 Responsibilities for the above within MoFED should be clearly stated. The mission recommends that the MoFED takes a close look at these two PIP and PEP exercises and decides where it wants to go. Basically, MoFED needs at least to clarify the status of PIP and PEP, the departments in charge and the exact plan for carrying out related PIP and PEP activities in the future. MoFED also needs to clarify whether or not (and how) to proceed with these exercisesinthe future. The mission recommends that MoFED to look at the possibility of a forecast exercise for a three-year period that would indicate subsidies for the Regions and that would be broken down by Region. The exercise would need to indicate the sectoral allocation provided that MoFED receives the three-year aid forecast from donors. The mission recommends that the MoFED takes a close look at the proposed Financial Calendar and responsibilities and particularly at the activities (and related timing) of the Planning Cycle. The activities to look at are in part related to the PIP issues discussed above. Regarding the PIP, if it is to be done in the future, its elaboration should take place within the first quarter of the EFT (and in no way after the elaboration of the budget as occurred for the budget preparation process in EFY 95). Availability of information on revenues (domestic and external) needs also to be looked at. The mission also recommends the MoFED takes a close look at the calendar as far as the timingof notification of the subsidies to the Regions is concerned (provided that MoFED receives the needed information from donors on time). The mission recommends a strict adherence to the deadline for notification of subsidies to the Regions in order for them to avoid delays intheir budget preparation process. The mission also recommends the calendar to be officially put in place after it has been looked at and tested. The mission recommends donors to continue coordinating their activities, to forward three-year aid forecast to the authorities and to do so in time. This information i s indispensable for the budget preparation process in general, for the effectiveness of the process and for respecting the budget calendar keeping in mind its impact on Regional budget processes. Technical Assistance Needed 1.3.4. Technical assistancei s neededto reorganise the MoFED and/or advise on the staffing needs. Inaddition, technical assistancei s neededfor the consolidation exercise of the budgets, to clarify the concept and to establish the level of details needed in a consolidated budget. Moreover, technical assistancei s also needed for the PEP. 1.3.5. Technical assistance should be provided at an early stage, keeping in mind that its success i s dependent on assumption of responsibility at high level within the MoFED. Technical assistance will be all the more effective once clear messages of ownership o f the reforms are sent from the highest levels of the MoFED. 18 2. ACCOUNTING AND FINANCIAL REPORTING EXECUTIVE SUMMARY 1. The Ethiopia CFAA was commissioned to assist donors in the assessment of the country's fiduciary risk with a view to the future provision of Direct Budgetary Support (DBS) and for the World Bank's Country Assistance Strategy. 2. T h i s section of the report i s to identify strengths and weaknesses in the public accounting and financial reporting systems. 3. The current system of Federal accounting uses a new chart of accounts implemented at the start of this fiscal year (2002/2003). It i s manual based with batch processing into stand alone Personal Computers (PC's) for report production and consolidation purposes. USAID i s funding a project to improve the manual/batch system countrywide through provision of manuals, computers and training and this has shown progress to date. 4. Given Ethiopia's well disciplined culture, the main challenge in improving public expenditure management is inobtaining better and faster managementinformation. Presently, a surprisingly high percentageof the budgetary institutions (BI's) produce information within two months of the month end despite lack of skills, low staffing levels and the poor infrastructure in the Regions. Delays from the Regions and from the other BI's can be up to 12 months behind. This has considerably retarded the preparation of consolidated accounts and the audit of such with the result that the last audited financial statements are for 1999/2000. 5. Mid term reviews of the Health and Education Sector Development Programmes do not identify major fiduciary problems or failure of funds to reach their intended uses but highlight the problemof untimely reporting and closure of Regional accounts. 6. The Federal Government of Ethiopia (FGE) has the basis for expenditure tracking and strengthening public expenditure management in its existing poverty strategy, expenditure reform program and welfare monitoring system. 7. Of major concern to the accuracy of public expenditure reporting i s the system of using three different channels for aid accounting. Two of the channels (2 and 3) are not always included inthe budget and, consequently, are excluded from the financial statements. 8. Delays in the provision of financial information and reports and exclusion of some expenditure i s problematic in that it does not enable effective macro-fiscal management nor provide adequateinformation on the overall fiscal situation inthe country. 9. On a positive note, the financial system i s easy to use, staff are dedicated and there are procedures to control virements and supplementary expenditure. 10. However, capacity building should be resourced with local and international technical assistance, training of staff in accounting and reporting, and procurement of computers with training of staff in their use. It i s just as important, though, to try and set limits on demands for capacity as well as to increase its supply. Duplication of effort needs to be avoided, service delivery improved and strategic choices made about the use of limited resources. Public employees need to be made aware of the issues of quality, access, use of resources and the impact of these issues on poverty alleviation. 19 11. The risk to donor funds is that the country's macro-fiscal situation and the effect of the budget and spending on poverty alleviation may not be accurately captured thus compromising the donor's aid strategy. Aid may not be targeted in the most effective manner for Ethiopia and tracking of poverty expenditure will be out of date. The fiduciary risk of this i s assessed as high. 12. Over the next three years the DSA project will continue to roll out to the Regions with massive staff training in the new systems and chart of accounts. This is one of the capacity buildingreformprograms being implemented by FGE. 13. Recommendations for improvement of financial management information are extensive and have been splitinto three time periods: Short Term 0 Reduction in the detail required from BI's and regions to assist in faster production of reports to Central Accounts Department of MoFED; 0 Use of estimated figures based on disbursements where regional infrastructure prohibits the timely collection of data. MediumTerm 0 Strategies for lessening the effect of Ads on staffing and skills in the public sector e.g. multi-skillsknowledgepooling etc; 0 Technical assistanceto fill strategic vacancies and to mentorhain upcoming staff; Harmonisationof donor aid policies and strategies; Nation-wide training for financial accounting staff; 0 Introductionof a system for communicationof all aid flows to budget and the (CAD); 0 The above recommendations are of equal priority. Longer Term 0 Complete revision of FGE conditions of service including competitive salary scales and performance contracts; 0 Revision of channels of aid flows and encouragement of donors to use more Direct Budgetary Support; Improvementof Regional infrastructure; 0 Implementationof IFMS. 20 2.1 ASSESSMENTOFPRESENTPOSITION Objectives and Scope 2.1.1. The objective of this portion of the CFAA i s to identify strengths and weaknesses of the overall intemal financial control system and stewardship function of the Federal government and to provide reasonable assuranceof the timely accountability o f public funds. This will assist in the understanding of the country's financial managementarrangements and provide a basis for designing and implementing capacity building programs aimed at strengthening financial accountability inEthiopia. 2.1.2. The CFAA process involved the interview of pertinent FGE ministry officials and donors, desk reviews of existing documentation collated by donors (PER'S,consultancies etc) and walk through procedures. Financial Systems 2.1.3. The current system of accounting at the Federal level i s for the MoFED CAD to receive reports from Budgetary Institutions and Regions and input these into a stand alone PC system on a batch input basis. The computer system produces a monthly trial balance, reports showing actual expenditure figures compared to revised budget, and financial statements for all institutions as well as consolidated reports. The software used is Microsoft Access which i s adequatefor the purpose. Computers are between 1 and 5 years old and, although the older computers will need to be replaced shortly, are suitable for their present use. This i s a simple single entry computerised system involving the batch processing of summary information. 2.1.4. The bank statement i s used as the primary source for cash registers and consequently all disbursements and receipts are reconciledto them. This is not ideal. 2.1.5. All manual accounting records are kept in Amharic whilst the computer system i s in English. The new chart of accounts system has introduced forms inEnglish. 2.1.6. Transfers to BI'sRegions are made by the Treasury Department who copy CAD on the details. CAD also receives deposit slips from the banks, reconciles the two and records the transfer on the computer system. The Budget Department reviews and monitors transfers on a monthly basis and checks the progress of work on capital projects. Because of the delays in gathering information for reports Treasury often disburses the next tranche before the last disbursement has been reported on by the BIIRegion. 2.1.7. Only the Treasury Department i s able to authorise new bank accounts and open them. 2.1.8. The new accounting system at MoFED CAD, BI's and SNNP Region has the facility to enable a record of commitments to be kept. These will then be recorded in the financial statementsunder the modifiedcashbasis. 2.1.9. The payroll system i s also computerised. There are 30,000 employees in Addis Ababa government offices alone. The system generates a checklist of all employees for them to sign on receipt of wages (paid cash). It also deducts pension and tax at source. 2.1.10. A new budget system has recently been put in place by USAID at the MoFED. It works on a double entry basis using Visual Basic software. 21 LegalFramework and InstitutionalArrangements 2.1.11. The preparation of financial statements for the Federal central accounts department is governed by Parliamentary Proclamations and was last revised in 1996/1997. Intemationally recognised accounting standards are not consciously followed as the accounts department follow Ethiopian regulations and generally acceptedaccounting practices. Relationships 2.1.12. Ethiopian government works on a Federal system similar to the USA. The Ministry of Finance and Economic Development (MoFED) i s the arm of the central Federal government. Within MoFED, the Central Accounts Department (CAD) prepares the accounts for the MoFED itself and consolidates the monthly, quarterly and annual financial statements for the 153 Budgetary Institutions (BI's) and the 11Regions. The Regions are fundedby a grant from the Federal government as well as Channel 2 and 3 aid and their own revenue raising abilities as set down by Parliament. BI's are funded by the Federal budget as well as Channel 2 and 3 aid. Recent Areas of Reform 2.1.13. The FGE i s implementing a series of reforms, one of which is the Expenditure Management and Control Programme. USAID i s funding part of this to assist in the upgrading of accounting and financial reporting systems. Under this project a new Chart of Accounts was introduced into the preparation of the Federal and consolidated accounts with effect from 8 July 2002. SNNP Region has also started on this system. It i s expected that the three other large Regions of Oromia, Amhara and Somali will introduce the new chart in the following year. Inthe meantime, all other Regions are using the old Chart of Accounts and a translation table has been produced by DSA for the use of MoFED CAD to incorporate old codes into the consolidated accounts. 2.1.14. New accounting manuals have also been introduced into MoFED CAD and SNNPR and staff trained in their use by the DSA project. DSA prepared these new manuals and provided computers, training and technical assistance for the new modified cash accounting basis. 2.1.15. It i s too early yet to determine how successful the preparation of accounts using the new chart i s but it i s expected to achieve budget control, cash control and accountability. To date, SNNP Region has managed to prepare its July 2002 statements by early September which i s encouraging. 2.1.16. The European Union recently commissioned a study for an IFMS system in MoFED, BI's and Regions and are to implementthis at the beginning of 2003. Strengths 2.1.17. The following strengths were observed: 0 Dedication of staff. The government's main strength in this area i s the dedication and integrity of its accounting staff. Despite vacancies and lack of capacity, staff are able to produce monthly and consolidated financial statements (for the BI's and Regions which respond quickly) within a satisfactory period. The level of staff turnover i s relatively low at 10%per annum of which half of these are retirees. 22 Simplicity of the system. The new manual accounting system i s to be commended for its simplicity meaning that staff without computer knowledge are able to prepare primary documents and collate returns in batches. Computer shlled staff are needed for batch input and for preparation of adjustments. However, becausethe system is not real time, it can operate without the needfor all staff to be computer literate. Bank reconciliation. Bank reconciliation at the CAD are up to date. (However, there is no information at CAD as to how recent i s reconciliation at BI's or Regions as these are not required to be presented to CAD.) At the end of each year, all bank accounts are blocked and funds remainingflow back to the Treasury. This i s a good system of control to ensure that no unaccounted for expenditure takes place after the year end from previous year's funds. Implementation of new system The new chart of accounts system was implemented in July 2002 and has already improved collation of data. Staff at MoFED and BI's have been trained on the new system and in consequent basic accounting procedures. This has improved the standard of slulls in the accounts departments and i s noticeable in the improvement ininformationprovided to the CAD. Control of virements and supplementary expenditure. Virements between line items of expenditure are strictly controlled. BI's must apply via the budget department in MoFED for all transfers. In respect of capital expenditure only the Council of Ministers can approve transfers to recurrent expenditure. Supplementary expenditure requires approval from the Council of Ministers and Council of People's Representatives. Weaknesses 2.1.18. Detailedbelow are some of the identified weaknesses: Lack of skills. Although the MoFED CAD has several staff members either at graduate or diploma level in accounting the department i s operating at 50 percent capacity. At the moment staff are able to maintain output by working extra hours and because many Regions and budgetary institutions are between two and twelve months behind in submission of monthly accounts. However, it is unlikely that staff will be able to be retained if overtime continues indefinitely. Neither will the department be able to cope with the timely throughput of work if Regions are upgraded and submit information more efficiently. Capacity restraints are restricting the pace of changeover to the new chart of accounts and process. Cash salaries system. It is still necessaryto pay FGE staff incash. Previously, staff were paid by cheque but this caused congestion in the banks as employees queued to withdraw their salaries in cash. The banks then implemented a service charge on employees. This meant that FGE had to withdraw the cheque system due to the number of employees complaining of the charge. Payroll transaction costs are, therefore, high. Low salary scale. The low salary scale means that FGE has difficulty in attracting and retaining shlled employees. However, because there is only a small private sector, staff are still attracted to the public sector but motivation to remain, with the exception of job security, i s poor. 23 0 Delays in receiving financial statements from BI's and Regions.lOO of the 153 BI's have managedto prepare their financial statements using the new chart of accounts since July 2002 and are at most only two months behind. This i s a significant rate given the manual preparation of accounts and low levels of capacity across all BI's. However, of those Regions and BI's which have not delivered financial statements on time, some are up to 12 months behind in processing. These delays mean that management information cannot be prepared in time to assist planners and managers or to adequately alert budget personnel/treasury to problems in capital project implementation. The reasons for delay are not all due to the manual accounts system and lack of slulls/capacity at these institutions/Regions. In some instances, BI's are awaiting details from other departmentsmegions and are not prepared to release information until figures can be accurately verified. There are heavy penalties for production of inaccurate information. However, it is also true that the level of detail required in reports for consolidation purposes takes a considerable length of time to accumulate and i s not always necessaryfor managementpurposes. Regions and outlying areas of line Ministries face added difficulties in obtaining information due to the lack of infrastructure in rural areas. For instance, some places are several days from a road and or telephone lines. Ministry of Defence often cannot complete monthly returns e.g. wages cannot be disbursed to troops for several months. Because the cash basis of accounting i s used in those RegiondBI's not on the new system, the wages are not brought to account as a commitment and therefore not shown on the financial statements. An additional problem with delays ininformation is reflected inthe Treasury department. Whereas current legislation states that no advance can be made to a public body by the Treasury until the previous advance has been retired, of necessity to pay urgent expenses this is sometimes flouted. As aresult, there is abacklogof unaccounted for advances. 0 Financial Statements and Audit Reports Outstanding .The last set of audited financial statements i s for the fiscal year 1999/2000. On this report the Auditor General stated that the financial statements did not give a true and fair view. The reasons for this are published in the Gazette but are in Amharic. It i s understood that some of the reasons were becausethe Auditor General was not able to vouch certain large payments. The last set of financial statementsprepared but not audited are for the fiscal year 2000/2001. Language. All manual accounting records and forms are currently kept in Amharic. Under the new system forms are in English as i s also the computer system (whether on the old or new system). As some staff, particularly in rural areas, are not fully conversant inEnglishthere is the risk that mistakes will be madeincompleting accounting records. Aid expenditure is not always accounted for. Aid disbursed through the Channel 3 route i s unlikely to be brought to account as the departments responsible for Federal and Regional budgets are usually unaware of the funding. No reference i s made of Channel 3 expenditure inreports to the MoFED. There i s also the possibility that some Channel 2 aid is not brought to account since there i s no record of aid given kept centrally which i s checked to the budget. In the case of external assistance channelled through BI's, it i s the receiving institutions' responsibility to notify the MoFED to ensure that funding i s included in the Federal Budget but this does not always happen. Where the financing i s excluded from the budget, BI's tend to also exclude the project from their reports to MoFED but usually report direct to donors. This can be partly explained by lack of awareness of the necessity to report aid to MoFED, the large numbers o f projects where expenditure takes place and poor communication linkswith outlying areas. 24 The Aid Co-ordination section of MoFED negotiates aid funding with donors but even this department may not be aware of all sector aid, aid-in-kind, technical assistance or direct procurements for projects as there i s little integration of the various government information systems for finance, budgetingand planning purposes.Food aid is substantial inEthiopia and is also not incorporated inthe budgetor actual expenditure figures which will have important macroeconomic effects. 0 Incomplete control over physical assets. The modified cash basis of accounting does not provide for the physical control and recording of assets except where this i s undertaken as a secondary system e.g. separate recording and control of stocks at medical stores. Under the cash system assets are expensedas they are purchased. 0 Lack of information on Assets and Liabilities. The current (new) financial system only captures a limited amount of debtors, creditors and commitments and does not record fixed assets (as these are expensed at date of purchase). In particular, there i s no procedure for the recordingof pension liabilities or contingent liabilities. 0 Lack of Balance Sheet. The financial statements do not include a Balance Sheet or statementof cashflow. 0 Aid Reporting Systems. The different methods of reporting required by donors (notably the different channels of funds) causes hightransaction costs on an already overburdened and under skilled government staff. 0 Weakness inrecording of retained revenues. Accountability for and transparency inthe area of retained revenues i s weak. There is a standing finance instruction that enjoins all public bodies to submit to MoFED the amount they have collected and details of its use. However, this i s not regularly or accurately reported on. 0 No Public Accounts Committee. There i s no independent Parliamentary oversight of the financial statements (other than presentation at budget time) as these are not submitted to a Public Accounts Committee for review andmonitoring. 0 Funds outside of the budget. Whilst there may be valid reasons for setting up some funds e.g. The Road Fund,outside of the budget, excessive use of such arrangementscan both diminish transparency and reduce fiscal policy control/flexibility. 0 Set off of expenditure and revenue. Certain institutions retain revenue collected to meet expenditure e.g. Ethiopia Postal Service, Ethiopia Standards Committee. In their actual financial data and budgets these institutions present revenues and expenditure as one line item thereby showing net revenue/expenditure. 0 Payments in cash. A significant number of payments are made in cash which compromises the audit trail and physical security of this asset. 0 Lack of critical information for reporting purposes. MoFED through the Treasury advances foreign exchange payment to external creditors on behalf of BI's for which they are required to refund Treasury in Birr. At any one time, CAD cannot establish the amounts owed to Treasury by BI's. 0 Legal framework. The legal framework for accounting and financial reporting was last revised in 1996/97.With the introduction of the new chart of accounts and DSA system it may be out of date. This would be an appropriate time to review the regulations as well as amending inconsistencies in current legislation. 25 0 Publication of annual consolidated financial statements. The annual consolidated financial statements are not routinely published in Ethiopia thereby failing to meet international standardsof transparency and accountability. 0 Cash management i s inefficient. There are many bank accounts across the BI's and several of these at any one time will have idle balances. This leads to inefficient cash management of treasury funds. Risks 2.1.19. The above weaknesses all highlight the problems of delayed and inaccurate management information as well as the fact that not all funds are included in the budget and financial statements. 2.1.20. The risk to donor funds i s that the country's macroeconomic situation and the effect of the budget and spending on poverty alleviation may not be accurately captured thus compromising the donor's aid strategy. Donor aid may not be targeted in the most effective manner and tracking of poverty expenditure will be out of date. The risk of this to donor funds i s assessedas high. 2.2 ASSESSMENT OFPLANSFORTHE NEXT THREEYEARS 2.2.1, Existing plans for the next three years are for the continued roll out of the new chart of accounts systems to other Regions. It i s expected that Amhara, Somali and Oromia will be trained and use the new system from next year. The following year the other Regions and cities will be covered. 2.2.2. The European Commission has prepared a draft financing proposal and investigated a systemfor IFMS within the Federal and Regional govemments. 2.2.3. Improvement in government accounting is one of the seven components of the Civil Service Reform Programme. It consists of accounting, budgeting, legal framework, financial information systems, fees and charges, public investment programmes, internal audit, asset management, procurement, aid management, cash management, external audit and development of the accounting and auditing professions. 2.3 CONCLUSIONSAND RECOMMENDATIONS 2.3.1. There i s a high degree of budgetary discipline in Ethiopia and there i s no problem with unauthorised expenditure and govemment arrears. The risk of corruption and diversion of funds i s low. 2.3.2. There are two main problems affecting public accounting and reporting in Ethiopia. The first stems from the perennial difficulty of developing countries to be able to pay slulled staff attractive enough salaries to encourage them to make a career in the public sector. The second i s from the wide and diversified rural areas making infrastructure difficult and expensive to put in place and maintain. 2.3.3. The third serious problem arises from communication of aid funds from donors to government and between government departments. Although aid is being accounted for in a manner to satisfy donor requirements this does not necessarily mean that aid fund flows and expenditure on projects funded by aid is reported to the budget and CAD at MoFED. Until such time as these can be satisfactorily resolved management information will continue to be incomprehensive and out of date for its purposes. 26 2.3.4. Inorder of priority the following actions are recommendedto improvethe availability and accuracy of financial managementinformation: Short Term Reduction in the detail required from BI's and Regions to assist in faster production of reports to CAD; 0 Use of estimated figures based on disbursements where Regional infrastructure prohibits the timely collection of data. MediumTerm 0 Strategies for lessening the effect of Aids on staffing and skills in the public sector e.g. Multi-skdls,knowledge poolingetc; Technical assistance to fill strategic vacancies and to mentorhrain upcoming staff; 0 Harmonisationof donor aid policies and strategies; 0 Nation-wide training for financial accounting staff; 0 Introduction of a systemfor communication of all aid flows to budget and CAD. Longer Term Complete revision of FGE conditions of service including competitive salary scales and performance contracts; 0 Revision of channels of aid flows and encourage donors to use more Direct Budgetary support; Improvement of Regional infrastructure; 0 Implementationof IFMS. 27 3. INTERNAL CONTROLS, INTERNAL AUDIT, RECORDS STORAGE AND INFORMATIONTECHNOLOGY EXECUTIVESUMMARY 1. This report i s written against the background of major organisational changes in Public Expenditure Management in Ethiopia. The amalgamation of the Ministry of Finance (Mom and the Ministry of Economic Development and Co-operation (MEDaC), and the devolution of financial authority to Regional Woreda level both have had significant impact inthe Country Financial Accountability Assessment (CFAA) component area. The impact of devolution in particular to RegionsWoreda of budgetary and financial autonomy has had a detrimental impact on the level of internal control being exercised at Federal level. In many ways, this was an obvious outcome of the change as the previous financial integrity (involving 100percent validation of payments, which helped mitigate against the weakness of the single entry system) i s no longer achievable at Federal level becausethe FederalFunds are increasingly mixed with those of Regional origin. The situation has also been exacerbated because of the previously existing capacity and slulls shortagesin Intemal Audit and MoFED Inspection. 2. However the current situation i s one of flux, with large-scale change taking place both in organisational terms and in the introduction of a `double entry' approach. This means that there i s an opportunity to address the situation and increasethe "confidence" level in the Federal Government of Ethiopia (FGE) financial system again. While the content of this component report addresses the factual context of a decreasing level of internal control compared to previous studies, the positive aspect of the work undertaken and something which should be emphasized i s that the quality of many of the FGE officers consulted and their recognition and knowledge of these difficulties indicates that the corrective action and initiatives needed in the situation will be welcomed. This commitment i s vital and all of the FGE officers consulted in the preparation of this report in Internal Audithspection, Information Technology (IT) demonstrated enthusiasm for planned initiatives of which they were aware. 3. With regard to the areas of InformationTechnology and Records Storage, both canbe summarized as being at a basic level in the FGE. There are plans in place for an Integrated Financial Management System (IFMS), but these need to be reviewed in the context of changing needs and the capacity to absorb the new technology. Existing work in the DSA project i s progressing using an incremental approach and lessons from that experience should be absorbed into the IT plans. There are no plans in place at present with regards to improvement in Records Storage, but as procedures and systems are enhanced this will have to be included infuture plans particularly as backup i s neededfor IT developments. Recommendations 4. The following recommendations are made with regard to this component - 0 The existing internal audit planshnitiatives previously in place should be revised and implemented to accommodate the following: 9 increasedfinancial devolutionto Woreda level; 9 amalgamation ofInspectorateandInternalAudit function; 9 relationships with wider audit initiatives. 0 The IFMS initiative should be re-appraised to consider the impact o f : 9 The Decentralisation Support Activity (DSA) Project evolutionary approach and experience; 9 Localinformation systems capacity andsustainability; 9 Thelevel of systembeingconsidered; 9 The impact ofincreasedregional financial devolution; 9 Anincreasedor co-ordinated capacity buildingemphasis. 0 Development o f an integrated Financial Information Systems Strategy covering Regional and Federal initiatives in Budget, Accounting and Audit; 0 The proposed capacity building project comes on stream quickly and in a co-ordinated way with Internal Audit and IFMS projects, in order to ensure capacity to absorb new technical initiatives that are inplace in government; 0 Either as part o f the capacity building project, or as a new project, an approach i s developed to ensure that record maintenance and storage methods are raised to an acceptable standard; 0 Detailed analysis work commences on existing and future systems, including flowcharts, manuals and office instructions in appropriate languages. Internal AudiUIntemal Control EuropeanUnion (EU), Department for International Development (DFID) IFMS EuropeanUnion (EU) Capacity Building World Bank (WB) PossibleTime-boundActionPlan(Months1to 36) 6. The approach outlined below consists o f a co-ordinated combination o f capacity building in conjunction with technical developments in internal control/audit, IFMS and Records Storage. It also addresses the need to recognise increasing delegation to RegionaUWoreda level b y targeting that level earlier than in existing plans with the necessary capacity skills building and appropriate tools. This Regional initiative runs in parallel with developing capacity, skills and introducing appropriate sustainable technology to assist at the Federal level. There i s also an implicit intention to "step" rather than leap in Information Technology following on from initiatives already taken in the D S A project The information detailed in this component does however need to be placed in the context of overall prioritisation for the FGEinthe consolidated CFAA. Month1-3 0 Development o f Capacity Project and integration with Internal Audit and IFMS plans: 0 Revision o f Internal Audit Plan; 0 Financial InformationSystems Strategy. 29 Month 4 0 Integration of revised plans encompassing; 0 Internal Audit; 0 IFMS; 0 Capacity Building(including record storage). Month 5 to 6 0 Program ImplementationPeriod Months 7 to 18 0 Capacity buildingprogramme, Federal level and pilot Regiomoreda; 0 Budget system component of IFMS introduced at Federal Level; 0 Evolution of IFMS financial systemfrom DSA implementation; 0 Introduction of improved collection methods at WoreddRegional Level; 0 Internal Audit Manuals revised and piloted at Federal Level; 0 Organisational/Structural changes implemented at Inspectorate/Intemal Audit; 0 DocumenVRecord Policy Created and introducedon pilot basis to Federal Bodies. Months 19 to 36 (range of roll-out depending on the success inMonths 1to 18) 0 Roll out of capacity building programme in Internal Control/Financial and Budget Systems area; 0 Roll-out IFMS systems to targetedRegions; 0 Roll-out of InternalAudit Strengthening to Regions; 0 Roll-out to other Federal Bodies new DocumenVRecord storage approach. 30 3.1 ASSESSMENT OF PRESENT POSITION Background 3.1.1. This component of the CFAA covers three areas: intemal control and intemal audit 0 record management information technology This report addresses these issues at Federal level. Other work during the CFAA process covered them at Regional level, the overlay occurring because of the interrelationship between the two levels will be covered inthe overall country CFAA. Objectives and Scope 3.1.2. The objective of this study was to use existing documentation, investigation and consultation with government to address:- * Strengthdweaknesses of the overall internal financial control system, stewardship function, records management, internal audit and the use of information technology. Mechanisms to ensure the adequacy of intemal controls in govemment units and the internal control structures. Developing and maintaining reliable financial and management information and accurately disclosing that information intimely reports. Processused 3.1.3. Two methods of investigation were primarily used:- * Documentation already prepared and made available. A full list of all this documentation i s attachedas Annex A, but, in summary, the primary documents used were:- 9 Diagnosis of ExistingControl Capacities inEthiopia(EC May 2002); 9 IFMIS Scope, Objectives andBroadStrategy, MainReport(EC December 2001); 9 Public Expenditure onPoverty Reduction(World Bank December 2001); 9 RevisedInternalAudit Project Document (February 2000). Investigation and consultation with Government of Ethiopia officers. Individuals met in the Ministry of Finance and Economic Development and Ministry of Education (MoE) are listed in Annex B. Consultation and sharing of information also took place with other CFAA team members. LegalFrameworkand InstitutionalArrangements 3.1.4. The work of the financial management function of the FGE i s controlled by the following instruments - The Constitution, as set down inProclamation 1/1995; Proclamation 57/1996: Federal Government of Ethiopia Financial Administration; Regulation 17/1997 Council of MinistersFinancial Regulations; Ministry of Finance and Economic Development - Financial Directives. 31 3.1.5. Proclamation 57/1996 directs that the MoFED (previously referred in other reports as to two separate ministries) establish the format for the annual budgetary submissions and to set the ceiling on which the budget requests are based. The proclamation also makes the Council o f Ministers responsible for ensuring that Regional Governments remain accountable for subsidies and that they have a financial management and reporting system that is consistent with the Proclamation. The Proclamation does not, however, establish any procedure by which the Council of Ministers can enforce their responsibility. 3.1.6. Regulation 17/1997 sets out the following procedures relevant to this report: 0 the annual budget should include all capital and recurrent expenditures arising from taxation, external assistanceand external loans; once the budget has been approved, it i s the responsibility of the Heads of each public body to provide information to enable the government to maintain necessary central control over budgetary funds; 0 the MoFED prepares an annual set of consolidated accounts to show actual revenue and expenditure against the approved budget, which i s submitted to the office of the Federal Auditor General for audit. Budget Controls 3.1.7. All public bodies prepare annual budgets. The theoretical approach is that of `zero base' but, in practice, given time and resource constraints capital budgets tend to be a `roll over' of the previous year plus new programmes and the recurrent budget tends to be incremental. There are delays in agreeing budget ceilings partially due to the problems that exist in the determination of actual expenditure reporting. 3.1.8. At Federal level, the procedures for both capital and recurrent budgets are similar. The Federal subsidy to the Regions i s calculated by applying an agreed formula matching population, level of development, revenue contribution and recurrent commitment. The budget procedure works for projects financed through MoFED or public bodies, but not for channel 2 and channel 314funds which are not included in the annual budget. Where external financing i s recognised in the budget, it i s channelled through the MoFED or a line ministry and the disbursement i s outside the budget ceiling. 3.1.9. Intheory, controls usedfor disbursement are tight and nobudget is disbursed without the appropriate evidence of expenditure and/or funds being available. The reality expressed in various reports i s somewhat different, with funds being released out of necessity before financial reports are received. In addition, it is reported in at least one of the background papers supplied for the CFAA that MoFED do not appear to follow up on the utilisation of released funds in a reasonable timeframe. As a consequence of this, the Federal Auditor General has highlighted in various reports the existence o f unutilisedaccount balances which have not been refunded. 3.1.10. Another issue highlighted during investigation in the MoE was the change that the `Sector Approach' has made to disbursement. For example, funds are released to Regions under the World Bank project directly from the MoFED, bypassing the MoE. Resources used previously to check and verify proper use of the Federal element of Regional funds have not been moved to Regional level; consequently, while Federal resources for control are still in place, the rangehmpact of checks inthe system at Ministry level have been lessened. Regional l4Channel 2 is project funding from line ministries which canbypass MoFED,Channel 3 is funding from external assistance which bypassesboth MoFEDand line ministry. 32 level reports will illustrate if an increase in control resources has taken place at the Regions to compensate for this change at Federal level. 3.1.1 1. The legal framework requires reporting from all levels (Federal, Regional, Zonal, Woreda) on a monthly, quarterly, semi-annual and annual basis. However, in practice, there are delays in collating the data. All the relevant reports consulted and subsequently confirmed by investigative work indicate that bodies are behind schedule in preparing reports due. The delays are caused by a variety o f reasons: 0 lack o f resources; 0 lack o f training; 0 difficulties ingetting data from remote Regions; 0 problems with data accuracy; 0 increasing workload at Regionalmoredalevels because o f budget delegation. Financial Controls 3.1.12. T h i s section i s restricted to examining internal control and internal audit, since external audit i s dealt with in a separate section o f the report. 3.1.13. It has been a common trend in previous analyses o f FGE Public Expenditure Management to conclude that, in comparison to some other sub-Saharan countries, financial control i s better than the `norm'. In terms of internal control, there was one issue that dominated the background o f the financial system - that o f the "single entry" accounting system. While this was an inherent weakness in internal control terms against international best practice, the impact of using Internal Audit as a 100 percent inspection tool for all payments has previously ensured an adequate level o f integrity in financial transactions. 3.1.14. However, the current process o f change underway in the FGE has had a significant impact on this situation at Federal level. The devolution o f budgetary and financial responsibility to Regions means that the Federal 100percent validation check which was one o f the main internal control mechanisms has been seriously weakened. The Federal Internal Audit does not validate payments at Regional level, even though an increasing percentage of the Regional spending i s Federally funded. Some check i s made on capital expenditures, but the previous 100% level o f verification, which mitigated against the shortfalls o f the `single entry' system, are no longer in place. The previous "confidence" in financial transactions under a `single entry' approach cannot now be considered valid unless the previous level o f payment validation at Federal level i s now in place at RegionaUWoreda level. l5 3.1.15. The validation check described above i s undertaken by Internal Audit, but another control at the Federal level i s the work o f the MoFED Inspection Department. Inspection undertakes a different but overlapping role similar to the normal Internal Audit function, but with an emphasis on budget utilization. The Inspection Department also checks some Federal funds - predominantly capital - at Regional level. There is an Inspection Audit plan and rolling programme o f inspections. Under previous analysis prior to the CFAA, this approach was another reason for a "confidence" in the integrity o f the FGEfinancial system. However, as with payment validation, once the budget moves away from Federal level, the Inspection checkmg procedures can no longer be completed with the same coverage because o f the increasing impact of logistical issues, language, major role change, etc. This means that the situation will not improve without some sort o f intervention. l5 See CFAA RegionalReports,which demonstrate variationsinthe standardsbeing applied 33 3.1.16. The current situation in summary is that the previous key internal controls at Federal level in the system and the ones that justified (at least partially) in the past the `better-than- average' appraisal of public expenditure management inEthiopia are of diminishingimpact. 3.1.17. With regard to the role of Internal Audit itself, the MoFED Directive "Financial Responsibilities of Members of Public Bodies" sets out the purpose of internal audit as follows: "Assist senior management of the body in question by evaluating the effectiveness of that body's internal control system, and by making recommendations for improvements where necessary. For the purpose of this Directive, the term internal control system' means the whole network of individual systems and procedures .....". 3.1.18. All of the previous reports prepared and the investigations undertaken lead to the conclusion that the current role of internal audit fails to meet generally accepted international practice standards. The internal audit functions consulted inMoFED and MoE concentrate on a post-payment (100%) compliance validation as well as some procurement and corruption checks. It i s understood that other Federal Internal Audits Departments undertake a similar role. There is limited or no evidence of the normally accepted Internal Audit and Control tools, such as, Risk analysis, Internal Control Questionnaires,Flowcharts, etc;. 3.1.19. The overall conclusion i s that there is an overlap of work between the Internal Audit Department in Ministriesand the MoFED Inspection Department and that, in comparison to international best practice and the FGE's own definition, internal audit i s not being satisfactorily fulfilled by the existing arrangements. The internal audit departments are understaffed and those staff in place do not all have the appropriate qualifications. RegionalandFederalRelationships Internal Control 3.1.20. The Regional aspect of internal control/audit i s addressed elsewhere in the report and some points have already been made. Previous reports and consultation undertaken would confirm the following:- the move towards increased responsibility and control at Woreda level has not been matched in all cases with a movement of resources involved in internal control functions from Federal to Regional level; the existing pressure on resources was such before the change that the level of accountability of Federal resource allocatiodexpenditure at Regional level was already weak and the change has further exacerbatedthe situation; the use of channel 2 and channel 3 funding and the sector approach in Health and Education has further weakened the internal control mechanisms operated by MoFED and the relevant lineministries; in contrast to the `need' for additional monitoring/inspection or, more correctly, audit at Regional level from Federal Departments, there i s infact a trend inthe opposite direction. The Line Ministries Internal Audit do not have this role within their current range of responsibilities and the MoFED Inspection Department has a difficulty with not enough resources and also a lack of the necessary skilled personnel with the appropriate language capabilities. 34 InformationTechnology 3.1.21. This component of the CFAA was also tasked with examination of the area of information technology in public expenditure management. The work in this area for this report included review of existing documentation and visits to relevant departments and projects. The two existing systems most relevant to the CFAA are - 0 Budget Disbursement Accounting (BDA) Single EntrySystem; 0 Budget Disbursement AccountingIBIS (BDA) Double Entry System l6 3.1.22. The former is a PC-based application devised from a previously used mainframe application by MoFED staff using an Access database. It uses summary schedules of information to recordbudget, accounting and treasury informationinthe single entry method. Itis operational inRegionalheadquartersas well as Line Ministries. Intechnical terms, it is a low-level system and the database i s being used to organise data in a slightly more sophisticated way than a spreadsheet consolidation model. The value of this system i s the production of reports in an organised format; however, the integrity of the data and its timeliness is dependent on the manual systems and controls in place. The system is, therefore, more a financial and budget presentation tool than a `financial system' as such. 3.1.23. The BDA (Double Entry System) has been developed through necessity by the DSA project to accommodate the new chart of accounts and double entry approach. Its origin was the Budget Information System (BIS) to complement the new chart of accounts, but it could now be described as a double entry `upgrade' of the old BDA system. It has been developed in Visual Basic with Structured Query Language (SQL) capabilities. It is not seen by the DSA project as a final solution, but was developed because there was no alternative at this point in time. Again, it i s not an "accounting or budget" system in the normally recognised sense but has taken the information technology progress in an incremental step, building on existing capacity and in-country expertise. The double entry accounting recording module has also been developed and i s being tested at the Federal level with plans to move it to the Southern Nations Nationalities and Peoples Region (SNNPR) in the next financial year after piloting the budget module in the current year. The revised double entry BDA system also incorporates a conversion/ translation table, which allows informationfrom those bodies still operating under the old single entry system to convert data to the new chart of accounts format. 3.1.24. This new double entry BDA system has been a significant step forward in terms of budgeting and financial reporting based around a double entry chart of accounts. However it i s not (and does not claim to be) a financialbudget system that would meet intemationally accepted best practice. Many of the fundamental difficulties of the old system in integrity terms are still presentwith the data beingdependent on manual systems/summary transaction reporting. There are however significant lessons to be learned from the capacity-building investment that has been required just to take this incremental step in IT infrastructure. The volume of training required at Federal level and inthe pilot Region to ensure understanding of the new chart of accounts indicates the scale of the task of moving from the existing information technology base. 3.1.25. In addition to the BDA systems there i s also a payroll "system" in operation for 30,000 Federal employees. This again i s an Access database, used for recording payroll payments, rather than being a "calculating payroll" system with the necessary data integrity and internal control mechanisms, which would be expected from an intemational standard For the purposesof this analysis the former Budget Information System, which now also has an Accounting element via the DSA project, i s treated as an upgrade of the old BDA system 35 payroll/human resources system. There is no linkage to HR systems and the system i s `standalone'. There are other I T initiatives (ASYCUDA and Tax Identification Number) which are on the periphery of this area but do not affect the central analysis of information technology systems at the heart of the CFAA. Storagemecord Control 3.1.26. No significant evidence of previous examinationheporting in this area could be identified. The treatment of record storage appears to be at the basic level, with an obligation to store for at least the 10years as required by legislation being fulfilled. The actual activity is relegated to the physical keeping of records in the basement or other similar location. No evidence o f specialised storage instructions, facilities, fire and flood controls, security, indexinglibrary instructions were identified. It would appear that Storagemecord Control i s not currently a highpriority issue. 3.1.27. Similarly the backup procedures and secure `off site' storage of information systems data i s not given a high priority. However, since these systems are not as yet significant and the informationi s a duplicatiodsummary of manual data this does not yet represent a critical risk. Recent Work 3.1.28. In this component area of internal control, internal audit and information systems, various reports, project designs and project concept notes have been prepared (see references at the beginning of this section). However, at present, none of these initiatives have actually started apart from the BDA double entry system, which was undertaken through necessity rather than as part of a co-ordinated plan. 3.1.29. The reasons for this lack of activity and support may range from: 0 a previous lack of interest or commitment on the part of donors for various reasons; 0 more pressinginitiatives gettingpriority: 0 the changing nature of the structure/responsibilitylevels in the government impacting on plans. 3.1.30. Whatever the reason, recent activityhmpact on this area has been limited to work and initiatives undertaken inthe DSA project as highlighted above. Strengths and Weaknesses 3.1.31. The previous strength of the internal control systems in operation in FGE was based around a post-payment validity check, which countered some of the weaknesses of a single entry accounting system. However, as already identified, changes in organisational arrangements have resulted in the diminution of this internal control as the level of verification i s no longer at the same level. Where the payments are still made at Federal level, the 100% check of payments by the Internal Audit function and the work of the MoFED Inspection Department are still in place but the coverage can no longer be considered to be complete. 3.1.32. One o f the strengths identified during this CFAA work was the knowledge, expertise and commitment of FGE officers. There i s a discipline and recognition of issues, which leads to an optimism that, with the necessary support, the issues that need to be addressed will be tackled. However, it must be recognized that even in the past when the internal controls in 36 place via the Internal Audit and Inspection functions where operating at a more comprehensive level, previous reports supplied to the CFAA team had identified other weaknesses inthe FGEfinancial systems. These included: lack of regulations/instructions and office operational manuals available for staff and applied at the necessary levels inthe government; 0 compliance with budgeting/financial reporting i s hampered by a shortage of suitable resources and skills; 0 there i s a lack of training; 0 reporting systems are not operating ina complete, timely and accuratefashion; 0 funding and reporting channels for donors, federal ministries and regional bodies are not satisfactory or complete incoverage: 0 there i s an overlap of duties between Internal Audit and MoFED Inspectorate and the range of functions undertaken do not meet the government's own directives or international standards. 3.1.33. In addition to these issues raised inprevious reports, the following can now be added. 0 the negative impact ininternal control of increasedRegional financial autonomy needs to be addressed; 0 the existing information technology systems do not meet the standards, which are necessary for reliance on their output in terms of data integrity, systems integrity and complete coverageof the financialbudget area. Risks 3.1.34. The previous "confidence" in comparative terms to other countries with regard to financial internal control integrity in FGE has to be reviewed. The impact of increasing Regional financialbudget autonomy has not been matched with improved/enhanced internal control mechanisms. While it i s recognized that this analysis i s given at a point in time where large-scale transition is underway the situation i s such that the existing internal control, internal audit, record storage and information systems will not in their current operation perhaps meet all of the standards that donors should require to ensure accountability in use of funds. The devolution of responsibilities to Regions/Woredas has increased the risk associatedwith internal control systems, which (as per previous reports) were already in need of enhancement at Federal level. Any evaluation of the Fiduciary Risk to both government and donor community of the existing internal control, internal audit, record storage and financial systems area in the Government of Ethiopia must currently place all in the `high risk' category unless initiatives are taken quickly to address some of the issues that have been identified. 3.2 ASSESSMENTOFPLANSFORNEXTTHREE YEARS Identification 3.2.1. The following relevant projects/plans were identified inthis component area: 0 Internal Audit Project (proposed February 2000); 0 IFMIS Project (Pilot plusroll-out December 2001); 0 Capacity Building for Decentralised Service Delivery Project - Project Appraisal Document (World Bank 2002). 37 Appraisal of ExistingPlans 3.2.2. Internal Audit. The existing project document was written in 2000. While the core of the intention i s still valid because there i s an urgent need to address the internal audit function, this document needs to be updated to accommodate the changes in devolution of increased financialbudget autonomy to Regional level. It also needs to address more explicitly the issue of the MoFED Inspectorate Department and the recommendation of the Feb 2002 EC report that Internal Audit and Inspection should be merged (Recommendation 17). This i s a fundamental issue in any consideration of the strengthening of the "internal audit function" across the whole of government. Additionally, the relationship between Internal Audit as a function at Federal level and Regional level as well as the relationship with the external auditors (both Office of the Federal Auditor General and organisations such as Audit Services Corporation) needs to be considered and made part of any wider audit initiative. 3.2.3. IFMS Project. The IFMS scope, objectives and broad strategy document, and subsequent pilot project plan address reasonably the issues if the government i s to use information systems as an instrument in improving financial control. There i s no question that, in the context of international comparators, FGE needs to move away from the manual single entry accounting system; the support of the DSA project i s already moving along this path. There are, however, areas in the proposed IFMS plans which are of concern in terms of completeness, previous experience in Ethiopia and other countries, and practical implementation. These can be summarised as follows: 3.2.4. Completeness. The key principles of systems implementation in a country such as Ethiopia are - Suitability - the "fit" of possible ISAT solutions to local circumstances as well as to functional requirements; 0 Sustainability - the ease with which the chosen solution can be supported and maintained using local capability, and with which the system can be scaled to meet future changes to organisational structure, data volume and functional requirements; Implementation scheduling - the complexity and changing organisation architecture in which the IFMS i s implemented means an optional sequencing i s necessary, which avoids disruption to existing processes during what is usually a prolongedperiod of introduction. 3.2.5. The existing IFMIS document does not identify clearly enough the solutions proposedidentified in terms of these three areas. There are also normally four levels of systems solution identified, which can be graded by cost and complexity: Top tier -e.g. ORACLE, SAP, etc 0 Second tier - e.g. JBA, JD Edwards, CODA, etc 0 Third Tier - e.g. Aggresso, Great Plains, Platinum, Sun etc. 0 Bespoke Systems -e.g. Enhancement of locally developed systems. 3.2.6. While there i s a valid argument made in the document for the use of an integrated Commercial Off-the-shelf (COTS) package, there i s a vagueness with regard to the solution being considered. Pages 56 and 67 indicate consideration more towards the top/second tier than the third level. However, there i s a serious question mark over the suitability of packages at this level for countries such as Ethiopia. For example, experience in Ghana and Uganda would indicate that implementation is not straightforward and that budgets and 38 planning timetables are exceeded with the end results being below government and donor expectations. This experience i s not highlighted in the document. Tanzania, which is also used as an illustration, has had a more successful outcome to date relative to other countries, but the document does not emphasise the particular organisationakapacity issues that accompanied the system introduction there and assisted the implementation process. The Tanzanian systemcould be considered, at best, an upper thirdtier approach. 3.2.7. Previous Ethiopian Experience. The document prepared for IFMS does not take into account, in comprehensive terms, experience to date in Ethiopia, partially becauseevents have movedon since its preparation: The USAID DSA project - while not designed to have having an `IT' component, this project has through necessity and by adopting an "evolutionary" approach has been able to achieve an acceptance of the introduction of information technology to improve budgeting and financial reporting. The scale of the ownership investment required to undertake even this incremental change was large and required training of trainers, etc. to ensure the capacity of the govemment within the FGE to guarantee success. The possible scale of the system being considered in the IFMS report i s not clearly identified, but the indication of it being at the higher end of the scale raises questions as to whether it is a `leap' rather then a `step' that is being proposed. Additional consideration should be given to following the evolutionary approach that has worked to date in the DSA project. The existing systems are developed locally and are, therefore, sustainable in Ethiopia. The IFMS document does not undertake an analysis of the local private sector (or public sector) information systems support capacity. For a project such as that proposed, an analysis of such support capacity and its present and future development i s essential in considering what approach to take. Without this analysis, the Govemment runs the risk of dependence on support from organisations outside Ethiopia with consequential financial and possible political issues when such a system i s finally implemented. Language - the political and cultural issues associatedwith language use inEthiopiahave not been addressed in the E M S report. It i s possible to have multilingualfinancial and budget information systems (e.g. Bangladesh). In the Federal environment operating in Ethiopia and with the increasing Regional autonomy, this issue needs to be given a priority. 3.2.8. Practical Implementation. The current desigdplan for IFMS gives concern in the following areas: Budget - experience in other countries e.g. Malawi, demonstrates that the best place (if possible) to start systems development i s in Treasury/Budget. The fundamental, key tool i s the classificationkhart of accounts and this originates in the budget area. Commercial accounting packages are notoriously weak in meeting govemment budgeting needs. Precedence of installing an accounting system with a "budget" module has shown that this creates both practical user problems as well as lack of ownership issues for the key "budget" stakeholders. The success of the DSA system i s partly because it started in budget. The current plans do not reflect this prioritisation and, perhaps, the option is that a separate budget system meeting forecasting, modelling and other requirements may be required. 39 the increasing delegation of financialhdget information to Regionalworeda level means that to concentrate initially and solely on a Federal system i s to emphasise on a decreasing area o f budgetlspending impact. While the Federal i s critical and important, any initiative that does not consider Woreda/Regional initiatives as well will not make the impact that governmentldonors anticipate on improved financial and budgetary control. However, practical infrastructure and logistical difficulties in Regions have to be recognised. Nevertheless, unless practicalhnnovative methods for transaction capture at Woreda level are developed in tandem with IFMS style Federal systems, the IFMIS system will in reality become an integrated database of summary information. It will not be the "complete" financialhdget information system indicated inthe proposed plans. 3.2.9. Capacity BuildingProposals. While this document and plans in this area are not as far advanced as the Internal Audit and IFMS documents that have reached the project design stage, it i s considered essential that this element "catches up". In fact, there is an argument that this initiative should precede the others. Experience in other countries shows that the implementation o f improved financial and budget controls - either via internal audit, internal systems enhancement, information systems introductiordenhancement - are directly constrained by the capacity o f the government to absorb the changes. To consider Internal Audit, IFMS or other initiatives without the necessary capacity-building initiatives in place, either within those projects or as part o f a wider programme, will mean that implementation will inevitably be slower than planned. An indicative `rule o f thumb' used in similar environments i s that the technical issue (e.g. internal audit, information systems) i s no more than 40 percent o f the success factor, the remaining 60 percent is mainly the "investment" in and by the government with regard to training, commitment, motivation, etc. to make the technical aspect happen. The current plans for Internal Audit and IFMS therefore need to have an increased capacity-building emphasis, or be planned more in integration with the proposed capacity-building project. 3.2.10. Other. No projects/plans were identified for a records storage initiative. While it i s anticipated that some o f this area would be covered in improved internal control and IT initiatives, there i s clearly a need for a more general initiative in this area. This i s necessary to ensure accountability and traceability o f financial records for both government and donors for a reasonable period o f time (currently 10years under existing legislation). ActiondOptions 3.2.11. The following general weaknessedgaps in existing plans in this CFAA component have been identified: the current plans do not recognise the impact o f changing emphasis and responsibility in financialhdget issues from Federal to RegionalNoreda level; the current internal audit plans need to address more specifically relationships with InspectorateDepartment and external audit bodies; detailed analysis and recording o f payment, receipting and budget functions needs to take place to ensure that training and capacity-building i s based on reality and to form a foundation for office instructions and manuals; the IFMS project plan needs to include consideration o f >>> the practical implementation o f such a system inEthiopia; the level o f system required; sustainability/local support infrastructure; 40 9 the experience of the USAID DSA Project implementation and, perhaps, at least partially following its roll-out one "step" behind; 9 languageandRegionalissues. 0 the capacity-building proposal under consideration needs to be "fast tracked" to complement and perhaps lead in implementation terms the other initiatives in internal audit and information systems; 0 an initiative needs to take place in co-ordination with the other plans in this area, with regard to record management and storage. 3.3 CONCLUSIONSAND RECOMMENDATIONS 3.3.1. The impact o f development to Regions/Woreda o f budgetary and financial autonomy has had a negative impact on the level o f internal control being exercised at Federal level. The previous integrity given by 100 percent validation o f payments i s no longer taking place for Federal funds at the Regional Level. However, the current situation i s one o f flux with large-scale change taking place both in organisational terms and in the introduction o f a `double entry' approach. This means that there i s an opportunity to address the situation and increase the "confidence" level in the integrity o f the FGE financial management system again. 3.3.2. While the content of this report has had to be placed in the factual context of a decreasing level of Internal Control compared to previous reports, the positive aspect that should be emphasised i s that the quality o f many o f the FGEofficers met, their recognition of the difficulties and their commitment would indicate that the corrective action and initiatives needed to address the situation will be welcomed. 3.3.3. Ways o f assisting them to do this include - 0 The Internal audit project should be actioned/amended/updated to accommodate increasing Financial and Budget devolution to Regions/Woredas. It should also specifically address the issue o f Inspectorate and Internal Audit merger and the organisational and capacity issues this would create. The project should also have links with wider audit initiatives and include the relationships with external audit. 0 The IFMS project in its present form should be re-appraised and the following take place: > the development of a Financial Information Systems Strategy that considers more completely the lessons o f D S A evolutionary approach, local capacity and sustainability issues, lessons learned in other countries with regard to system scale, the implementation starting point, emphasis on Regional issues such as data capture, language, and infrastructure; > an increased priority on capacity issues in any IFMS initiative, so that when technical activities take place the ability to absorb changes i s inplace. 0 The proposed capacity project should be runinparallel (ifnot ahead) o f the Internal Audit and IFMS projects so that it i s "preparing the ground". 0 Strong co-ordination takes place between DSA, Capacity, Internal Audit and IFMS projects. 41 0 That either as part of the Capacity Building Project or as a separate component/project, issues associated with Record and Informationhandling capacity in the government are addressed. 0 Under the remit of DSA or some of the projects mentioned above, a detailed documentation of budget, expenditure and receipting activities takes place, generating flow charts, descriptive analysis and other documentation which can be used for translation, training, office procedures,internalaudit manuals, etc. 3.3.4. These initiatives/recommendations impact on most of the other components in the CFAA but inparticular onBudgeting,Accounting andFinancialReporting, andAuditing. 42 4. PUBLIC SECTORAUDITING EXECUTIVE SUMMARY 1. The Office of the Auditor General (OFAG) i s responsible for auditing the Federal government accounts. The OFAG derives its mandate from article 101 of the Constitution of the Federal Government of Ethiopia, Proclamation number 1/1995. Proclamation number 68/1997, which established the OFAG, sets the detailed roles and responsibilities of the OFAG. The Constitution and the Proclamation give the OFAG full powers to audit the accountsof Federal ministries and other government agencies, and subsidies transferred to the regions by the Federal govemment. The Constitution and its enabling law uphold the OFAG's professional independence. 2. Neither the Constitution nor the Proclamation prescribes the term of office of the Auditor General and Deputy Audit General. The term of office of the Auditor General and Deputy Auditor General should be set by law so as to give them reasonable assurance and timeto dischargetheir responsibilities. 3. From time to time the OFAG calls on the services of the Audit Services Corporation (ASC), established by Proclamation number 12611977 and other private audit firms to undertake the audit of the accounts of Public Enterprises (PES) and other government executed projects. Means should be sought to improve the capacity of ASC since it audits most of the accounts of PESand other government executed projects. 4. The already started External Audit Project under the Expenditure Management and Control Sub-program (EMCP) of the Civil Service Reform Program should continue with a higher pace in order to increase the capacities of the OFAG and Regional Audit Bureaus in terms of technical efficiency and adequatemanpower. 5. Each public body has an Internal Unit responsible to examine and evaluate the adequacy and effectiveness of the body's internal control systems and the quality of performance in carrying out assignedresponsibilities. The Ministry of Finance and Economic Development (MoFED) issued a directive on internal audit, which specifies the roles and responsibilities of the Internal Audit Unit in each public body. The OFAG issued a detailed Internal Audit Manual to be followed by internal auditors in their day-to-day activities. In general, the Internal Audit Unit in each public body i s under staffed and the role of internal audit does not meet the requirements laid down in the MoFED directive. The Internal Audit Unitineach publicbody shouldhave sufficient staff, who are well qualified andexperienced. 6. At the MoFED, there i s an Inspection Department responsible for carrying out an annual inspection of ministries and government agencies on the utilisation of budget and report its findings to the State Minister-Finance and Budget and Treasury Departments of MoFED. The Department is understaffed both in quantity and quality. There is a duplication of efforts between the Inspection Department of MoFED and the Internal Audit Unit at each public body. The relationship between the two should be reviewed so that they complement each other. 43 4.1 INTRODUCTION Background 4.1.l.Public sector auditing is an essential element of effective and democratic governance. It provides an independent information, assurance and advice to the legislature on whether public finances are being used in an effective and efficient manner. ObjectiveandScopeof the Assessment 4.1.2. The objective of this assessment i s to identify the strengths and weaknesses of the public sector auditing, and make recommendations on how to improve the weaknesses observed. Public sector auditing at the regional level are covered by other teams of the CFAA and are reported on separately. ProcessUsed 4.1.3. Previous studies and assessments in the public sector auditing have been taken into account in this study. Interviews of government officials at the OFAG, MOFED, the House of Peoples' Representatives and CIDA were usedinthis assessment. LegalFrameworkandInstitutionalArrangements 4.1.4. The OFAG is responsible for auditing the accounts of public bodies. The Office gets its mandate from Proclamation numberM995 and Proclamation number 68/1997, which established the OFAG. Internal Audit Units in every public body and the Inspection Department of MoFED are responsible for the internal audit functions of public bodies. Federal Financial Administration Proclamation number 57/1996; Definition of Power and Duties of the Executive Organs Proclamation number 4/1995 and MoFED Financial Directives are the sources of power for Internal Audit Units of public bodies and the Inspection Department of MoFED. 4.2 EXTERNALAUDIT Assessmentof PresentPositionandCurrent Reforms 4.2.1. The Constitution, Article 101 of Proclamation number 1/1995 dated 21 August 1995, gives power to the Auditor General to audit and inspect the accounts of ministries and other agencies of the Federal Government and reports its findings and recommendations to the House of Peoples' Representatives. Further more, the Constitution states that the Auditor General is appointed by the House, the annual budget of the Auditor General i s approved by the House and the details of the functions of Auditor General i s to be proclaimedby law. 4.2.2. Proclamation number 68/1997, dated 6 March 1997, established the Office of the Federal Auditor General (OFAG). The Proclamation states that the Federal Auditor General and Deputy Federal Auditor General are appointed by the House of Peoples' Representatives and are accountable to the House. The Constitution and its enabling law upholds the OFAG's professional independence. Neither the Constitution nor the Proclamation prescribes the term of the office of the Auditor General and Deputy Auditor General. The objectives of the OFAG as statedinthe Proclamation are: To strengthen an audit system required for a reliable informationnecessaryfor the proper management and administration of the plans and budget of the Federal government; 44 To ascertain that all receivable money and property of the Federal government are collected, preserved and usedproperly, in accordancewith the laws and regulations of the Federal Government, and report same to the House of Peoples' Representatives; To undertake a financial and performance audits of the offices and organizations of the Federal government; To make efforts, in cooperation with the concerned organs, to promote and strengthen accounting and auditing professions; To give professional assistance and advice to regional and Federal civil servants and organizations engagedin accounting and auditing professions; and To draw up standards of auditing by which accounts of the offices and organisations of the Federal Government shall be examined. 4.2.3. The OFAG i s also responsible for auditing accounts involving budgetary subsidies and any special grants extended by the Federal government to regional governments. Each Region has a Regional Audit Bureau, which functions as the Auditor General for the region. The Bureau reports to the Regional Council of Peoples' Representatives. The Regional Council appoints the Regional Auditor General. Detailed assessments on the Regional Audit Bureaus for the selectedregions are available inthe regional section of this report. 4.2.4. By law, the OFAG i s responsible to issue, renew, suspend and cancel certificates of competence of private auditors and accountants, who provide auditing and accounting services to the public at large. 4.2.5. There i s a well-developed organizational structure for the OFAG. The OFAG has a headquarters and 5 branch offices to audit the federal subsidies to the regions. The OFAG branch offices coordinate their work with the Regional Audit Bureaus. The Office has 313 employees, 187 professional and 126 support staff. Out of the 187 professional staff, 6 are qualified professional accountants and the.others are first degree and diploma holders. The number of the support staff i s about 40 percent. According to the 1993 E.C. annual report of the OFAG, professional staff have left the Office for a higher pays in the private sector and it was not possible to attract qualified people with the existing salary scale of the Office. Over the past eight years, 182 audit staff resigned and only 35 recruited. This reflects that staff move to the private sector from the public sector after they have obtained the necessary skills. Recent salary revisions and the granting o f an exception to the civil service salary scale for the OFAG have not been sufficient enough to attract or stem the loss of professional staff. 4.2.6. The OFAG does not have adequate office space, sufficient vehicles and computers to carry out its mandate. There are only 32 computers for the whole OFAG staff. In its 1993 E.C. reports to House of Peoples' Representatives, the OFAG mentioned the problems related with office space, vehicles and computers and the impact on the effectiveness and efficiency of the OFAG in carrying out its mandate. 4.2.7. The OFAG is a member of the International Organization of Supreme Audit Institutions (INTOSAI) and uses INTOSAI Code of Ethics and Auditing Standards in carrying out audits. Currently, OFAG i s in the process of adopting the INTOSAI Code of Ethics and Auditing Standards to the local condition. The OFAG conducts financial and performance audits and special investigations requested by appropriate bodies of the government. The OFAG has audit manuals, which are being usedby its auditors in their day- 45 to-day activities. A number of bilateral donors (for example, USAID) have reviewed the methodology and standardsusedby the OFAG and confirmed its high quality. 4.2.8. Many of the public bodies are either using or developing computerized accounting systems. The OFAG audits the accounts of such public bodies around the computer since it has not developed appropriate capacity to apply audit techniques. 4.2.9. According to Article lO(2) of Proclamation number 68/1997, a body designed by the House of Peoples' representatives shall audit the accounts of the OFAG. So far, the accounts of the OFAG have not been audited by an independent body assigned by the House of Peoples' Representatives. However, the Auditor General assigns internal staff to audit the accounts of the OFAG and report their findingsto him. 4.2.10. At the beginning of each year, the OFAG prepares an annual work program to audit the accounts of federal ministries, other government agencies and regions taking into account the number of staff available, the allocated budget to each public body and the level of the intemal control systems (from cumulative knowledge and experience of the OFAG). In general, the OFAG each year covers 80 percent of the expenditure, 90 percent of revenue and 40 percent of subsidies. 4.2.11. During the EFY 1993, the OFAG audited the Federal government accounts for the year ended 30 Sene1991E.C. and concluded that the accounts did not fairly state the Income and Expenditures of the government for the year ended 7 Sene 1991 E.C. The report i s addressedto the Ministry of Finance and Economic Development (MoFED) and copied to the House of Peoples' Representatives. In addition, the OFAG conducted 117 financial audits, 13 performance audits and 11special investigations at federal and regional levels in EFY 1993. Some of the qualification points mentioned inthe OFAG's reports on the Federal govemment accounts for the year ended 30 Sene 1991E.C. were: Subsidies and grants approved and transferred to the regions were not accounted for properly with adequatedocumentations and reports; Proceeds from foreign loardcredits during the year under audit were not correctly reflected in the accounts. There i s no record, which shows the principal amount, the interest and the amount paid for each of the loans and credits; Proceeds from local loans and sale of treasury bills were not correctly recorded in the accounts; Additional expenditures budget used duringthe year under audit was not approved by the House of Peoples' Representatives. Article 21 of the Financial Administrative Proclamation number 57/1996 states that supplementary budget should be approved by the House; Transferring of budget from capital expenditure to revenue expenditure is not allowed according to the Financial Administrative Proclamationnumber. 57/1996. However, Birr 301.2 million was transferred from the capital expenditure to the revenue expenditure during the year under audit. 4.2.12. The OFAG i s currently auditing the Federal government accounts for the year ended 30 Sene1992 E.C. MoFED has already closed the accounts for the year ended 30 Sene 1993E.C and submitted the draft accounts to the OFAG. There i s a two years lag in auditing the Federal government accounts. This is mainly due to the late submission of draft accounts 46 by MoFED to the OFAG. The Proclamation which established the OFAG requires the OFAG to complete the audit of the accounts within four months after receipt from MoFED. There i s no legislation, which sets the time for MoFED to submit the draft accounts to the OFAG for audit. 4.2.13. The Audit Services Corporation (ASC) and other private audit firms audit the annual accounts of public enterprises and donor-financed project on behalf of the OFAG. The Audit Services Corporation was establishedby Proclamation number 12611977 to carry out the audit of the accounts of production, distribution and service giving organizations of which the government i s the owner or majority shareholder. Currently, the ASC i s the auditor of most of the public enterprises and donor-financed projects. ASC follows the International Standards on Auditingwhen carrying out the audits of the accounts of its clients and has its own manual. ASC does not use computerized auditing systems, such as computer assisted audit techniques (CAAT). Staff of the ASC are leaving for higher pays and currently ASC has a shortage of professional staff. According to the 1993 E.C annual reports of the OFAG, ASC has 153 employees, 108 professional and 45 support staff. During the E M 1993, ASC audited the accounts of 207 public enterprises and other agencies. 4.2.14. There i s an External Audit Project under the Expenditure Management and Control Sub-program of the Civil Service Reform Program. The objective of the project i s to build capacity at the OFAG and Regional Audit Bureaus in the areas of financial and performance audits and special investigations. The OFAG and Regional Audit Bureaus coordinate the Project. Most of the preliminary studies have been completed. Subject to the final review of the Project documents by an international consultant, the project proposals are ready for implementation. To implement the proposals of the project studies, the OFAG and Regional Audit Bureaus need technical and financial assistance from the donor community and the government. 4.2.15. The Canadian InternationalDevelopment Association (CIDA) signed a Memorandum of Understanding (MoU) with the Government of Ethiopia to provide technical assistanceto the OFAG and two Regional Audit Bureaus. The purpose of the project i s to improve the auditing capacity of the OFAG and the two Audit Bureaus. Specifically, the assistance will be usedfor staff training and development; procurement of equipment, computers and vehicles; revision of audit manuals; and institutional linkages. The amount about USD4.75 million and i s expected to be effective in April 2003. The assistance i s in line with the External Audit Project undertaken by the OFAG and Regional Audit Bureaus. The Irish Aid is currently providing financial assistance to the staff of the OFAG, who are attending professional studies. Recommendations 4.2.16. The following are recommended: The term of office of the Auditor General and Deputy Auditor General should be set by law so as to give them reasonable assurance and time to discharge their responsibilities; 0 Strategic staffing review for the OFAG should be done and adequate financial resources made be available to the Office to hire the required staff both in terms of quality and quantity in order to discharge its constitutional responsibility. The OFAG's annual budget needs to be increased to cope up with the necessary requirements for more office space, vehicles and computers. In addition, the role of ASC should be clarified taking into account the long-term plan of the OFAG; 47 The OFAG needs to strength its capacity in the area of computerized auditing systems so as to audit the accounts of public bodies "through the computer" rather than "around the computer"; The External Audit Project under the EMCP should continue at a faster pace and implementationof the recommendations of the Project should start as soon as possible; The Financial Administration Proclamation number 57/1996, should be amended to set a time limit for the closing of government accounts and submission of the draft accounts to the OFAG. The current law does not force MoFED to close the accounts of the Federal Government within a certain time period after the end of the fiscal year; A body assigned by the House of Peoples' Representatives should audit the annual accounts of the OFAG. 4.3 INTERNALAUDIT Assessment of PresentPositionandCurrentReforms 4.3.1. Each ministry and government agency has an Internal Audit Unit. The scope of the Internal Audit Unit, as stated in MoFED Directive-Financial Responsibilities of Members of Public Bodies issued in 1991E.C., i s to examine and evaluate the adequacy and effectiveness of public bodies' internal control systems and the quality of performance in carrying out assigned responsibilities. The Directive states that the internal audit function should be independent from the operational activities and the Head of Internal Audit Unit should directly report to the Head of the public body. The Directive includes the responsibilities, the approaches and standards to be followed and the scope of the Internal Audit Unit of each public body. 4.3.2. Recent studies inthe area of internal audit have concluded that the Internal Audit Unit at each public body i s under staffed and the role of internal audit does not meet the requirements laid down in the MoFED directive. A visit to the Internal Audit Unitof MoFED and confirmed the results of the previous studies. The internal unit of MoFED reports directly to the minister of MoFED. It i s staffed with 4 auditors, including the Head of the Unit.The Head of the Unit has a first degree in accounting and the other three are diploma holders. On average, there are 2-3 auditors in other public bodies. 4.3.3. The OFAG is responsible for issuing internal audit manuals and for maintaining a register of internal auditors. To this effect, the OFAG issued internal audit manuals to be used by internal auditors and conducts training to up-date the knowledge of internal auditors on auditing standards, government regulations and laws and other related topics. 4.3.4. Under the EMCP Sub-program of the Civil Services Reform Program, there i s an Internal Audit Project. The project issued draft Internal Audit Standards, Code of Ethics and Internal Audit Reference Manual. The drafts require some revisions and the Project i s currently looking for local consultants to finalize the drafts during this fiscal year. Thus, significant support i s required for this project to bring about the required changes in the area of internal audit inthe country. 4.3.5. There is an Inspection Department in MoFED. This i s responsible for carrying out an annual inspection of line ministries' and government agencies' utilization of allocated budget and reports its findings to the State Minister-Finance, and Budget and Treasury Departments of MoFED. The Inspection Department also has a responsibility to inspect subsidies transferred to the regions by the Federal government. The department has 93 auditors, 1 with 48 an advanced degree, 12 with first degree, 38 with diplomas, 32 with technical school certificate and the rest with secondary school certificate. Their i s an Inspection Department Audit Manual usedby staff as areferenceguide intheir day-to-day activities. 4.3.6. The roles of the InspectionDepartment at MoFED and the Internal Audit Unit at each of the public bodies often overlaps, and there i s no evidence that the two cooperate with each other. 4.3.7. Each region has an inspection department in the Regional Finance Bureau, which conduct similar activities like the Inspection Department inMoFED. Recommendations 4.3.8. The following are the proposedrecommendations: 0 The Internal Audit Unit in each of the public bodies should have sufficient staff, who are well qualified and experienced. In order to staff the pay scale of the civil servants should be reviewed in line with the existing labour market of the country including the private sector. Regular training of all internal auditors in the public sector should be provided in order to increase their knowledge of recent development in government regulations and auditing standards; 0 There i s duplication of work between the Internal Audit Unit in each of the public bodies and the Inspection Department of MoFED. The relationship between these two bodies should be reviewed: The Internal Audit Project under the EMCP should continue at a faster pace. 49 5. LEGISLATIVE OVERSIGHT 5.1 PARLIAMENTARY OVERSIGHT 5.1.1. The Ethiopian Constitution provides the House of Peoples' Representatives (the equivalent of Parliament) the central role of accountability. At its most basic, this requires the House to authorize the collection of federal public funds (taxes and duties) and the expenditure of public funds, after due debate, consideration, and ratification of the federal budget (Article 55.11) The Constitution also provides the House with the authority to establish standing and ad-hoc committees as it deems necessary to accomplish its work (Article 55). 5.1.2. One of these committees which has relevance to, and a bearingon the CFAA work, i s the Budget and Finance Affairs Committee. This committee i s further divided into three sub- committees under its mandate; Public Accounts; Revenue; and Recurrent and Capital Budget sub-committees. The Budget and Finance Affairs Committee was established and begun working in 1998. In the present sitting of the House, the composition was changed in July 2002. There are thirteen members drawn from both the ruling as well as opposition parties. The chairman and vice chairman of the main committee are both from the ruling party; all the three sub-committees are chaired by members from the rulingparty with vice-chairmen from the opposition. 5.1.3. The Budget and FinanceAffairs Committee appears to be more focused on the review of the budget before it i s passed; the review after expenditure i s incurred i s less consistently applied. Firstly, the ex-post reviews are only carried out after the Federal Auditor General has submitted his report to the House, and this may be years later. At the time of the assessment, the latest report submitted to the House by the Federal Auditor General was for 1999. The delay obviously reduces the importance of the reviews as a deterrent as the people responsible may have moved on. 5.1.4. Although the committee holds hearings on the Federal Auditor General's report, it lacks resources to properly carry out its work. The three sub-committees have to share one conference room for their meetings. There are supported by one Secretary with limited computing facilities. 5.1.5. The current structure of the Public Accounts Committee, where it reports to the House through another committee which also has other responsibilities appears to be inappropriate. The role of Parliament goes beyond legislation and includes checlung government activities especially in the area of accountability. A comprehensive system of committees adds enormously to the effectiveness with which accountability operates. A system in which there i s a committee with responsibility for each area of policy enables the legislature to develop groups of members and staff with specialist knowledge on activities of the government. 5.1.6. There i s a knowledge gap in the area of accountability by members who have different backgrounds. This i s especially the case as the composition of the committees was recently changed. These members need support and training to ensure that they acquire knowledge on budgets and budgetary process. In addition, the committees should have power to engage external expertise to helpthem with their work. 5.1.7. Members of the House naturally have a certain loyalty to their party, which makes it more difficult for them to comment critically on actions of their party' government. What is required i s the fostering of a culture that allows and facilitates a bi-partisan approach in parliament when overseeing executive activities. 50 5.1.8. The role of the Office of Federal Auditor General (OFAG) has been extensively discussed elsewhere in this report. Despite experiencing various difficulties, the OFAG has been able to perform a fairly reasonable and commendable work, and the reports portray a good understanding and grasp of issues affecting government performance in the area of financial management. The relationship between the Federal Auditor General and Parliament emanates from the Constitution, and this should be balanced so that their roles and independence remain clearly defined and separate. On one hand, the Federal Auditor General does provide fair and impartial audit reports and information to Parliament within a specified period of time following his receipt of the annual report from the government. Parliament, through its standing committees such as the Budget and Finance Affairs Committee, and more importantly, the Public Accounts sub-committee, in turn is then required to enforce accountability. 5.1.9. There is no evidence of a systematic follow up of issuesraised by the Federal Auditor General. The collaboration between OFAG and Parliament in terms of following up accountability issuesalso appears to be limitedto the provision of the annual report by OFAG to Parliament. In his report to Parliament for the EC 1993 fiscal year, the Federal Auditor General highlighted the lack of adequate follow up on issues raised in his previous reports. This oversight mechanism the Federal Auditor General was referring to could be better addressedthrough a standing committee of Parliament charged with a clearly spelt mandate. The OFAG could then provide assistanceand support through such a committee by attending its deliberations on the audited accounts. Assessmentof Risk 5.1.10. Parliamentary committees are essential tools of enhancing financial accountability issues, but only ifthey are properly funded, as well as constituted with clearly defined mandate. The oversight functions vested in the Legislature as a fundamental principle of separation of powers appears not to be effective, and yet there are highexpectations from the public. Ongoing Reforms 5.1.11. Under the Parliamentary Capacity Development Project, Canada i s providing $4.5 million to Parliament to ensure that the Federal Parliament and its Members are better equipped and more effective in law-making and overseeing government and ensuring its accountability to the rule of law and other democratic principles. The project aims at assisting committees better understand: 0 best practices inoversight and legislative review; 0 policy issues and operations of ministries for which they have oversight arrangements; and 0 gender policy issues relevant to their mandates. 5.1.12. The project also expects the committees to adopt professional practices through broad pro-active public consultation; travel and consultation throughout Ethiopia; making greater use of research and information to balance that coming from the Executive; keeping consistent and complete records; and increase use of non-executive and non-partisan sources of advice and information, including civil society organizations and independent experts. 51 5.1.13. The project has not been successful in addressingthe intended goals. The project has reached mid-term of implementation but with only about twenty percent achievement of intended goals. The project will undergo a mid-term review soon to identify the bottlenecks preventingsuccessful performance. Conclusions andRecommendations 5.1.14. Detailedbelow are the proposed recommendations: Establish a specific oversight mechanism to effectively hold the Executive to account for their activities. Consideration should be given to constituting the Public Accounts Committee as a full committee reporting directly to the House; There should be a bi-partisan approach to the overseeing of Executive activities; as representatives of the people, members should operate without fear or favour for a strong public financial accountability culture; There should be systematic and close collaboration between the Office of the Federal Auditor General and Parliament pursuant to the Proclamations under which they are created and appointed. In the area of financial accountability, this would normally be through the Public Accounts Committee. The presence of the OFAG during deliberations of the audited accounts would enhance accountability; Committees should be given power to draw on expertise from outside the House to assist them in carrying out their mandates; Members should acquire knowledge on budgets and budgetary processes. Training i s therefore essential. 5.2 FEDERALETHICSAND ANTI-CORRUPTION COMMISSION LegislativeScrutiny 5.2.1. The Federal Ethics and Anti-Cormption Commission was established in May 2001 by Proclamation number 23-5/2001 as an independent Federal Government body capable of investigating and prosecuting, checking and preventing corruption and other improprieties, as well as fighting corruption through the promotion of ethical values in the society. The Commission i s accountable to the Prime minister, but i s free from intervention, interference, or direction by anybody with regard to the conduct of its operations. 5.2.2. The Commission is headed by a Commissioner, and has a Deputy Commissioner, both appointed by the House of Representativesupon nomination by the Prime Minister. Both are appointed to a term of office of six years, which may be renewed. Neither can be removed from office except if found guilty of an offence by the court of law, or can no longer carry out responsibilities on account of mental or physical illness. The qualifications, age restrictions and experienced are not defined. 5.2.3. The Commission has far reaching powers ranging from combating corruption though public awareness; preventing corruption and corrupt practices; and investigating suspected corruption. The Proclamation also gives the Commission the investigation and prosecution powers of the police and Public Prosecutor specified in the Criminal Procedure Code and other laws. The legislative framework under which the commission i s established and operates appears to be sound. 52 5.2.4. It is too early to determine the effectiveness of the Commission to combat corruption as it has only been inexistence for about one year. Inthat time, focus has been on workmg on a number of logistical issues including staffing, preparation of the five year strategic plan from which the annual budget i s derived, and formulating regulation for approval by the Council of Ministers. 5.2.5. Despite its short period of operations, the Commission has made its presence and powers known and felt. At the time of assessment, 541 corruption cases had been registered with the Commission. Of these, 15 criminal charges involving 101officials as well as private citizens had been instituted. The test of the Commission's effectiveness would be determined by how successful the prosecution i s carried out. 5.2.6. The Commission's mandateonly applies to federal institutions, while it is hoped that similar institutions will be established in the regional governments. If the Commission can make an impact on addressing corruption practices at the federal level, this would in itself be an achievement. However, there is a strong desire for this work to be extended to regional governments given the massive decentralization, devolving of responsibilities, as well as transfer of resources that the government has embarked upon. 5.2.7. There was no evidence that the activities of the Commission was available to the general public, or regularly published. For an institution which encourages transparency and accountability, information about its activities should be published to increase public awareness. Information on the number of cases filed with the Commission, their sources, inquiries, submission of charge sheets, penalties, acquittals, quantum of financial involvement, amounts recovered, etc should made available to the public in some formalized publication (media, internet, annualreports). 5.2.8. There appears to be no evidence of a systematic and widespread corruption in the government sectors. In fact, a number of studies have alluded to the disciplined culture of the Ethiopian society which does not encourage corruption. On one hand, the creation of the Commission may be seen as a testimony to this desire on the part of government to stem corruption before it becomes widespread. On the other hand, it may be seen as an emerging scourge requiring not the traditional institutions and mechanisms, but the establishment of an independent anti-corruption agency. Either way, Ethiopia fairs very well in the Transparency InternationalScale inrelation to other countries inthe region. 5.2.9. Strategic decisions will need to be made as to what functions and focus the Commission will adopt. As indicated, the Commission has far reaching powers under the Proclamation giving rise to its establishment. Nonetheless, the approach adopted by the Commission should be basedon the perceived areas where corruption may be rampant. There i s also the question of the definition of corruption and which matters should come under the jurisdiction of the Commission. Given the low level of corruption (in relation to similar countries in the region), the focus may be more on combating and sensitisation through public awareness. The Commission could also build the promotion of ethical values on the disciplined culture in society alluded above. The fight for corruption also has to be approached on numerous levels, using specific knowledge or slulls from a variety of disciplines (law, finance, economics, accounting, etc.). The recruitment process should address the disciplines identified as critical. 5.2.10. It was evident from discussions with senior staff that the Commission would require support in the form of resources to carry out its mandate. Obviously the effectives of the performance of the Commission would be persuasive in attracting support from the international community. The Commission i s requiredto have a five year strategic plan under which the government i s supposedto approve and allocate the Commission's budget. 53 Assessmentof Risk 5.2.11, The level of corruption in Ethiopia is not as systematic nor widespread as in other countries in the region. Nonetheless, the establishment of the Commission i s a testimony on the part of the govemment to curtail the scourge (however prevalent or otherwise it might be). The challenge facing the Commission i s to determine the area of focus of their operations if it has to add value to fighting corruption. On one hand, it i s to early to gauge the effectiveness of the performance of Commission; on the other hand, this i s the time for the Commission to make strategic choicesregarding the focus of their operations. OngoingReforms 5.2.12. None advised other than the recruitment process, preparation of the five year strategic plan, and the formulation of rules, regulations, and procedures. ConclusionsandRecommendations 5.2.13. The following are the recommendations: 0 The Commission should make a strategic decision regarding the areas of focus in combating corruption given the perceived low level inthe government; 0 Information should be made available to the public about the operations of the Commission to increasepublic awareness; 0 Recruitment and training of staff should take cognisance of the various levels and disciplines of expertise required to combat corruption; 0 The operations of the Commission should address the emerging issues of significant resourcetransfers and devolution of responsibilities to the regional governments; 0 The Commission should be adequately funded in order to effectively discharge its responsibilities. 5.3 PUBLICACCESS TO INFORMATION Assessment ofPresentPosition 5.3.1. The Constitution guarantees freedom of thought, opinion, and expression. This right includes freedom to seek, receive and impart information and ideas of all kinds. The Constitution also guarantees freedom of the press and other media and specifically includes prohibition of any form of censorship, and access to information of public interest. 5.3.2. In practice, the initial reaction is mixed. Information held by public authorities is not easily accessibleto the public, and there i s no comprehensive guidance on how to obtain such information. On one hand, information appears to be available in various forms and from various sources. Parliamentary debates are aired on television, albeit a few weeks after the fact, while the public can attend Parliamentary sessions upon request. On the other hand, there does not appear to be a concerted effort on the part of government agencies to engage the media and civil society in disseminating information on govemment activities. For example, the Anti-Corruption Commission requires substantial and effective links with civil society, both to utilize citizens' reports as a major part of their strategy, and also to build up public support. 54 5.3.3. The sophistication of the media to widely report and circulate information of public interest i s obviously something that will come with time given the necessary enabling environment. Assessmentof Risk 5.3.4. There i s full support for Parliaments to be open to the media and the civil society as one of the tenets of ensuring effective parliamentary oversight. Civil society and the media should therefore be encouraged to become actively involved in ensuring the accountability of government. l7 OngoingReforms 5.3.5. The Department of Intemational Development (DFID) of the United Kingdom i s providing support to the Ethiopian Government on the introduction of Freedom of Informationlegislation. This i s part of the Ethics sub-program and i s aimed at strengthening the capacity of the media to be able to contribute towards improvingethics in government and civil society through fair and impartial investigation and reporting of cases of corruption and impropriety. At the time of assessment, terms of reference had been completed for the expected consultancy to assist the government in the formulation of the Freedom of Information Legislation. Conclusion and Recommendation 5.3.6. Proposed legislation would provide the necessary enabling and organic legislative environment. However, there is need now and then to translate the application of law into practice and this requires the relevant public institutions to engage the media into their operations. Inall well functioning democracies such as New Zealand, Parliamentaly reports are open to the media andthe recommendations of the Public Accounts Committee have been widely circulatedleading to the successhl prosecution of individuals. 55 6. AMHARA REGION EXECUTIVESUMMARY 1. The Government of Ethiopia i s pursuing a radical reform programme to push decentralisation further to the sub regional (woreda) level. One of the main objectives of this decentralisation policy i s improving service delivery. Since the beginning of 2002/03, devolution programmes are being implemented in the four largest regions, Amhara, Oromiya, Southern Nations, Nationalities and Peoples Region (SNNPR) and Tigray, covering 87% of the population. 2. Simultaneously, the federal government i s implementing a budget and accounting reform programme since 2000/01. The regional authorities have to roll out these reforms in the coming years. 3. This Country Financial Accountability Assessment (CFAA) i s made at a stage when the devolution process in Amhara is only three months underway, while the budget and accounting reforms are under discussion. This CFAA report will mainly focus on the effects of these devolution measures on the operation of the existing financial management system. Its findings, therefore, are of a tentative nature. DevolutionMeasures 4. The following devolution measures have been implemented at the start of the current fiscal year (July 2002) inAmhara. 0 The authorities of the woredas have been made responsible not only for the budget preparation and execution of the recurrent expenditures but also for the capital expenditures. The regional authorities in Amhara have used a transparent formula for the allocation of block grants to woredas (population 70 percent, level of development 20 percent and revenue generating effort 10percent). 0 Zonal departments have been downgraded to branch offices of the regional bureaus. Most (about 3,500) of the staff of these offices has been relocated to woredas, except for a few administrative functions. Also some staff of the regional bureaus (about 300) has beenrelocated to woreda level. FinancialAccountabilityEnvironment 5. Earlier studies18 describe the reputation of the civil service in Ethiopia of being well disciplined and committed. Fraud and absenteeism appear to be rare by any standard. The impression of the team during its mission confirms this picture. The Bureau of Finance and Economic Development (BoFED) in Amhara i s well-managed and the civil service shows a serious commitment to comply with the existing budget execution regulations. 18 See Roberts (2001)and also the Public ExpenditureReviews of several years (World Bank) 56 6. Existing studies have also stated that funds to woredas are flowing in a predictable and timely manner. Expenditure controls are effective and funds largely reach the purposes intended. Weaknesses due to Devolution 7. The devolution i s threatening some of these achievements, at least in the short term. There seems to be a kind of trade-off between devolution of spending on the one hand, and a strong financial accountability environment on the other. 8. In the team's small sample of the zone North Wollo, the following weaknesses in budgeting, accounting and auditing could be identified as a consequence of the recent devolution measures. 0 The relocation operation has provided the woredas with quite sufficient manpower to fill the majority of the lower vacancies. However, most higher posts (which require a College diploma or a Bachelor degree) are still vacant, such as positions for office heads. 0 Lower qualified staff members are now operating temporarily as acting head, but do not receive the higher salaries. This i s not a sustainable situation as it leads to lower job motivation and labour dissatisfaction. 0 The budgeting posts within the finance office of the woredas in North Wollo have not been filled as these posts also require a Bachelor degree. 0 Duringlast year, the inspection and internal audit units within the offices of the woredas in North Wollo were reasonably well staffed in terms of numbers but poor in terms of quality. Most of the new employees have neither an audit background nor audit experience. Simultaneously, the zonal inspection, which in the past provided the necessary support to the woredas, has been dismantled. 0 Due to similar capacity problems, the financial reporting at woredas level i s not functioning properly anymore. For example, for the first two months of the current fiscal year only 2 out of 9 woredas have submitted their monthly accounts. Hitherto, woredas submitted their monthly accounts within two weeks after the endof a month. 0 These accounting problems might delay the consolidation of financial accounts for the Amhara region. Further delay might be caused by devolution itself. The majority of the information needs to be collected at the 113 woredas (instead of the 11 zones). Some of these woredas are very remote. 0 At the regional level (bureaus) staff reductions (leaving the service and relocating to woredas) have led to a weakening of its internal control and internal audit quality. 0 Extensive discussions within BoFED on the formula for calculating the block grants to the woredas have delayed the preparation of the budget for the current fiscal year, at regional and at woreda levels. Therefore, the sectoral bureaus and woreda offices have not received formal notification of their ceilings for 2002/03. 0 For a number of woredas in Amhara (about twelve), the block grants that they will receive from the region appears to be insufficient to cover even their recurrent expenses (largely salaries). 0 Many remote woredas do not have banking facilities near their home, as the Commercial Bank of Ethiopia (CBE) does not have a branch office ineach woreda. 57 Recommendations 9. Decentralisation in developing countries leads almost inevitably to a temporary weakening of the financial management systems. Lower level governments have to learn how they can manage effectively the resources made available to them. There are no quick and easy solutions to prevent this. 10. The Ethiopian authorities are aware of most of these transition difficulties at woreda level and have introduced a few practical measures (such as pooling system for financial and supporting staff and the establishment of budget committees). Nevertheless, the effect of these measures appears to be insufficient. The government should take effective measures at woreda level to safeguard the quality of the financial accountability environment and to reduce the duration and the depth of the transition. Most problems are related to the human resource capacity: poor quality of manpower, low educational backgroundand understaffing. 11. Some recommendations inthis regard are: Further in-depth staff training in financial management, for a longer period of time, to upgradethe current staff. The regional Civil Service Commission, together with BoFED, should re-assess the civil service requirements in Amhara in order find a solution for the hiring problems of staff with a Bachelor degree. The woreda authorities inAmhara have serious difficulties to hire staff with a Bachelor degree, in particular in zones without a university (such as North Wollo). It should be assessed whether well-qualified persons with grade 10 plus 2 or 3 years relevant vocational training could do thejob. The GoE should carry out a re-assessmentof the staff structure and the real requirements at woreda level based on experiences in the first year of devolution to prevent a potential wastage of recurrent budgets on salary cost. It is crucial to create the right balance between expenditure salary cost on the one hand and capital expenditure on the other. The current staffing at woreda level might be insufficient, but filling all vacancies would imply smaller capital expenditures, e.g., less construction of primary schools and basic health facilities. The GoE should deliberate upon the introduction of a special incentive scheme for higher educated staff to overcome their reluctance to fill vacancies in more remote areas far away from the regional and zonal capitals. Housing and salary allowances and other benefits could be offered to these employees. Further Reforms inBudgetingand Accounting 12. The regional authorities in Amhara have to roll out the budgeting and accounting reforms that are pilotedin the federal government in the current financial year (e.g. new chart of accounts for revenue and expenditures, definition of cost centres, introduction of a modified cash double entry system). 13. The authorities of Amhara have expressed their intention to implement the new budget system in the next fiscal year (2003/04) and they are considering implementing the new accounting system inthe same year. 14. Although the rolling out of these reforms will probably contribute to the removal of the main weaknesses identified in earlier surveysig, the authorities at woreda level seem not ready to implement them. These reforms require in-depth training over a longer period of time. The regional authorities should give careful thought to the risk of a further breakdown of the accounting system. 15. Temporary postponement or a slower introduction of these reforms i s recommended, especially for the accounting system. It could be considered to introduce the new accounting system with pilots ina selective number of woredas. Inthis way, lessons can be leamt without seriously disruptingthe existing systems. Woreda authorities would also get some breathing space to digest the consequencesof the latest devolution of funds. Implicationsfor DirectBudgetsupport 16. Following the end of the border conflict, some donors have indicated a willingness to consider a shift from project aid to direct budget support. In the case of direct budget support the opportunity of ring-fencing donor funds as a source of fiduciary assurance i s nil. Therefore, the financial accountability environment in Ethiopia should provide sufficient fiduciary assurance to the donors. The current decentralisation process has increased the financial accountability risks. The GoE should take effective action to maintain its good reputation infinancial management and to convince the donor community that these risks are manageable. 19 See, for instance, the annual Public ExpenditureReviews from the World Bank. 59 6.1 INTRODUCTION 6.1.1. Ethiopia i s a federal state with 67 million people". The Constitution of 1994 mandates a federal structure with considerable autonomy to the regions in administrative and fiscal matters. It consists o f nine regions and two city administrations that enjoy the status of regions. Amhara i s the second largest of these regions with about 17.3 million inhabitants. 6.1.2. The main distinctive features of the current federal system include the heterogeneity of the regions, the highdegree of regional autonomy, large vertical and horizontal imbalances, and the continuing evolution of the system with its impetus for decentralisation within regionszi. 6.1.3. The Federal Government of Ethiopia (FGE) i s actively pursuing a radical reform programme to push decentralisation further to the woreda (sub-regional) level. The main objective of this decentralisation policy i s improving service delivery. Since the beginning of financial year 2002/03, this programme is being implemented in the four largest regions of Amhara, Oromiya, Southern Nations, Nationalities and PeoplesRegion (SNNPR) and Tigray, covering 87 percent of the population. 6.1.4. Simultaneously, the federal government i s implementing a budget and accounting reform programme since 2000/01. The regional authorities in Amhara have to roll out these reforms in the coming years, but still need to take a final decision on the time schedule for this roll out. 6.1.5. This Country Financial Accountability Assessment (CFAA) report describes the strengths and weaknesses of the financial accountability environment in the public sector in the Amhara region and the fiduciary risk that they may pose. It focuses on the effects of this devolution program and identifies measures, in particular training and capability building programs, that could helpto strengthen this accountability environment. 6.1.6. This report presents the main findings of the CFAA mission to Amhara. It is prepared at the time that the devolution process in Amhara is only three months underway. Therefore, its findingswith regardto the devolution process are of a tentative nature. 6.1.7. The region i s in the middle of a massive devolution process. The measures implemented at the start of the current fiscal year (July 2002) inAmhara are: The authorities of the woredas have been made responsible not only for the budget preparation and execution of the recurrent expenditures but also for the capital expenditures. Hitherto, the zonal authorities were managing the capital expenditures, includingthe sectoral programs. The regional authorities in Amhara have developed and used a transparent formula for the allocation of block grants to woredas (population 70 percent, level of development 20 percent and revenue generating effort 10 percent). In this formula, they use an offset for aid resources(loans and grants) of 15 percent. The bonus for revenue generation efforts in this formula provides an incentive to woredas to raise additional own revenues and to increasetheir revenue base. 20 Basedon estimates preparedby MEDAC for 2001/02 inthe context of the FederalBudget Grant Formula. 21 See Public ExpenditureReview, World Bank, 2001. 60 Zone departments in Amhara have been downgraded to branch offices of the regional bureaus. Most of their staff (about 3,500) has been transferred to woredas, except for a few administrative functions. The authorities had the intention to also shift larger numbers of regional staff to the woredas, as they instructed the regional bureaus to reduce their number of positions by 60 percent. Eventually, only about 300 employees were relocated. This low figure i s caused by vacancies in the regionalbureaus and skilled staff that refused to relocate and therefore decided to leave the service. 6.1.8. The CFAA report covers the different stages of the budget cycle at regional and woreda level. It deals with the financial planning and budgeting; the budget execution; the accounting and reporting; and with the internal and external audit systems. Finally, it focuses on the strengths, the weaknesses and the challenges of financial management in Amhara, as well as providinga risk assessment and some recommendations. 6.2 PLANNINGAND BUDGETING 6.2.1. The Constitution gives regional governments the power to draw up and administer their own budget. 6.2.2. For the fiscal year 2002/03, the approving and preparing of sub national budgets has been severely delayed due to the uncertainty surrounding the decentralisation process. As a consequence,the ability of the GoE to prepare a consolidated budget by the end of September will be severely compromised**. Regional Findings 6.2.3. In Amhara, the budgeting preparation process has been decentralised to the woreda level. The following steps and phases in the budget preparation process in Amhara region can be distinguished. Budget call: a) to regional bureaus; and b) at woreda level through finance offices to all other offices. Pre-ceilingbudgetingby a) regional bureaus and b) woredas. Budget evaluation and recommendation: a) at the Budget Department of the Bureau of Finance and Economic Development (BoFED); and b) at the finance office in each woreda. Federal subsidy announced => determination of regional expenditure envelope (federal subsidy i s 66% of the domestic resourceenvelope for Amhara in2002/03). Budget hearings: a) inRegional Council; and b) in all Woreda Councils. Authorisation of ceilings by the Regional Council for a) the region and b) for each woreda. Formal budget notification: a) BoFED informs sector bureaus; and b) finance offices informtheir sector offices. Final preparation of the budget. Publication. 22 The preparationof a consolidatedbudgetby the end of Septemberhasbeenagreed as one of Ethiopia's Completion Point Triggersunderthe HIPC debt initiative. 61 6.2.4. The announcement of the size of the federal subsidy is a crucial stage in the regional budget preparation process. Also this year, this information from the federal government came quite late inthe preparation process (May 2002). 2001/02 2002/03 inmillions as % in millions as % Sources of Revenue of birr of total Of birr of total Treasury 918.0 78.7 1,204.9 81.3 Federal Subsidy 709.8 60.8 974.9 65.8 Own Revenues 208.2 17.8 230.0 15.5 External Loan 146.8 12.6 154.5 10.4 External Assistance 101.7 8.7 122.9 8.3 TOTAL 1,166.5 100.0 1,482.3 100.0 6.2.6. After determination of the requirements for regional bodies, the balance i s available for distribution to the woredas. For 2002/03, the Regional Council has decided that 38 percent of the Treasury funds i s required for the regional bodies (including the zonal administration). Therefore, the other 62 percent (i.e., Birr 747 million) will be allocated as block grants to the woredas (see Table 2.2). - Table 2.2. Budget Expenditures for Amhara, 2002/03 inmillions as % of Expenditure Of birr total\a To Regional Bureaus 420.9 34.9 Recurrent 278.5 23.1 Capital 142.4 11.8 Contingencies 31.0 2.6 Municipality subsidy 6.0 0.5 Sub-total 457.9 38.0 To Woreda Administration 641.8 53.3 To Woreda Councils 105.2 8.7 Sub-total 747.0 62.0 Total Treasury Funds 1,204.9 100.0 ExternalLoan 154.5 External Grants 122.9 TOTAL REGIONAL BUDGET 1,482.3 \a as percentage of Treasury Funds (i.e., exc. donor support). 6.2.7. For the allocation of block grants to the 113 woredas of Amhara, the regional authorities have developed and used an objective formula. The three components of this formula are population, a composite 'level of development' index and an element intended to reward revenue effort. The weights of these three components in the formula are 70%, 20% and lo%, respectively. A lack of reliable data for the other components seems to explain the high(er) weight for population inthe formula for A~nhara*~. 23At the federal level a similar formulahas beenused.This last versionof this federal formulaincludesas a fourthcomponent a povertyindexwith a weight of 10percent. The other three componentsweight are 55 percent for population,20 percent for level of development and 15 percent for revenueraisingeffort (see PER, 2001, Volume11). 62 6.2.8. The fine-tuning of the formula has caused some further delay in the budget preparation process. Therefore, the authorisation of the regional and woreda ceilings for this year took place only in July 2002. As a consequence, the sector bureaus and woreda offices had not received a formal notification of their ceiling for this financial year at the time of the CFAA mission (late September 2002). 6.2.9. BoFED expects that all 113 woredas in Amhara will have finalised their budget preparation in October 2002. Therefore, the consolidated budget for the region will probably be ready inNovember 2002. 6.2.10. Similar to the federal level, the regional authorities in Amhara have used a budget- offset mechanism to determine the overall divisible pool to the woredas. Essentially, this mechanism combines the available resources for block grants to the woredas with the registered external aid (loans and grants) flowing directly to the woredas. In Amhara, these external aid flows for 2002/03 are estimated at only Birr 7.4 million, i.e. equal to 1percent of the block grants. The regional authorities have used an offset of 15 percent for these aid resources. 6.2.11. Budgetingin Amhara appears to be largely an incremental exercise. Strategic priority setting and reallocation seems to get less attention. For the financial year 2002103 this i s even more the case. In the budget call, the sector bureaux were instructed to submit only financial requests for ongoing projects. No capital expenditures will be made available for new projects this year. 6.2.12. The budget preparation process in the Amhara region considers only a time period of one year. Any medium-term programming (i.e., a perspective of three to five years) has not been carried out so far. The current time span of one year i s too short for the purpose of adjusting expenditure priorities. 6.2.13. The feasibility of a medium-term perspective i s greater if revenues are more predictable. This predictability i s poor for the regions in Ethiopia as long as the federal government fails to provide indicative medium-term projections of the federal subsidies (Le., the major part of the revenuesof the regional authorities). 6.2.14. In general, budget outturns at regional level in Amhara tend to be very close to the totals appropriated, especially for the aggregates. For capital expenditure substantial gaps exist betweenbudgeted figures and outturnsZ4. Forthcoming Budget Reforms 6.2.15. The regional authorities in Amhara have to roll out the budget and accounting reforms that are piloted at the federal government. For the budget system these reforms include the new chart of accounts for revenues and expenditures, budget and reporting formats and the definition of cost centres. 6.2.16. The Govemment of Amhara has expressed its intention to implement these budget reforms in the next fiscal year (2003/04) for the whole region, i.e. simultaneously for the regional bureaus and all the woredas. 24 These findingarebasedonthe budgetand outtum figures for 2000/01 63 Findings at Woreda Level 6.2.17. From this financial year 2002/03 onwards, the authorities of the woredas have been made responsible not only for the recurrent but also the capital expenditure. Therefore they are currently also incharge of the planningand budgetingof capital projects. 6.2.18. In the previous financial year (2001/02), in preparation of this devolution, the regional authorities (in co-operation with the USAID-financed DSA project) have trained about 2,600 employees in two-weeks training courses on financial management (from each woreda about 20 employees). 6.2.19. However, most woredas still have difficulties preparing their own budget. So far, most of the budgetingposts within the finance office of the woredas in North Wollo have not been filled with adequatestaff, as these posts require a Bachelor degree. 6.2.20. This staffing problem at woreda level in North Wollo i s even wider. Numerous financial management positions are still vacant. As an example, the finance offices of both woredas that were visited by the team have 30 staff positions. From these 30 positions 13 require a Bachelor degree. All these top positions inboth woredas are still vacant. 6.2.21. Inboth of these woredas the Council seems to have found an interimsolution to cope with the shortage of budgeting staff. They established a budget committee of representatives of the different offices. This committee has largely prepared the budget. The remaining staff of the zonal finance department has provided advice and checked the draft budget on obvious inconsistencies, such as an imbalance between recurrent and capital expenditures. 6.2.22. With regard to the budget preparation process for 2002/03 at the time of our visit (late September), the Woreda Councils had approved and authorised the overall ceiling. Nevertheless, the finance office had not yet notified the sector offices about their respective ceilings for this financial year. 6.2.23. For a number of woredas in Amhara (about twelve), the block grants that they will receive from the region (based on the regional formula) appear to be insufficient to cover even their recurrent expenses (largely salaries). These woredas are mainly located in zonal towns, where a large number of zonal staff preferred to stay after the zonal departments were stripped down. BoFED i s fully aware of these difficulties. It assumes that this delicate situation will provide clear incentives to these woredas to dismiss some of their staff. In its budget for 2002/03, it has also reserved additional contingencies (2.6% instead of about 1.5% last year) for temporary support to these woredas. 6.2.24. But even most other woredas seem to have limited resources for capital expenditures. For instance, the budget envelope for the woreda Bugna for 2002/03 i s Birr 7.7 million. In this budget, salary costs are Birr 5.0 million and operating cost are estimated at Birr 1.9 million. Furthermore, under contingencies Birr 0.8 million has been reserved for vacancies. As a consequence, only Birr 133,000 (roughly US$l5,000) will remain for capital expenditures. Role of Service Beneficiaries 6.2.25. Inthe visited woredas the impact of service beneficiaries in civil society to change the expenditure priorities i s only marginal in the budget preparation. Representative structures at woreda level and below are not consulted. The most influential interest groups in Amhara appear to be the farmers associations that are organised at kebele level. Users, women, mothers, fathers associations do exist at woreda level, buttheir influence seems minor. 64 6.2.26. Moreover, the potential impact o f beneficiaries is also restricted. In most woredas only a small part o f the budget i s available for new policies and projects. The majority o f the public expenditures are recurrent, earmarked for existing activities (salaries and operating cost). 6.3 BUDGETEXECUTION RegionalFindings 6.3.1. The disbursement system in the Amhara region has generally been effective in controlling expenditure without the need for cash rationing. Disbursement processes at the federal and regional government are similans. Disbursements are made on request, and for salaries the Treasury assumes a cash flow o f one twelfth o f the annual allocation with some flexibility for higher than average cash flow requirements in specific months. 6.3.2. BoFED i s responsible for disbursing and releasing the subsidy element o f funding to sector bureaus at the regional level, and to zonal finance departments. These zonal departments, in turn, disburse funds to woreda finance offices. Above the limit o f Birr 500,000 the inspection department in BoFED shouldbe asked for approval. Smaller payments only need to be pre-authorised b y the head o f a sector bureau or budgetary institution. If the amount i s higher than Birr 3,000 this head should ask advise from an internal purchase committee. 6.3.3. Essentially, the process o f expending the capital budget i s not allowed to begin before funds are budgeted. Notification of the budgets for this financial year has not reached the regional bureaux or other spending agencies yet. One result i s an extreme accumulation o f capital expenditures in the final months o f the financial year. For this year, none o f the public bodies visited by the team has started the execution o f the capital budget. 6.3.4. Cash management at the regional level i s sub-optimal due to the large numbers o f bank accounts. This makes it difficult to manage overall liquidity efficiently. In the sector bureaus in Amhara that were visited by the CFAA team the number o f bank accounts vary from 7 for the Bureau o f Health, 14 for Education to more than twenty for Agriculture. Most bureaus have two Treasury bank accounts (one for capital and for recurrent expenditures) while the others are all donor accounts. A rationalisation o f the treasury function should take place. Nevertheless, this can only happen in co-operation with donors that are willing to share bank accounts with other donors. Findingsat Woreda Level 6.3.5. Up to the current fiscal year, BoFED released the subsidy element of the funding for the zones and the woredas to the zonal finance departments. Each zonal finance department, in turn, disbursed funds to the woreda finance offices based on a monthly request from the woreda finance offices. The zonal department was largely in charge o f makingthe breakdown to the woredas. 6.3.6. From 2002/03 onwards, the zonal departments have formally become branch offices of the regional bureaux. They should only channel monthly releases from BoFED to the specific woreda finance offices based on instructions from BoFED. So far, however, BoFED in Amhara has only disbursed as a block grant to the zonal finance departments. These departments still appear to have the authority to distribute these resources to the woredas. *'Foradetailed description of the processes at the federal level see Public Expenditure Review 2001, Vol. 11. 65 6.3.7. Many remote woredas do not have banking facilities near their home, as the Commercial Bank of Ethiopia (CBE) does not have a branch office in each woreda. Therefore, cashers from these woredas need to physically transferlarge amounts of money from the nearest CBE office to the safe at their finance office. In the zone North Wollo, for instance, there i s only one CBE office, while there are 9 woredas. 6.3.8. A senior regional official expressed his expectations that in the future the Amhara Credit and Savings Institutions (ACSI) could fulfil the role of banker for the woredas. Each woreda in Amhara has such an ACSI office that operates as a local savings bank. They collect savings, provide credits to farmers and small enterprises and pay pensions to retired civil servants. 6.3.9. At woreda level the total number of bank account is not known. There are separate bank accounts for Treasury funds for both recurrent and capital expenditures. In addition, most donor projects have their own bank account. 6.4 ACCOUNTINGAND FINANCIAL REPORTING RegionalFindings 6.4.1. The Amhara region i s still using a single entry system while the federal government has introduced a double entry this financial year. The expenditure reporting in Amhara i s fragmented. Regional bureaux and woreda finance offices issue separate reports for each source of funding (Treasury funds and separate donors). 6.4.2. The Disbursement and Account Department in BoFED has the responsibility for the accounting and reporting for Treasury funds. Govemment financial statements for revenue and expenditure are prepared monthly and annually. The annually statements contain a comparison of the actual expenditures with the budget figures. 6.4.3. BoFED expects to complete the financial statementsfor 2000/01 within a month. This means that there i s a backlog of about 16 months. The justification process, in particular with regard to settlement of amounts suspended from previous years, appeared to be a time consuming exercise. The financial statements for 1999/00 have been presented earlier this year, while the consolidated accounts for 1998/99 are now under audit. 6.4.4. The regional bureaux submit their monthly financial accounts in hardcopy format to the Disbursement and Account Department of BoFED. This department applies the strict rule that no monthly advances are releasedto the sector bureaux unless their appropriate requests and accounting reports have been received. The Disbursement and Account Department became understaffed as it lost some of its employees to the woredas. The consolidation and the entry of monthly accounts from the woredas in the Budget Disbursement and Accounts (BDA) systemis carried out at zonal level. Findingsat Woreda Level 6.4.5. Since the three month, the financial reporting at the woredas is not functioning properly anymore. The increased responsibilities of the woredas and their capacity problems are causing serious delays in the preparation of monthly expenditure reports. 6.4.6. Hitherto, upward budget accountability was well-established. All woredas in North Wollo submitted their monthly accounts within two weeks after the end of a month. The zonal finance department was using this submission as a requirement for release o f new funds, just like BoFED i s doing for the regional bureaux. 66 6.4.7. At the end of the previous financial year this conditionality has been lifted for the woredas because their weak capacity was seen as a circumstance beyond their control. Two from the nine woredas in North Wollo have not submitted their monthly accounts for June 2002 (the last month of the financial year 2001/02). For the first two months of 2002/03 the situation i s worse: only two out of nine woredas have so far submitted their monthly accounts to the zonal finance department. 6.4.8. In each of the zonal finance departments one employee is in charge of the consolidation of the monthly account of the woredas and the data entry into the BDA system. In the zonal finance department visited by the team (North Wollo), this employee has been shifted to a post in one of the woredas. No one of the current staff in the zonal finance department seems able to replace her so far. Therefore they decided to lock the door of the room of this employee to prevent abuse of the desktop computer. 6.4.9. These delays in accounting might also increase the backlog concerning the consolidation of financial accounts in Amhara. At this stage it i s difficult to assess the seriousness of these delays. On one hand, these delays may be rectified within a few months; on the other hand, these delays may be the beginning of a long lasting problem for the financial accountability environment. 6.4.10. To deal with the lack of financial support staff and to optimise the use of its existing staff, woredas have set up a pooling system for their financial and other support staff. This support staff of each woreda i s divided in four pools, each covering a number of offices. Forthcoming Accounting Reforms 6.4.11. The regional authorities in Amhara have to roll out the budget and accounting reforms that are piloted at the federal government. With regard to the accounting system it covers a shift from a cash based single entry accounting system to modifiedcash double entry system. 6.4.12. The Government of Amhara i s considering rolling out the accounting reforms to the whole region in the next fiscal year (2003/04), simultaneously with the budget reforms. A final decision with regard to this will not be taken before January 2003. Then they expect to know more about the experiences of the federal government, which started the piloting at the beginning of this financial year. 6.5 INTERNAL CONTROLAND INTERNAL AUDIT Regional Findings 6.5.1. The internal audit in Amhara has an-ex post nature in line with the new financial regulations. It i s organised in the same way as at the federal level. There i s an internal audit department within each regional bureau while BoFED has its own Inspectionand Government Procurement Department. 6.5.2. The internal audit units in each bureau are in charge of ex post control of vouchers and checking on a daily basis whether the payments are made correctly. They report to their Head of Bureau. In some bureaux (e.g. education) all financial and physical transactions are controlled, In a number of bureaux, however, only one employee i s carrying out these activities (although there i s more than one position), and sometimes even on a part-timebasis. Therefore, the quality of the intemal audit is, to say the least, questionable. 67 6.5.3. The Inspection and Government Procurement Department within BoFED is responsible for the internal financial auditing of transactions and property of the expenditures of the 21 regional bureaus. Other tasks of the Department are internal control (supervision of internal audit departments in other bureaus) and government procurement. The Department reports internally to the Headof BoFED and also informs the audited of its findings. 6.5.4. The Department of BoFED has10 positions of which only 4 are filled. The staff reduction (shifted to woredas) at the regional bureaux in Amhara has led to a weakening of the internal control and internal audit function. In response to the staff shortage, the Inspection Department i s tahng smaller samplesto prevent a largebacklog. The Inspection i s currently auditing 1998199 up to 2000/01, dependingon the specific bureau. It starts its audit activities for a specific year after a sector bureau has closed its financial accounts. Findings at Woreda Level 6.5.5. Based on the experience in North Wollo the CFAA team i s concerned about the current quality of the internal audits and inspections in Amhara at woreda level. Duringlast year, the inspection and internal audit units within the offices of the woredas in North Wollo were reasonably well staffed interms of numbers but poor interms of quality of staff. Most of the new employees have neither an audit background nor audit experience. Simultaneously, the zonal inspection, which provided support to the woredas in the past, has been dismantled. Most of the staff of the zonal inspection has been shifted to all kind of positions at woreda level. 6.6 EXTERNAL AUDIT AND PUBLIC ACCOUNTABILITY Regional Findings 6.6.1. The Bureau of Audit, also called the Regional State Office of the Auditor General (RAG),is responsible for auditing the financial accounts of all government institutions using government funds in the Amhara region. The RAG in Amhara was established in 1995 and has the following four objectives. 0 Ensuring the proper usage of public resources and property through auditing (financial audits, investigationaudits and value for money audits); 0 Ensuring compliance with laws and regulations regarding financial and property activities; 0 Ensuringthe existence of adequate auditing systems; and 0 Helping in the development of the audit profession in the region. 6.6.2. In practice, the main task of the RAGi s carrying out financial and compliance audits. The RAG has developed an awareness of good audit practices. It carries out audits in accordance with the standards set by the International Organisation of Supreme Audit Institutions (INTOSAI). Based on observations and feedbacks, the RAG seems to fulfil its audits quite satisfactorily and has built up a good reputation. 6.6.3. The main problem affecting the operation of the RAG, however, are the poor quality of manpower and its insufficient quantity. The RAG has difficulties in hiringqualified staff on the labour market and its turnover rate is high. Only 97 of its 181 staff positions are filled (i.e. 84 vacancies). From these employees, 67 are auditors (for 131 positions) and 30 are administrative supporting staff. The educational background of these 67 auditors is accounting oriented: 26 have at least Bachelor degree (for 62 positions); 24 have a Diploma (i.e. 2 years training in accounting, for 69 positions). The other 17 have only grade 12 (while there are no positions for auditors with grade 12). The lack of manuals, systems and training 68 facilities are other constraints. The RAG has its own manual, but its quality is weak. Due to these weaknesses, the RAG has neither the capacity nor the expertise to carry out value for money audits. 6.6.4. The RAG in Amhara i s basically an independent public institution with its own legal charter. The RAG i s treated differently from other regional bureaus. The Regional Council has appointed the RAG and decides on its regulations and its budget. The Proclamation gives the Regional Council the right to audit the accounts of the RAG, but it i s not done. The RAG reports to the Regional Council in its two annual audit reports, a consolidated report of its findings for all audited institutions, and a Public Finance consolidated audit report (Consolidated Fund). 6.6.5. The first report that is submitted every year contains the findings of all audits during the year and reports how the audited have addressed the findings. Its last annual report (2000/01) covers its audit findings in 68 public entities (out of more than 1500 auditable entities in the region). Its overall audit opinions were as follows: adverse for 3 entities; qualified for 6; unqualified (clean) for 55; and a disclaimer for 4 entities. The opinions for the large sector bureaus such as for health, education and agriculture were all unqualified. In the water sector, the opinion was adverse. 6.6.6. The second report, the Public Finance audit report, will be submitted when an audit of a financial year has been accomplished. The last year for which the audit of these regional consolidated budgets was accomplished i s 1997/98. 6.6.7. The RAG gave a disclaimer as the overall audit opinion for these consolidated regional accounts, largely because supporting documents were not available at the regional level. BoFED explains these weaknesses to lack of staff and to past ignorance concerning compliance with procedures. Some reports that were prepared at zonal level were not sent to BoFED. 6.6.8. The consolidated regional accounts for 1998/99 are now under audit. BoFED has also closed the consolidated accounts for 1999/00, but the RAG has not taken them under audit yet. 6.6.9. The RAG has a five-year plan and prepares a work plan each year. This work plan has been exchanged with the Federal Auditor General to prevent duplication of work. In practice, the Federal Auditor General primarily focuses on the four large sectors (education, health, water and agriculture), and sends all audit reports to the RAG for audit work carried out inAmhara. The RAGincludes them inits consolidated annual report. PublicAccountability 6.6.10. The RAG reports to the Regional Council. This Council in Amhara has 249 elected members. In 2001, this Council formally set up standing parliamentary committees in the following fields. Economic Affairs Capacity Buildingand Social Sectors Legal Administration Women Affairs Budget and Public Accounts 6.6.11. The Economic Affairs Committee has 7 members while the other committees have five. The Budget and Public Accounts Committee deals with the audit reports from the RAG. This committee also contributed to the budget preparation for 2002/03. The Council accepted 69 the committee's proposal to change the allocation of the regional resource envelope in favour of the woredas. This committee has also supported the budget request from the RAG for this year without any limitations. 6.6.12. The chairman of the Budget and Public Accounts Committee requested extensive support from the donor community for the current capacity buildingprograms of the Ministry of Capacity Buildingand in particular to the sub-programme on expenditure managementand control. This committee i s convinced that large capacity building and training efforts will be needed in the coming years to implement the budget and accounting reforms at the regional level. Findingsat Woreda Level 6.6.13. Up to now, the RAGhas includedinits financial audits of sector bureaux a sample of a few zonal departments and woreda offices. From the financial year 2002/03 onwards, the RAGalso needs to cope with the devolution of spending authority to the woredas. Inresponse to the devolution to woreda level, it has the intention to set upbranch offices at zonal level. 6.6.14. However, this extension of its tasks will put further pressure on the limited capacity of the RAG.Duringthe interview, the Deputy Auditor of the RAG expressedhis concerns to the team. H e requestedof the donor community in Ethiopia technical and financial support for fellowships, training materials, professional joumals, IT systems and software. Recently, the RAG has signed a Memorandum of Understanding with the Canadian International Development Agency (CIDA) for logistical support, fellowships, computers and training. 6.7 STRENGTHS,WEAKNESSES AND CHALLENGES 6.7.1. The strong points, the weak points and the challenges with regard to the financial managementsystem in Amhara can be described as follows. Planning and Budgeting 6.7.2. Strong points are: e Ingeneral, budget outtums at regional level in Amhara tend to be very close to the totals appropriated, especially for the aggregates. e As a result of the recent decentralisation measures, woreda administrations are in a position to take decisions on recurrent and capital expenditure simultaneously. e The regional government has used an objective formula for the allocation of the block grants to the woredas. 6.7.3. Weaknesses and challenges are: Budgeting in Amhara at any level i s largely an incremental exercise. Strategic priorities are poorly defined and reallocation gets low attention. Medium-term programming (3 to 5 years) of expenditures i s not carried out. A substantial part of the donor support is not included inthe regional budget. Significant delays in the budget preparation, partly caused by the late notification of the federal subsidy. Fine-tuning between the budget calendars of the federal and the regional government i s needed to reduce delays. The budget preparation for this year has also been delayed becauseof long discussions at regional level on the allocation formula. Most woredas have serious difficulties preparing their budget, because skilled budgeting staff for the finance office cannot be found. 70 0 The sectoral bureaus and woreda offices have not received a formal notification of their ceilingfor this ongoing financial year (2002/03) by late September 2002. 0 Insome woredas the federal subsidies will probably be insufficient to cover the recurrent expenditure. BudgetExecution 6.7.4. Strong points are: 0 A strong commitment to comply with the existingbudget execution rules and regulations, especially at the regional level. 0 Budget discipline seems to be strong. 0 Effective disbursement system. No needfor cash rationing. 0 BoFED disburses funds to the regional sector bureaux in time, but only after receiving a proper request and financial accounts of the previous month. 0 The same is true for BoFED's disbursement to the woredas through the zonal departments. 6.7.5. Weaknesses and challenges are: 0 Cash management at regional and woreda level is sub-optimal due to the large number of bank accounts. 0 Inthis financial year, the budget execution in most woredas has not been backed yet by monthly financial reports (see below). 0 Capital spending i s accumulated in the final months of the fiscal year due to delays in budget preparation. 0 Zonal departments still seem to take the authority to distribute the Treasury resources between the woredas, although they have formally become branch offices of the regional authorities. Accounting and FinancialReporting 6.7.6. Strong points are: 0 Regional bureaux are up to date and very disciplined with regard to the monthly reporting to BoFED. 0 Upward budget accountability has been well-established, In the past, woredas submitted their monthly accounts within two weeks. 6.7.7. Weaknesses and challenges are: 0 Expenditure reporting i s fragmented. Separate reports are issues for each source of funding. 0 Since the start of this financial year, monthly reporting is substantially delayed. These delays in submission of monthly financial accounts are caused by the budget delays but also by capacity problems related to staff relocation. 0 Inresponseto these 'circumstances beyond the control of the woredas' zonal departments have relaxed the reporting discipline. 0 BoFED has a backlog o f about 16 months with regard to the completion of the consolidated financial statements. Internal Controland Audit 6.7.8. A strong point i s that internal auditors and inspectors are committed to control the compliance of the financial regulations. 71 6.7.9. Weaknesses and challenges are: 0 The audit coverage of the inspection department of MoFED i s low. It has been reduced last year due to further staff shortage. 0 Each bureau has its own intemal audit department. In some cases these units are so poorly staffed that they are not able to carry out the necessarycontrols. 0 At woreda level, the internal control and audit function is carried out poorly. Around the start of this fiscal year, woredas have received a significant number of new employees to carry out these tasks. However, the background and experience of a large number of them seems not relevant and therefore they will need at least substantial training and time to settle in. External Audit and PublicAccountability 6.7.10. Strong points are: 0 The RAG i s basically independent and seems to carry out its financial audits satisfactorily. 0 The RAG prepares two annual reports for presentation to the Regional Council, a consolidated report of its findingsin all public entities and a public finance audit report of the Consolidated Fund. 0 A Budget andPublic Accounts committee hasbeen established in2001. 0 This committee seems to be convinced of the need for a strong RAG and has supported its budget requests. 0 The work plan of the RAG have been geared to the work plan of the Federal Auditor General. The RAGreceives and makes use of the observations from the Federal Auditor General. 6.7.11. Weaknessesand challenges are: 0 The decentralisation should lead to more activities of RAG at woreda level. At this moment, RAGseems not equipped to carry out these additional activities. 0 The quality and quantity of the staff of the RAG is currently also insufficient to carry out value for money audits. HumanResource Capacity 6.7.12. Strong points are: 0 The civil service inAmhara i s well-disciplined. 0 BoFED seems well-managed and is determined to roll out the federal budgeting and accounting reforms successfully. 0 In preparation of the decentralisation, the regional authorities have successfully implemented in 2001/02 a large training program for the woredas in financial management.They trained 2,600 woreda employees, about 20 from each woreda. 6.7.13. Challenges are: 0 To set up further in-depth training programs in financial management to upgrade the insufficient skills inthis field. 0 To fill the numerous vacancies for higher positions in the woreda administrations. Shortages of budget and accounting skills in the civil service are a severe constraint to effective budget formulation and management. 0 To create at woreda level a better balance between the required number of staff and the related salary cost on the one hand, and capital expenditure on the other. A re-assessment of the staff structure at woreda level might be a good startingpoint. 72 0 To prepare all levels of the regional administration in time for the introduction of the upcoming rolling out of the federal budgeting and accounting reforms. Large training inputs are requiredfor this. 6.8 RISKASSESSMENT AND RECOMMENDATIONS 6.8.1. Decentralisation in developing countries leads almost inevitably to a temporary weakening of financial management. There are no quick and easy solutions to prevent the emerging weaknesses as they are largely related to a learning process. Nevertheless, the GoE should take effective action that would lead to gradual recovery of financial management at sub-regional level in Ethiopia. Practical solutions need to be found for the capacity problems at woreda level related to the poor quality of manpower, for the low educational background, and to a lesser extent for the understaffing. Furthermore, a re-assessment should be made of the number of staff really required at woreda level. Increasing the number of staff seems less urgent than the training of the existing staff. Further Reforms inBudgeting and Accounting 6.8.2. Inthe coming years, the regional authorities inAmhara have to roll out the budgeting and accounting reforms that are piloted in the federal government in the current financial year. The authorities of Amhara have expressed their intention to implement this new budget system in the next fiscal year (2003104) and they are considering implementing the new accounting system inthe same year. 6.8.3. Although the rolling out of these reforms might contribute to the removal of main weaknesses identified in earlier surveysz6,most authorities at woreda level seem not ready to implement them. These reforms require intensive preparation and in-depth training over a longer period of time. The regional authorities should give careful thought to the real risk of a further breakdown of the accounting system. 6.8.4. Temporary postponement or a slower introduction of these reforms i s recommended, especially for the accounting system. It could be considered to introduce the new accounting system with pilots in a selective numberof woredas. Inthis way, lessonscan be leamt without seriously disrupting the existing systems. Woreda authorities would also get some breathing space to digest the consequencesof the latest devolution of funds. Implications for Direct Budget Support 6.8.5. Following the end of the border conflict, some donors have indicated a willingness to consider a shift from project aid to direct budget support. In the case of direct budget support the opportunity of ring-fencing donor funds as a source of fiduciary assurance i s nil. Therefore, the financial accountability environment in Ethiopia should provide sufficient fiduciary assurance to the donors. The current decentralisation process has increased the financial accountability risks. 6.8.6. The GoE should take effective action to maintain its good reputation in financial managementand to convince the donor community that these risks are manageable. 26 See, for instance, the annual Public ExpenditureReviews from the World Bank 73 7. TIGRAY REGION EXECUTIVE SUMMARY 1. Tigray region i s one of the smaller regions of the nine regions of Ethiopia (population 3.8 million, 80,000 km'), bordering onto Eritrea. The border i s still closed after the war of 1998-2000. 85 percent of the population i s rural and engaged in subsistence agriculture. It i s administratively divided into six zones, including Makele, the regional capital, and 47 woredas (districts), of which 35 are rural and 12 urban. Woredas range from 80,000 to 150,000 population. 2. Tigray i s in the midst of a massive devolution process, common to all the regions, which i s intended to shift resource allocation powers to the woredas, considered to be the key level of local government. This assessment is made at a time when woreda staffing, allocation of responsibilities and training in their expanded functions, i s only half completed. This i s evidenced by the lack of any monthly expenditure reports from the woredas, either recurrent or capital expenditure, since the change came into force in July 2002. There i s a general lack of trained manpower. 3. However, there is good understanding and leadership at the regional bureau level, and an administrative culture of compliance with regulations wherever feasible - the control environment i s good. A comprehensive set of reforms in public financial administration i s planned. With technical assistancefrom the EMCP, and the DSA project inparticular, and the additional resources expected from the World Bank Public Sector Capacity BuildingProject, there is every likelihood that Tigray will successfully absorb the planned reforms and that the benefits of woreda devolution will be realised. 4. A fiduciary risk analysis gives an overall `B' rating on a scale of A to C, i.e. some weaknesses in compliance and/or rules/procedures needing to be changed. The main weaknesses are related to the current woreda staff position. When woredas are functioning smoothly, it i s expected that the risk rating would improve toward `A'. Solution of these short-term issues should be a pre-condition of direct budget support by donors, together with evidence of commitment by the regional government to an agreed program of financial management improvement to address the medium and long-term issues, such as the omission of significant revenues and expenditures from budgets and accounts (unreported aid flows, community labour, and regional organisations outside the consolidated regional budget), the lack of a public expenditure planning procedure (which should be based on the development of the federal PEP and subsidy projections), an unstable budget timetable, a single entry accounting system that reports only revenues and expenditures, a lack of operational independenceof external audit, and lack of legislative review of the public accounts. 5. Bureau heads are not directly answerableto the Council. However, they are becoming more accountable to Tabia Development Committees, made up of local community representativesand government officials, which press for delivery of sector programmes and effective use of resources, especially where the local community has also contributed. 6. The issues are well known and are currently being addressed by the EMCP. One feature of the proposed double entry accounting system that gives cause for concern i s the continuation of the existing segmentation of expenditure budgets, bank accounts, cash books, ledgers and reports according to source of funding. This unnecessarily complicates cash management, programme/project management and fiscal management. The federal accounts are moving to the Treasury Single Account System and the regions and woredas should follow suit. Each public body should have a single bank account for capital and recurrent 74 expenditure and, subject to agreement with donors, external loans and assistance. The double entry system manual can be adapted accordingly. 7. Given this financial management improvement (risk reduction) programme, it i s easier for donors to shift from project-tied support to direct budget support. This modality can still be virtually earmarked to target projects, without duplicating or supplementing government procedures. A donor would work with the regional authorities on project development, providing technical assistance as necessary, and disburse (1) against inclusion of the project inthe approved budget and (2) against standard government in-year expenditure and performance reports and audited project statements. 75 7.1 INTRODUCTION Background 7.1.1. Ethiopia's 1995 Constitution mandates a federal structure with considerable autonomy devolved to the regions to plan and manage development programmes. Although the share of the regions in the combined federal-regional revenue i s only about 15-20 percent, they account for nearly 35-40 percent of the total expenditure. When only the anti-poverty intensive sectors such as health, education and agriculture are considered, the regions' share inthe combined expenditure is about 70 percent.27Inthe PRSPcontext, therefore, the regions are the front line in the administration and monitoring of most anti-poverty programmes. In Tigray, as in other regions, the local authorities manage programmes in education (primary and secondary), health, rural roads, water supply, agriculture, irrigation and food security. 7.1.2. An important feature of local government in Ethiopia is the high degree of political consensus with the centre on development objectives and strategy, and the trust placed in local authorities, especially at the regional level, to administer large transfers of funds. Block grants are not earmarked or tied to agreedprojects or purposes. 7.1.3. In March 2002, a further decentralization was federally mandated from regional headquarters to woredas, to take effect from July 2002. Hitherto, woredas paid only salaries: their sectoral programmes were executed by zonal offices, which intermediated between regions and woredas, executing sectoral programmes from zonal allocations of the regional subsidy and consolidating expenditure reports. FromJuly 2002 (the start of EFY 1995), zones are abolished, at least as regards their sectoral offices for education, roads, etc. Their staff are said to have been transferred to woredas, except for a few who still administer functions that cannot, for one reason or another, be transferred to woredas, such as court administration. However, there i s resistance to relocation (some outlying woredas have very poor infrastructure) and some of the more qualified staff have resigned. Numbers are not available.28 7.1.4. Zonal offices may still have a role in collecting and transmitting data from outlying woredas, or chasing up late reports, but this i s still under discussion. They have no role in the downward transmission of funds or in managing their use (with limited and temporary exceptions as mentioned below). They may also have a Treasury role in malung cheque payments on behalf of woredas that don't have localbanking facilities. 7.1.5. The language of the region i s Tigrigna, which limits the pool for recruitment to government posts. Amharic i s widely spoken and understood except perhaps below the woreda level. English is little spoken below the regional bureau level. 7.1.6. Utilities such as water, electricity and telephones are generally satisfact~ry,~~ but banlung facilities are scarce. *'PER ''Nation-wide, (2001) Vol. 11, p.2. around 60 percent of zonal and regional staff have been redeployed to woredas (Ministry of Capacity Development estimate). 'Redeployment', however, does not always mean that the officers have moved, or that they are functioning intheir new duties. "Even after the failure of the rainy season this year (June-August 2002), there is water in rural taps and electricity for 24 hours a day, while telephones work 2/3rds of the time. 76 Objectives and Scope 7.1.7. The terms of reference (TORS)for the local government component were prepared by the Royal Dutch Embassy and the Royal Norwegian Embassy in collaboration with the Government of Ethiopia and the World Bank in the spring of 2002, and adopted by Ireland Aid. Coordinated TORSfor the complete CFAA were developed subsequently by the World Bank and handed to the CFAA team at the commencement of the field work. These latter TORS have been f~llowed,~'with the agreement of Ireland Aid. The objectives of this regional assessment are twofold: Fiduciary Risk Management. To identify the strengths and weaknesses of the region's accountability arrangements and provide reasonable assurance that proper checks and balances exist, as designed and practised, for ensuring the intended use of public funds (the region's own money as well as the money that other institutions provide to the region); Development Strategy. To facilitate a common understanding by the region and development partners of the region's financial management arrangements and provide a basis (short, medium and long term) for designing and implementing capacity building programmes aimed at strengthening financial accountability inthe region. 7.1.8. The scope of the assessment covers the financial planning, budgeting, accounting, reporting and audit of all funds used by the regional and woreda authorities, viz. regional bureaus and woreda offices. In principle, public enterprises were included, but in fact, the regional and woreda authorities own no public enterprises of any significance. ProcessUsed and Sources of Information 7.1.9. The report i s based on discussions with the government officials and others listed at Annex B and analysis of the extensive documentation listed at Annex A. The regional team worked in Addis Ababa 16-18 September 2002, gathering information at the federal level, then in Tigray region from 19-26 Septemberinterviewing officials from the Regional Bureau of Finance and Economic Development (BoFED), Audit Bureau and selected sectoral bureaus, and again in Addis Ababa from 27 September to 3 October 2002. While in Tigray, the team visited Makele Zonal Office and three woredas - Wukro Woreda (Rural and Urban) and Hawsien Rural Woreda, and met officials from their Finance Offices and Administrative Pools. A BoFED representative accompanied the team on its visits to the woredas. 7.2 LEGAL FRAMEWORK AND INSTITUTIONAL ARRANGEMENTS 7.2.1. The Constitution of the Tigray Regional State, revised 6 November 2001, requires the Finance Bureau to prepare the budget for the year and annual accounts of the regional bureaus and the consolidated accounts of the region (including the accounts of zones and woredas), and the Regional Auditor General to audit them, and submit his report to the Regional Council. Proclamation 5111994 of November 2001 sets out the legal framework of financial management in the region inmore detail. This i s a virtual replica of the Federal Proclamation. Itis basically sound, but will requireto beupdatedfor the changes currently beingintroduced. Changes have also been proposed by a project team under the ongoing Civil Service Reform Programme (see below under External Audit). 30 With appropriatechange of wording from `country' to `region'. 77 7.2.2. Tigray has an elected Regional Council (regional counterpart of the Federal Council of People's Representatives). All members belong to the TPLF party: there i s no official opposition. Council members appoint an Executive Committee (counterpart of the Council of Ministers), chaired by a President (counterpart of the Prime Minister). Itmeets weekly. 7.2.3. The secretariat of the Executive Committee consists of 12 sector bureaus (finance, capacity building, agriculture, education, health, water, informatiodculture, mass organisations/sport, justice, women's affairs, etc.) The heads of these bureaus sit on the Executive Committee. Bureaus have sub-bureaus and subordinate offices (such as police, prisons and militia under the Bureau of Justice). Intotal there are 46 `budgetary institution^'^' inthe regional administration. Accountability of BureauHeadsis to the ExecutiveCommittee and the President.32In the absence of any machinery for legislative review in Tigray (such as a Public Accounts Committee), Bureau Heads are not directly answerable to the Council. However, they are becoming more accountable to Tabia Development Committees, made up of local community representatives and govemment officials, which press for delivery of sector programs and effective use of resources, especially where the local community has also contributed. 7.2.4. The pre-eminent bureau is the Regional Bureau of Finance and Development (BoFED), established in December 2001 by merger of the former Bureau of Finance and the Bureau of Economic Development and Cooperation. BoFED receives and distributes the subsidy from the Federal Treasury, reviews and consolidates annual budgets for all budgetary institutions and obtains their approval by the Regional Council, keeps records of adjustments to budgets during the year, keeps records of its own transactions, verifies and enters monthly reports of transactions by other bureaus, zones and woredas, and submits reports to the Executive Council and (annually) to MoFED. It has a general responsibility for the financial system at all levels of the region. 7.2.5. Tigray comprises six zones (Westem, Central, N~rth-West,~~ Eastern, Southern and Makele, the regional capital) (see below). 7.2.6. Zones are further divided into woredas, run by elected Woreda Councils. The functions of the Woreda Council are: to approve annual woreda development plans and budgets and monitor their implementation; set the rates for certain taxes and collect local taxes and levies; administer all fiscal resources; construct and maintain rural tracks, water points and administrative infrastructure; administer primary schools and health institutions; and manage agricultural development activities and protect natural resources.34 7.2.7. A Woreda Council appoints a Woreda Executive Committee. Since July 2002, municipalities have been designated as urban woredas. At present, the region has 35 rural ~ o r e d a s11urban woredas, and Makele zonal body, which counts now as an urban woreda, , ~ ~ total 47 woredas. The administrative staffs of urban woredas are combined with the administrative staff of the surrounding rural woredas, i.e. there are 35 woreda administrations for 47 budgets. Each woreda administration has a Rural Chief Administrator who reports to 31A `budgetary institution' is an administrativeunit or project that receives abudget from a public body. A `public body' i s an institution that has a legal mandate, its own budget, submits its accounts to BoFED and is on an official list of public bodies. These definitions are adaptedfrom the DSA project definitions inthe federal level accountingmanual(FGE Accounting System, VOl. I). 32The Education Bureau Head and Health Bureau Head are accountable via the Capacity Building Bureau Head, and the Agriculture BureauHeadand others are accountablevia the RuralDevelopmentBureauHead. 33This zone has recently beencarvedout. Formerly there were five zones. 34World Bank (2001a) Woreda Studies, para.7.12. 35The budget for the current year (EFY 1995, ending 7 July 2003) shows only 34 rural woredas. The demarcationof woreda boundaries appears to be still changing. the rural Woreda Executive Committee and Council and an Urban Chief Administrator who reports to the urban Woreda ExecutiveCommittee and Council. 7.2.8. The Woreda Executive Committee appoints Woreda Office heads. Wukro, for instance, has 20 Sectoral Offices, while Hawzien has only 15. After much debate, it was decided, and approved by the Regional Council, that sectoral offices in each woreda administration will share the services of three administrative pools, each having a structure of 11 officers, such as Finance and Administration Officer, Accounts and Budget Officer, Cashier, Procurement Officer, Property Officer, Archivist, etc. Each administrative pool should be located in the same compound as the offices it serves. The pools serve the sectoral offices as follows: RuralDevelopment Pool Health Office Rural Development Office Education Office Agriculture and Natural Resources Office Capacity Building Office Cooperatives Office RuralRoads Office General Administration Pool Rural Water Office Women's Affairs Office FoodSecurity Office Sports and Youth Office Disaster Prevention and Preparedness Office AIDS Office Social Affairs Office Culture and Information Office 7.2.9. These Pools, having a total recommended structure of 33 officers (3*11 each) are in addition to the Finance and Economic Development Office in each Woreda Administration, for which a staff structure of 39 officers i s re~ommended.~~For an average woreda having 350-400 officers and 600-700 teachers and health workers, this organization may prove administratively top heavy for the volume of The numbers are a compromise between the demands of sector offices for dedicated administrative staff (as at zonal, regional and federal levels), and the need for low-cost administration. Nevertheless, preliminary data from the Ministry of Capacity Building indicate that, if all posts are eventually filled, total number of staff would increase by around 45%.38A high proportion of the available funds go into administration, even though only half these posts have been filled so far. Priority should be given to training the existing administrative sta8 rather than increasing their numbers. The staff structure should be reviewed in the light of the first year's experience, actual work volumes and an appropriate ratio of technical front-line staff to support staff. A consultancy study i s planned under the proposed Capacity BuildingProject. 7.2.10. Woreda areas are in turn divided into smaller units - kebelesin urban areas and tabias (currently 559) and farmers' associations in rural areas. A tabia i s a cluster of three to five villages, population ranging from 1,500 to 5,000. Kebeles and farmers' associations are also elected bodies, but their heads are not full-time paid civil servants, and they do not have woreda budget allocations. 36 These numbers were provided as guidelines by the Federal Ministry of Capacity Building. It i s up to Regional Councils to determineand authorizetheir respective establishments. Only about half the recommendedstructure of finance posts had been filled at September 2002, viz. about 24 out of 33 in the Wukro pools and 14 out of 39 in the Wukro OFED. InHawzien OFED, 10 posts had been filled out of 23. To assist the decentralization process, the Ministry of Capacity Building is discussing a Federally-fundedincentivespackagefor approvalby regional Councils. It shouldbenotedthat entry qualifications may be higher than necessary andshouldbereviewed. ''WukroWoredaAdministration processes about 50 paymentvouchers a month at present (September 2002). 38 InAmhara, the long term need was assessedin July 2002 at 33,000, against 23,000 then available.Interview with Deputy Director, District-Level DecentralizationProgramme, Ministry of Capacity Building. Data for Tigray, including abreakdown by skill, were expectedto be availableend October 2002. 79 7.2.11. Woreda Offices have a triple accountability - vertically to the Woreda Council, a functional accountability to their respective Regional Bureaus, and (horizontally) to the beneficiaries and other stakeholders in sectoral development programmes, such as Tabia Development Committees and Farmers' Associations. 7.2.12. As in other regions, zones have been administrative bridges between regions and woredas, in effect deconcentrated offices of regional bureaus. They are not elected bodies. With the latest phaseof decentralization, zonal offices are being phased out. From July 2002, woredas are mandated to receive allocations of the annual federal grant to the region in the form of block grants and to submit financial and performance reports directly to the regional bureaus. Block grants are legally untied to particular purposes, but tied implicitly to the implementation of national sectoral development programs formulated jointly by federal and regional ministries, bureaus and (in future) woredas. This mandate implies a major shift of responsibilities and capacity needs to woredas, and also to the regional administration (which faces a substantial increaseinthe number of separate bodies reporting to it and to which it has to give guidance). 7.2.13. As a transitional measure while woreda staff and capacity build up, much of the responsibility for capital construction programs has been retained by regional bureaus. Woredas have initially been assigned responsibility for primary school construction, but in other programs, regional bureaus have retained responsibility for meeting the national standards of access to facilities, e.g. one high school and one health centre in each woreda. In future, the target is to retain only 15-20% of the regional envelope for the regional bureaus and transfer the balance to woredas. 7.2.14. It may be necessary to review the feasibility of rural woredas making cheque payments for capital construction programs where the nearest bank i s very distant. For some remote woredas without banking facilities, it may be necessary for zonal offices to provide a Treasury service, i.e. making cheque payments on behalf of woredas. This would not affect the authority and accountability of woredas for their own programs. 7.2.15. In principle, the Treasury subsidy can be allocated to recurrent and capital expenditure, and to programs and projects, in accordance with locally expressed needs and priorities. So far, however, funds have been so constrained that some woredas have very little for capital construction. 7.2.16. The closure of zonal offices has severely impacted donor-assisted programs formerly managed at the zonal level, such as the Tigray multisectoral development programme supported by Ireland Aid. This consists of 41 projects in 17 woredas in Eastern and Southem Zones. Pending the set-up of adequate arrangementsfor management and accountability at the woreda level, no disbursements have yet been made in EFY 1995. The Executive Committee has agreedthat Southern Zone continue to manage the Ireland Aid program until woreda staff are sufficient, while in Eastern Zone, where woredas are better staffed, the zonal officials retainonly oversight responsibilities. 7.2.17. There are about 25,000 officers on the Tigray State payroll. This includes 11,000 teachers and health workers. It was not possible to obtain abreakdownby level or sector. 7.3 PLANNINGAND BUDGETING 7.3.1. Education, health and agriculture bureaus have rolling three-year sector development programs and one-year action plans, which are based on (and have contributed to) national sectoral development programs. For instance, the Tigray Health Bureau has used management-by-objectives technique to develop its own medium-term plan, with goals, 80 objectives, activities, performance milestones and indicators, budgets and responsible persons.39Action plans for each project are submitted to BoFED Planning Department for approval. Other sectors do not have medium-term plans covering capital and recurrent expenditures and outputs. 7.3.2. Budgeting for the new structure started in late 2001 for the current year (EFY 1995, i.e. 8 July 2002 - 7 July 2003). The process suffered from the late notification of the Federal subsidy, which had been targeted for January 2002. This was not decided till June 2002, only one month before the start of the fiscal year. For EFY 1994, it was similarly notified late, in June 2001. The regional budget for EFY 1995 was approved by the Council inJuly 2002. The budget timetable needs to be planned so that the Council receives the recommended budget in June, and thus has time to debate and approve it beforethe fiscal year starts on 8 July. 7.3.3. At the woreda level, all the woreda recurrent expenditure budgets were also approved inJuly 2002, but the status of capital budgets varies. Hawzienhas an approved capital budget, for instance, but Wukro (rural and urban) has not prepared a capital budget for EFY 1995 except for a program funded by IrelandAid, its only source of capital funds. 7.3.4. The BoFED started in February 2002 by requiring all regional bureaus and woredas to prepare their budgets for EFY 1995 basedon needs, without any ceiling. Woreda staff were augmented, mainly from zonal offices, and given training by the DSA project and assistedby BoFED staff. BoFED then assumed a 10 percent increase in overall resources and cut initial requests down to this total, e.g. by eliminating unrealistic staff increases, and requiring construction programs to be funded more by the respective communities. 7.3.5. The merger of the bureaus for finance and planning is intended to facilitate the integration of recurrent and capital budgets. However, the bureaus remain as separate departments of the new BoFED, in different locations, one examining recurrent budgets and the other reviewing capital budgets and action plans. BoFED says that there i s now more emphasis on the adequacy of the recurrent operating cost budget and on efficiency, and that it i s easier to prevent double funding. It i s too early to judge the impact, but it i s unlikely that the benefits of integrated resource planning will be apparent until BOFED prepares a medium-term public expenditure program. This will depend on a PEP at the Federal level showing the projected subsidy to Tigray each year, and more dependable projections of donor flows, such as firm commitments for the next year and indicative figures for the following years, notified in good time. 7.3.6. The subsidy to rural woredas was allocated by BoFED and approved by the Regional Council according to priorities and a formula similar to the federal level. Firstly total resources were estimated - federal subsidy, regional and woreda revenues, external loans to the region, and grant assistanceto the region.40External flows were based on the estimated disbursements in the forthcoming year from known donor commitments, whether these were disbursable to BoFED, sector bureaus or direct to woredas or projects. Secondly regional core recurrent and capital expenditures, remaining zonal expenditures and a contingency reserve were deducted from the total. The balance represented the resources available for the woredas. Thirdly this was divided according to a formula basedon each woreda's share of the region's population, its `development gap' and revenue collection effort. In other words, a 39Tigray Health Bureau(2002). Article 51 of the Federal Constitution allows regions to borrow from `intemal sources', subject to term and conditions set by law. A proclamationof 1992 allows borrowing for projects that have a feasibility study showing the ability to repay the debt and subject to approvalby the FederalGovemment.No such borrowing hasbeendone. The PER (2001) vol. 11, p. 37 advises caution. In fact, Tigray BoFED takes short-termloans from CBE with Federalapprovalto meet fluctuations incash flows. These arenot budgeted and are repaid during the year. In addition, capital expenditures from the federal subsidy are financed on an overdraft system, but this appearsto be federalborrowingratherthan regionalborrowing. 81 woreda would get a higher subsidy if it had higher population or greater developmental needs, according to woreda survey data. It would also get a higher share if it raised relatively more revenue per head of population. Fourthly each woreda's subsidy was reduced by the amount of any external aid and assistance it was expected to receive and that had already been included in the total of regional resources.This was only partial, as little data was available. Fifthly the remaining balance was the proposed Treasury subsidy. Finally the proposed subsidy to each woreda, plus the woreda's own revenue, was checked to see that it would be sufficient at least to meet recurrent expenditures; in five or six woredas it was necessary to supplement the subsidy from the contingency reserve. The subsidy and any supplement are beingtransferred inequal monthlyinstalments to woreda bank accounts.41 7.3.7. As an example, the recurrent EFY 1995 budgets for Wukro amounted to Birr 8,570,000, and its estimated revenue was Birr 2,200,000, leaving a gap of Birr 6,370,000. This was far more than its formula share of the regional subsidy. The deficit was therefore made up from the reserve, and Wukro has received Birr 850,000 for the months of July and August 2002. The only capital budget was for Birr 1,257,000, committed by Ireland Aid, and approved by the Woreda Council. The 'freedom' to use the subsidy for capital or recurrent expenditures as they prefer - say for more classrooms or more teachers - i s not yet a reality for some woredas becauseof limited funding and high salary overheads. It is expected that the formula will be adjusted infuture years. 7.3.8. The approved Tigray Consolidated Regional Government Budget for EFT 1995 follows: Tigray ConsolidatedRegionalGovernment Budgetfor EFY 1995 (in millions of birr) EXPENDITURE Salaries 0p.Exps. Total Recurrentexpenditureby regional bureaus Admin. 31.5 14.2 45.7 Econ. services 17.3 9.8 27.1 SOC.services 29.2 27.1 56.3 Reserve 5.0 5.0 Total 83.0 51.1 134.1 Capital expenditureby regionalbureaus 193.9 Woredas -rural 220.0 Woredas -urban 47.0 TOTAL EXPENDITURE 595.0 SOURCESOF FUNDS Federalsubsidy (about 8.2% of national envelope) 377.7 External loans 59.9 External grants 47.5 Regionalrevenues(including woredarevenues) 90.0 Additional revenue to come from sector bureau revolving 19.9 funds, etc. TOTAL SOURCES 595.0 '*Itis recognizedthat needs are not equal each month, whether for capital or recurrent expenditure. Equal monthly allocations are a temporary measure until woredas are in a position to provide monthly cash flow projections. When they do, BoFED says they will get their allocations accordingly. The region gets its federal subsidy in equal monthly instalments.If necessary, BoFED would request adjustmentsby MoFEDso as to meettotal woreda needs eachmonth. a2 7.3.9. The `offsetting' of external resources given directly to woredas i s intended to mirror the procedure at the federal level and ensure that woredas get an equitable share of total resources according to the subsidy formula.42 This i s a revenue issue and an equity issue rather than a fiduciary risk issue. In EFY 1995, IDA loans, assistance from Ireland Aid multisectoral program, UNICEF, UNFPA and technical assistance were 100 percent offset. IrelandAid food security, and aid to NGOs such as REST were excluded. 7.3.10. The actual impact has not been assessed as this i s only the first year of application at this level and the formula has not been fully applied. Nevertheless, it is clear that offset is a disincentive to regions and woredas to try to increase aid flows and the overall resource envelope,43and also a disincentive to reveal their true extent. A woreda increases its share of the regional subsidy by concealing its projected external inflows (more than other woredas). It can easily justify this by the argument that these flows are very ~ncertain.4~ offset is If continued, it would be more equitable to baseit on actual flows inthe previous year.45 7.3.1 1. Donors look for assurance of `additionality', that their disbursements to favoured projects will not reduce Treasury flows, so they have a similar incentive to non- tran~parency.~~Considerable external resources are disbursed either to sector ministries/bureaus/offices (so-called channel 2) or direct to project executing agencies (channel 3)47 without first passing through finance ministries/bureaus/offices,48 so their inclusion in budgets and accounts depends on their being reported by the recipients. The Head, Federal Budget Consolidation, estimated that only 70% of all aid i s included in the Federal budget. 7.3.12. This is highly unsatisfactory as it undermines the objectives of the PRSP and prevents integrated resource management. It would be preferable for regional donors to disburse to the regional finance bureau (channel l), notionally earmarkmg disbursements to the targeted projects if their constituencies require this comfort. A donor's fiduciary assurancewould lie in satisfactory financial arrangements for the onward transmission and accounting (trachng) of these funds, and from audited reports on the target projects showing expenditure and the corresponding achievement^.^' This i s further examined below. 7.3.13. Regional budgets and accounts do not include a number of extra budgetary funds, either in the Regional Govemment accounts, or the consolidated regional accounts. Some of these are very significant, such as Tigray Rural Roads Authority revenues and expenditures and food aid, e.g. an EC study estimated that the value of unbudgeted food aid to Tigray over the five years to 2000 was equal to 52% of the budgeted expenditures5' It is intended that food aid and other extra budgetary resources will be made more transparent in the Federal `*Ministry of Capacity Building had proposed for EFY 1995 that there be no offset of extemal flows in determining woreda subsidies. 43The PER (2001), Vol. 11, p.46, points out that regionsshould not be penalizedfor expandingthe total resource envelope.They are encouragedto increaserevenuecollections, which arenot offset. A MEDaC study over FYs 1998-2000 (country-wide) showed that only 55% of budgetedextemal loans and 67% of budgeted assistancewas actually disbursed.There is no mechanismfor adjusting subsidieswhere foreign aid doesnot materialize. Some ad hoc adjustmentshave been made inthe following year. Regions much prefer Treasury flows to aid flows, as the former are more reliable. Reducingoffset to apercentageof commitmentsreduces the disincentiveto disclosethem, but does not create apositive incentive to transparency. 4sThis was recommendedby the World Bank (2001b),PER Vol. 11, para. 7.10 46At least one donor has apolicy of not disclosing its aid so as to ensure additionality. 47Offshoredisbursementsdirect to contractors, suppliers and consultants (aid inkind) also count as Channel3. 48WorldBank (2001b) PER Vol. 11, para. 1.14says that a significant amount of aid is not captured.No data are available. 49Expenditurewould of course be greater thanthe amount of donor disbursementswhere projects receive from multiple sources, such as aid against which the Govemmentprovides matching funds. Aid in kind shouldbe brought into budgets and accounts at its oppomity cost to the recipients.The omission of aid from govemment accounts may result in its omission also frombalance of payments and national income accounts. See DSA project outputs such as `Accounting for Donor Funds and External Assistance', December 29, 1998. "EuropeanCommission(2001b). a3 budget and accounts (EMCP budget reform ~omponent).~' would be preferable for all aid to It be budgeted and accountedat the level at which it i s disbursed (region or woreda) rather than the level at which it i s negotiated (normally the federal level). This would match resource inflows and beneficiary areas. 7.3.14. Another omission from the budget and accounts i s the contribution o f local unslulled labour to community-supported projects. There i s a strong tradition of direct participation of communities in almost all sectors in the identification of problems, planning o f interventions, and contribution of money and labour to the construction of facilities in agriculture, water and soil conservation, health centres, schools, feeder roads, etc. dating from the suspension of government services during the war of 1974. A participant can provide up to 20 days' free labour. For a typical primary school this could represent 10-20 percent o f the construction cost of Birr 400,000. In total, it i s estimated that this form of grant could be worth up to Birr 50 million a year to the region. Itis intended to bringthis iteminto woreda accounts (as grant revenue and as part of the cost of the appropriate projects), but not into their budgets. It i s not clear why project budgets cannot include this cost element. It i s recommended that woredas include the value of free labour in both the budgets and accounts for the relevant projects. This would provide better information for cost comparisons and efficiency. 7.4 PAYMENTSAND EXPENDITUREMANAGEMENT 7.4.1. At the regional level, BoFED Disbursement and Accounts Department makes payments for its own budget, plus monthly transfers to 35 sector bureaus and other budgetary institutions, and subsidy to 34 woredas. All payments have to be pre-authorized by the head of the sector bureau or other budgetary institution. For goods and services, a payment of up to Birr 500,000 can be approved by the head of the budgetary institution. Above that limit, BOFED approval i s also required. 7.4.2. Budget revisions can be authorized during the year only by BoFED; there i s no delegation to sector bureaus/offices. Savings from food security, training and fixed asset budgets cannot be transferred and used against other line items.52Budget transfers between sectors, or to fund an unbudgeted project, require also Executive Committee approval. There are many supplementary requests during the year. Those that need Council approval are included in Supplementary Demands via the Executive Committee; there were three Demands inEFY 1994. 7.4.3. Expenditure i s controlled by BoFED by a system of ledger cards showing, for each budgetary institution and line item, the approved budget, revised budget, cumulative transfers and expenditures, and unspent balances. There i s no control of commitments (purchase orders, contracts), so it i s possible for payments to be made from an unspent balance without leaving enough for outstanding commitments. However, over-expenditures are not common. The new system proposedby the DSA project includes commitment control. 7.4.4. The only centralized function is the payroll. BoFED receives payroll change notifications from all sector bureaus and budgetary institutions and prepares the monthly payroll (computerized). All salaries are paid in cash and signed for on the payroll. The procedure is tightly controlled. " At the Federallevel, the objectiveis 100%comprehensivenessof thePublicExpenditureProgrammeandannual budget. However, some donors cannot give reliable commitment data disaggregated by region and project, even for the year ahead. Actual disbursementsdepend on manyuncontrollable variables.InE M 1994, an annex to the consolidatedfederal budget valued expectedfood aid, but this was not repeatedin EFY 1995. '*Thisdiffersfrom the Federalrules. 84 7.4.5. At the woreda level, no changes have yet been made in the system of malung payments. Woredas make disbursements only for their recurrent expenditure, i.e. salaries and non-salary operating expenses. Capital expenditures are all paid by cheque by BOFED and the Finance Departments of regional sector bureaus. It i s expected that devolution of this function to woredas will be gradual. For instance, from July 2002 (EFY 1995) woredas are expected to have the capacity to make payments for primary school construction, so funds for this program will be included in the block grants to woredas. In fact, capacity is still very limitedbecauseof staffing problems. 7.4.6. Transfers to budgetary institutions and woredas are not expenditures. At the end of the year, the cumulative transfers are compared with the cumulative expenditures of each recipient, and unspent balances are returned or deducted from the next transfer. This i s checked by Inspection Department. 7.4.7. Payments can be made in July (the grace period) against the previous year's budget for goods and services received duringthe previous year. This results in the misreporting of expenditures and cash balances. The cash basis of accounting requires that all receipts or payments should be entered on the day they are received or paid and be charged to that financial year. This i s a temporary problem that will be met by the planned double entry system. 7.4.8. All woredas have access to abranchof the CommercialBank of Ethiopia (even if the nearest branch i s outside the woreda border) and have opened bank accounts under instructions from BoFED. Wukro Woreda, for instance, has a branch of CBE inWukro town. Hawsien Woreda area contains no bank: on the monthly pay day the Cashier draws cash from the CBE branch in Adigrat, 40 km away, pays sectoral office heads for them to pay to their staff, and keeps a small balance for operating expenses in the safe. Unclaimed salaries are returned to the safe. 7.4.9. There are separate bank accounts for Treasury funds for recurrent expenditure, Treasury funds for capital expenditure, and for each donor/project. The total number of bank accounts i s not known, but runs into hundreds. Integrated cash management i s not possible. The monthly labour of reconciling bank statements with the respective cash books i s multiplied.The advantagesof the Single Treasury Account systemhave not been reali~ed.'~ It i s recommended that a study of bank accounts be made and that bank accounts closed down where they are no longer in use, and merged wherever there are no legal reasons not to do so. Donors should support this rationalization of the treasury function. 7.5 ACCOUNTING AND FINANCIAL REPORTING 7.5.1. Tigray region i s still using the traditional single entry system. BoFED, each regional bureau, zonal department and woreda finance office, and each woreda administrative pool, keeps a cash book and a general ledgers4 for each source of finance and issues the reports required by each source (Treasury funds, and each donor). There i s no integrated expenditure reporting. There is a proliferation of bank accounts, budget ledgers (data on the budget for each line item) and general ledgers (data on revenues and expenditures). This i s mainly due to the donor paradigm of relying on parallel accounting and reporting systems. The result i s that expenditure reports on programs and projects arefragmented they report only expenditure from the sourceof funds to which the report i s sent.5s j3This has been adopted at the Federal level, but it i s unclear whether it is intendedto apply at the regional and woreda level. ''The(2001b) j4 cashbook is often confusingly called a general ledger, and the general ledger is called a subsidiary ledger. EC gives examples of this in Annex D. For instance, actual expenditure on the Arba Minch Water Technology Institute inEFY 2001was Birr 14.2 million, but the Ministry of Education reportedonly Birr 4.8 million. 85 7.5.2. Payments that cannot immediately be counted as expenditure for lack of documentation, such as travel advances, salary advances, and payments for purchases (where the procurement process and documentation may take days or weeks), are included in the reported cash balance as `suspense' items. The chart of accounts does not include advances, so suspense vouchers are treated as equivalent to cash. The cashier has to keep a `Suspense Cash Book'. An inspector or auditor doing a cash verification will include suspense vouchers as part of the cash balance. This i s accepted practice. However, there i s a tendency for suspense items to remain in suspense and not be cleared to expenditure, either immediately or within the one-month grace period for closure. Expenditure i s under-reported and cash balances over-reported. This weakness will be removed by the double entry accounting system, which includes proper accounting for advances. 7.5.3. The finance offices of regional bureaus and woredas keep track of their expenditures by means of manually written budget cards. In the woredas, administrative pools similarly should be keeping track of the expenditure of the sectoral offices they serve and reporting expenditure monthly to the Woreda Finance Office. 7.5.4. Reports on revenue and expenditure are prepared by the regional bureaus and woredas monthly and submitted to BoFED, normally within 15 days. At present, the woredas and zones are not functioning properly, and the last month to be reported to BoFED i s May 2002. None of the woredas had reported on June 2002 by late September 2002. It i s expected that this i s only a temporary delay, which will be corrected as woreda staff get clarification of their duties and BoFED/DSAtraining. 7.5.5. There i s no monthly financial reporting by BoFED to MoFED, despite a federal proclamation requiring it. This i s an administrative and political issue, reflecting federalhegional relationships. 7.5.6. On the sectoral development programs, reports on performance (outputs and physical progress) are submitted quarterly by sectoral offices to sectoral bureaus and from sectoral bureaus to sectoral ministries. On other programs, there is no systematic reporting to the federal level. There i s no integration of expenditure and performance into value-for-money reports. 7.5.7. Annual financial statements are due by the end of the `grace period' (one month for closure at the end of the financial year). At September 2002, the statements for EFY 1993 (ending 6 July 2001) had been issued to MoFED. The statements for EFY 1994 were still being prepared. These statements show only the budgeted and actual revenue and expenditure for the year, no cashbalances or other assets or liabilities. The proposed double entry system, for implementation in Tigray in EFY 1996 or 1997 (see comments below), includes cash balances and other financial assets and short-term liabilities. 7.5.8. A GTZ consultant has recently assessed the Tigray Health Bureauaccounting system and maderecommendations on strengthening it. 7.6 INTERNALCONTROLSAND RECORDSMANAGEMENT,INCLUDINGIT 7.6.1. The financial Proclamation, regulations and directives for the existing system are well understood, and appear to be closely observed. The authority for payments up to different threshold limits i s clear. Cheques are signed by two out of three designated officers (Cashier, the Head of Disbursement and Accounts Department, and Head of Bureau). In some cases the cash book had not been entered for some weeks, but these exceptions were due to temporary absence of staff. A small sample of documentation appeared to meet records management 86 standards, e.g. cash book pages were pre-numbered, every transaction was referenced to supporting documentation, and documents were filed in order and accessible. 7.6.2. At the regional level, following the new policy discontinuing `pre-audit', BoFED internal auditors have been transferred into accounts work and no longer sign off on payment vouchers. The discontinuance of pre-audit does not pose a risk because of the division of labour in the preparation, certification and approval of payment vouchers. 7.6.3. Some regional bureaus, such as agriculture, still have their internal audit units undertake pre-audit. They also verify cashbalances, especially at the end of the financial year. Internal audit reports are sent to management and the Bureau Head, who i s accountable to the ExecutiveCommittee. The only internal audit in the woredas so far i s pre-audit. 7.6.4. Apart from internal audit, both MoFED and BoFED have an `inspection' function. They are more independent than internal audit, but less independent than external audit (see below) as they report internally within the executive. The MoFED Inspection Department does a compliance audit on regional accounts after closure, but becauseof staff shortage and language problems, coverageof regional bureaus, departments and offices i s limited.56 7.6.5. At the regional level, BoFED has an Inspection and Procurement Department with 8 staff. They check financial statements of bureaus, departments, and offices after closure (100% coverageto ensurethat unspent balances are returned at the end of the year), and audit transactions in selected months for their compliance with regulations, particularly procurement transactions. Reports are sent to the audited and to the Head, BoFED. There i s some coordination in work planning with the Regional Auditor General (see below), but no formal exchange of reports. 7.6.6. As mentioned above, payrolls are prepared by BoFED on a computerized system. Payroll changes are authorized by the Personnel Division and the bureau head. Sections of the payroll are distributed to the respective bureaus with cheques for them to cash and make payments. All staff sign for pay received and any unpaid amounts are returned to BoFED. `Ghost' workers are not common. 7.6.7. Budgetary institutions have asset registers showing, for each kind of asset, the number held, their location, persons responsible and condition, but they are not systematically maintained. Inventory such as office machines, furniture and vehicles are controlled by a system of getting a signature from the officer to whom the inventory i s issued. It i s recommended, pending the inclusion of physical assets in the accounting system (the final stage of the proposed double entry system), that heads of budgetary institutions conduct a census of inventory undertheir control, and open and maintain an asset register, which should be independently verified at least once a year, in accordancewith the law. BoFED shouldlead this exercise and provide necessaryformats and training. 7.6.8. Apart from payroll preparation, computers are used only for word processing. Little training has beenreceived so far in computerised data processing. 56The Head of MoFED Inspection Department gave his view that all his staff would be re-assigned to intemal audit units in ministrieshureaus within the next 3-4 years. This should be supported, so as to build up intemal audit capacity within line agencies, andto reduce the overlap of oversight bodies. a7 7.7. EXTERNAL AUDIT 7.7.1. The Federal Auditor General has the right to audit all regional expenditures that are funded by the federal subsidy. In fact, due to shortage of staff, he audits only a small number of regional capital projects. There is no coordination between his office and the office of the RegionalAuditor General(RAG). 7.7.2. The RAG, also called Bureau of Audit, is mandatedby the Regional Constitution and by Proclamation 51/1994 to audit the accounts of all government institutions using government funds, i.e. regional bureaus, zonal departments and woreda offices. He does not audit tabias, as they are not government-funded, but may on occasion be required by a Court order to undertake investigations at this level. H e has adequate powers of access to books, records and persons, but insufficient staff to cover all audited in a year. In EFY 1993, he audited 36 out of a total of more than 400 units. These 36 were the larger ones, so he covered about 50% of total expenditure. This implies, however, that some smaller units are rarely subject to audit. 7.7.3. The Proclamationon audit makes no mention of control (systems) audit, performance audit, special investigations or audits of donor-assisted projects. At present, the RAG undertakes only regular financial audits (conformity of accounts with the transactions and evidence and conformity of revenue and expenditure with budgets), and i s starting to undertake performance audits.57The RAG'Scoverage includes donor-assisted projects, but donors require parallel audits by private firms. The RAG i s trying to apply INTOSAI standards. An opinion i s given on all financial audits as to whether they correctly reflect the revenues and expenditures for the year. There i s no external peer review, only intemal quality assurance arrangements. It i s planned to organize peer review by other RAGS. 7.7.4. Reports on each audited organization are sent promptly to the audited, the relevant sector bureau and Finance Bureau. An annual report, containing the findings of all the audits duringthe year, and results of follow up on recommendations, should be sent to the Council (the Speaker) by 15 March of the following year. In fact, the report for EFY 199358was issued in December 2001, i.e. within six months of the year end. This i s a good achievement. According to RAG, irregularities are due to lack of training, compounded by turnover of trained staff, while deliberate dishonesty i s rare. 7.7.5. The RAG has 62 staff, including 38 auditors, out of an approved cadre of 85. In the last year, 8 auditors have been lost to the private sector and only 5 replaced. The vacancies cannot be filled for lack of candidates with the minimum qualifications, viz. degree or diploma, speakers of Tigrigna, and at least 10 years' experience in audit or accounts work. Public sector salaries do not attract or retain such staff.59 7.7.6. The RAG has no financial or personnel management autonomy, and i s treated by BoFED and the Civil Service Bureau the same as other bureaus. The Constitution provides that the annual budget of his office should be submittedto the Regional Council and approved by it. This has been interpreted by Finance Bureau as requiringthat it be declared (approved) by the Regional Council only after its own scrutiny and approval. A study by the external audit project of EMCP has recommended strengthening the independence of RAGSby applying the Constitutional provision. However, few members of the Regional Council have ''A Performance Audit Manualwas issuedand revisedin 1996, and Performance Audit Standards in June 2002 (CSR project). 12 auditors have received two weeks' training in performanceaudit and will be grouped together in a new depanment of his office. '*In Tigrigna, not seen. 59 A newly graduated accountant would get 760 birdmonth about half to two thirds what he could get in the private sector - (1000-1500/month).With experience or professional qualifications the disparity widens. A professionally qualified accountant starts at about 3,00O/month inthe private sector, so hasno interestinapublic sectorjob. sufficient awareness of the role of audit or, for that matter, their own role in parliamentary control of finance. There i s no Public Accounts Committee or equivalent and it would be difficult to establish one as members attend only two or three times a year. It i s recommended that the RAG and Finance Bureau continue to negotiate the overall budget envelope of the Audit Office as at present,butthat the RAGbe empowered to use the funds made available as a block grant so as to maximize the effectiveness of the audit function. 7.7.7. The RAG i s appointed by the Regional Council on the recommendation of the President. There are no qualification requirements, nor provisions on tenure, remuneration or removal. The external audit project of EMCP recommended that the Constitution be amended to include a full description of the method of appointment, remuneration and removal of the RAG, and a clear statement on the independence of audit from the executive. Appointment should be for a period of seven years. This should not coincide with the election of a new Council (to avoid the RAGbeing seen as supporting a particular regime). The RAG should be removable only by a resolution of the Council on one of the following grounds: permanent incapacitation; inefficiency; neglect of duty; malfeasance; or conduct involving moral turpitude. We support these recommendations, which are in line with the INTOSAI Lima Declaration. 7.7.8. The RAG's office is not itself audited. The Proclamationrequires that an independent qualified auditor be appointed by the President to audit the RAG's Office but it i s not done. It i s important that the RAG's office should be above suspicion and quite transparent, and we recommend that the legal requirement be met. 7.8 STRENGTHSAND WEAKNESSES 7.8.1. The strengths of the regional financial management practices are as follows: 0 Good understanding of the present system, and highlevel of compliance; 0 Clear responsibility for financial managementinthe Finance Bureaus and Offices; 0 Continuing program of budget and accounting reform, systems design, computerization and training. 7.8.2. The weaknesses are as follows: Lack of clarity on the respective roles and staff structures of regional, zonal and woreda administrations, particularly the administrative pools in the woredas, and the (remaining) role of zonal administrations; Reluctance of some staff to relocate to the woredas, and likely loss of the more who can getjobs elsewhere; Lack of banking facilities in some woredas; No legislative review of the public accounts by Regional or Woreda Councils; no accountability of agency headsto Councils; Top heavinessof woreda administrations; The formula for allocation of regional subsidy to woredas (in its first year) did not, in some cases, provide sufficient funds to cover, with woreda revenues, their recurrent expenditures; The set-off of external flows to woredas i s resisted by both woredas and (some) donors. Woredas lose subsidy by disclosure of such flows and donors lose additionality. Also, set- off i s a disincentive to maximizingthe resource envelope; Significant extra-budgetary funds such as food aid and other aid in kind are omitted from both budgets and accounts; Most records and reports are hand-written; 89 Reports on programs and projects are fragmented according to source of funds; Insufficientregional audit staff (numbers and skills) to cover all audited regularly; 0 Lack of operational independence of Regional Auditor General with respect to budget transfers and personnel changes. 7.9 RISKS 7.9.1. A number of donors are considering moving from project support, which has a number of disadvantages, especially in the context of decentralization, to direct budget support (sector-wide/program budget support and general budget support).6oIn fact, Ethiopia i s already in receipt of general budget support through the IMFNorld Bank debt relief under the HIPC initiative, the World Bank structural adjustment credit (a single tranche credit to compensate for declining terms of trade), and the World Bank Poverty Reduction Support Credit under the PRSP. Programme budget support and general budget support cannot be tracked: the funds enter a pool of public funds, and individual uses of funds cannot be identified with individual sources. 7.9.2. These new modalities create a fiduciary problem. Funds are disbursed to MoFED, BoFED or OFED (woreda level) and are mixed with Treasury subsidies and other revenues. How can donor agencies assure their principals that their funds are being used for legitimate and productivepurposes, principally inthe reduction of poverty? 7.9.3. An objective of this study was to establish whether the system of financial management provides "sufficient or reasonable assurance" that proper checks and balances exist and are adhered to. It must be stated that this standard is not met in any developing country, almost by definition. Neither in respect of Tigray nor any other third world national or sub-national government could an auditor express an opinion that proper checks and balances are adhered to, even at the `moderate' level of assurance. This study is a `limited scope review': in conjunction with the PER and CPAR, it analyses the financial management arrangements of the country, assesses the risk that public funds may not be used for legitimate and productive purposes, and suggests ways of reducing the risk. Direct budget support can then be conditioned on the commitment of the government and other stakeholders to an agreed programme of risk reduction and on satisfactory progress in the implementation of the programme. Existing (or reformed) government procedures are then used for procurement, accounting, banking, reporting and audit; no additional costs are imposed on the government. 7.9.4. Given this risk reduction programme, it i s possible for direct budget support to be virtually earmarked to favoured projects, without duplicating or supplementing government procedures. A regional donor would continue its aid dialogue with its national partners, work with the regional authorities on project development, providing technical assistance as necessary, and disburse to the regional or woreda finance office (1) against inclusion of agreed projects in the approved budget, and (2) against standard government in-year reports on expenditure and performance and audited project statements. This i s a `black box' approach, which identifies donor inputs and project results without attempting to construct `funnels' through the box. Donors would gain the same assurance and retain the same knowledge transfer role that they now have with project aid. Fungibility would be controlled by further conditioning on an agreed fiscal pattern, such as minimumexpenditures in poverty- `'Projectsupport is defined as aid flows (grant or loan) that are tied to expenditures indefined projects, for which disbursements are made against satisfactory action plans and budgets and (for subsequent replenishments) against statements of (eligible) expenditures, progress reports and audit reports. Most aid in Ethiopia falls under this definition, including the World Bank Education and Health Programmes, UNDP and bilateral aid. The sector-wide approach provides support for agreed sector policies and programme, with disbursements made against satisfactory execution of the programme as a whole (audited expenditures and performance), without tying to individual components of the programme. General budget support is given against agreed government policies and an overall budget. For a recent analysis of donor trends in Ethiopia, see World Bank (2001b) PER Vol. I,chapter 4. 90 related sectors.61The attachedannex at the end of this section compares the characteristics of each aid modality. 7.9.5. Though all aid to Ethiopia i s a federal responsibility and must be approved by MoFED,~'disbursements should be made to the level at which the target projects are managed, so as to avoid the risk of funds not being transferred downward or of reports not being transmitted upward. The present lack of timely reporting by regions to MoFED i s no hindrance to aid flows and reporting at lower levels. Disbursements should be through finance bureaudoffices so as to ensure aid i s fully accounted, i.e. it should all be `channel 1'. On this assumption, it is possible to make a regional financial accountability assessment (RFAA) separatelyfrom an overall CFAA. 7.9.6. Fiduciary risk to public funds in the Tigray region i s defined as the expected value of the loss of developmental benefits arising out of gaps between present financial management arrangements and generally accepted international standards. This analysis is made according to the DFID and OECDDAC guideline^^^ on managing fiduciary risk when providing direct budget support. These build on the IMF Code of Good Practices on Fiscal Transparency, the IMF/World Bank reviews of 25 HIPC countries, and IFACPSC International Public Sector Accounting Standards. In the DFID and OECD/DAC guidelines, developmental benefits are defined (by implication) in terms of pro-poor expenditure^.^^ The methodology has been used inpilot assessmentsinMozambiqueandEasternCaribbean countries. 7.9.7. There are nine Principles. For each ,arating of A, B or C has been made: A represents a situation where there is substantial compliance with international good practice, although coveragemay not be 100per cent; B indicates that there are some significant weaknesses in compliance or that the rules/procedures need to be changed; and C indicates substantial failure to comply with the rules or that the system will require substantial upgradingto meet international good practice. 7.9.8. These ratings represent the level of seriousness and concern with which any prudential shortcoming i s viewed by the team and, inversely, the corresponding level of benefit expected from reform. Good Practice Principle and Rating Comment Benchmarks L clear set of rules governs the budget B A budget law specifying fiscal management process responsibilities i s in operation, and 1.1 A budget law specifying fiscal accounting policies and account code management responsibilities i s in classifications are published and applied. operation What i s not yet well established is the budget 1.2 Accounting policies and account timetable, the method of calculation of code classifications are published and subsidies, and the assignment of budget applied responsibilities in the woredas. 'he budget is comprehensive C 2.1 All general government activities Considerable external inflows are not yet are included inthe budget brought into the regional budget, also 2.2 Extra-budgetary expenditure i s not community contributions of labour. I t i s not ....,tn,.;n1 clear whether all funds and agencies 61Similar arrangements havebeenplannedfor ensuring that HIPC debt relief goes into poverty-targetedexpenditure. See World Bank (2001b) PER, Vol. 1, Box 4.3, p. 69. 62With the possible exception of aid direct to NGOs. 63DFID(2002) and OECDIDAC (2002). These two sets of guidelines are very similar. This implication i s drawn from two of the GoodPracticePrinciples, viz. that the budget supports pro-poor strategies, and that the budget is areliable guide to actual expenditure. 91 material operating in the region, such as the Tigray Rural Roads Authority, are to be consolidated with the regional budget in the future. budget supports pro-poor activities A A high proportion of the budget goes into 3.1 Budget allocations are broadly education, health, rural roads and other consistent with any medium term sectors that have been identified by a HIPC expenditure plans for the sector or for mission as pro-poor. Woreda allocations are the overall budget made according to a pro-poor formula. However, there is not yet a Public Expenditure Programme, full integration of capital and recurrent expenditure or analysis of the compositionof the budget.65 he budget is a reliable guide to A Budget outtums in aggregate tend to be very actual expenditure close to the totals appropriated by the 4.1 Budget outtum shows a high level legislature. Expenditure controls are of consistencywith the budget effective in preventing excess or unauthorized expenditures. Large gaps between capital budget estimates and actual implementation are precluded by including in the budget only those projects with secured financing.66 Kpenditure within the year is controlled There are currently delays in reporting from 5.1 In-year reporting of actual woredas due to initial problems in staffing expenditure and organization. Virements are closely 5.2 Systems operating to control controlled, but not commitments or arrears, virement, commitments and arrears pending implementation of the double entry system. Internal audit i s weak. overnment carries out procurement There has been rapid decentralization in line with principles of value for without sufficient attention to adequate money and transparency preparation, staffing and technical assistance 6.1 Appropriate use of competitive at woreda tendering rules 6.2 Decision making is recorded and auditable 6.3 Effective action taken to identify and eliminate corruption 7. Reporting of expenditure is C Reporting is dependent on the most timely and accurate remotelunder-staffed woreda, so 7.IReconciliation of fiscal and bank consolidation of reports at regional and records is carried out on a routine basis federal levels is delayed by the current 7.2 Audited annual accounts are problems of staffing and organization. submitted to parliament within the Reports are normally timely, but not statutory period comprehensive (as for budgets). Bank reconciliation are normally timely. Annual reports are also normally timely, but consist of only revenue and expenditure statements, without reporting of cash and other financial balances or financing. &There is effective independent B Audit is legally independent and has scrutiny of government expenditure adequate powers. However, audit and 8.1 Government accounts are inspection offices are under-staffed and independently audited unable to cover all public bodies each year. 8.2 Government agencies are held to There is no parliamentary review of the account for mismanagement and audited accounts. criticisms and recommendationsby the auditors are followed up. 65World Bank(2001b) PER, Vol. 11, paras. 1.3 and 1.23. World Bank (2001b) PER, Vol. 11, para. 1.10. 67World Bank(1997) CPAR, p. iii. 92 9. The budget process is B Budgets are approved by the Regional transparent Council, and annual statements are submitted 9.1 Information on the fiscal activities back to the Council. These are public of government is available in the documents. There is increasing involvement public domain of the private sector and civil society in the 9.2 Information presented in a way budget formulation process and in that facilitates policy analysis and monitoring at the community level. promotes accountability 7.9.9. The average of the above nine ratings is exactly B. The significance of this cannot be judged in relation to other countries as the methodology is new and few other countries (or regions) have been assessed this way. It is not possible to make a distribution of ratings, and compare Tigray with others. However, it is possible to say what changes would move Tigray's rating into the A category. This i s the subject of the comments below. 7.10 ASSESSMENT OFACTIVITIESiPLANS OVER NEXT THREE YEARS 7.10.1. The Civil Service Reform Programme (CSRP) has a component Expenditure Management and Control Programme (EMCP). This includes: accounting, budgeting, legal framework, financial information systems, fees and charges, public investment programmes, internal audit, asset management, procurement, aid management, cash management, external audit and development of the accounting and auditing profession. 7.10.2. The DSA project, based in the Ministry of Finance, presently funded by USAID, Ireland Aid and EC, has been providing technical assistance and training under the EMCP since 1997 in four areas: accounting, budgeting, cash management and expenditure planning. With respect to Tigray region, the project strategy is to roll out the following reforms that have been piloted inthe federal government and SNNP region6*: 0 expenditure planning - allocation of federal subsidy to lower levels, inEFY 1995 0 budget structure - definition of budget centres, chart of accounts for revenues and expenditures, budget preparation and reportingformats, inEFY 1996, and 0 accounting - a modified cash double entry system, including receivables and payables. This is a necessary stage in the progress toward full accrual accounting in accordance with international public sector accounting standards. 7.10.3. Some of the present weaknesses and risks mentioned in this study will be addressed by the proposed double-entry accounting system, as follows: 0 lack of control over expenditure commitments 0 lack of control of suspense items (advances) 0 lack of information in the present single-entry-based financial statements, such as cash balances, receivables, payables, public debt, contingent liabilities, tax expenditures, accounting policies, etc. as required by international standards. 7.10.4. BoFED informed the CFAA team that the accounting reform would be introduced in EFY 1996, i.e. inthe same year as the budget reform. It is yet to be decided if the roll out of the budget reform can be to all woredas in the region before the next budget call (February 2003), or whether it should be to selected woredas initially. The manpower, facilities and financial management skills of a wide sample of woredas should be assessed. The lessons of experiencein Oromiya and Dire Dawa are that the budget and accounting reforms are distinct 68How the budget reform was organized and managed in SNNP region is detailed in SNNP Regional Government, BoFED (2002). 93 and separate phases in a reform program that is likely to take at least five years of capacity building and should not be rushed. The DSA project has recommended that the accounting reform in Tigray be introduced inEFY 1997. We endorse this recommendation. 7.10.5. The Ministryof Capacity Buildinghas also organized training of trainers for officers from BoFED in four regions, including Tigray. Individual donors are providing training for officers concemed with the programs they support. There does not appear to be sufficient coordination yet among the various training and capacity buildinginitiatives. 7.10.6. Senior finance personnel in Tigray Regional Administration have had some training in the new budget structure and associated chart of account^,^' which will be introduced in EFY 1996 (starting July 2003). Training inthese systemchanges i s managedby BoFED with assistance from the DSA project. No training has yet been given to lower level staff. It i s intended to hold a training-of-trainers course in the region for about 100 officers selected from the bureaus and offices (probably December 2002). The trainers will then return to their offices and train their colleagues (about 1,100 in total, including the Finance and Administration Head, Accounts and Budget Head, Accountant and Cashier in each woreda pool, and 10-15 officers ineach woreda Finance Office). 7.10.7. Under the EMCP a computerized Budget, Disbursement and Accounting (BDA) system and Budget Information System (BIS) have been introduced in the Federal Government and SNNP region. It i s expected that these will be rolled out to Tigray and other regions. However, the BIS and BDA are not integrated (nor the PIP, debt management and payroll systems). An integrated IFMIS has been proposed (with funding by the EU) and this may be implemented at a later stage. 70 7.10.8. A manual has been prepared for the double entry system at the Federal leve1,'l and is in course of preparation for the SNNP region. For Tigray, a manual is expected in the future to detail the accounting system for the public bodies and budgetary institutions in this region. The Federal level manual i s a good basis for the regional manuals. It is, however, likely to need updating for changes in the banking arrangements (Treasury single account) that are being introduced at the Federal level, and should be replicated at the regional and woreda levels. The existing partition of cash books, ledgers and bank accounts kept by a public body according to source of funds (domestic revenue, external loans, external grant assistance, and by project donor) unnecessarily complicates budget management and cash management, and multiplies the number of records that have to be maintained. Corporate bodies, by contrast, integrate all sources of funds into a single cashbook, ledger and bank account, without loss of information or control. This should be the aim for each public body. 7.10.9. The Government has recently developed a five-year program for National Capacity Building (NCBP) that includes the ongoing Civil Service Reform Programme, an Urban Management Capacity BuildingProgramme, a District-Level DecentralizationProgramme, an IT Capacity Building Programme and 11other programmes, and established the Ministry of Capacity Building (MCB) to coordinate and monitor its implementation. The World Bank i s expected to provide technical assistance (consultancies, local and international training) in support of components of this programme:" 69Heads of Finance have attended courses given by the DSA project, e.g. the Head of Education Bureau, Finance and Budget Division, received5 days training inAddis Ababa. '*For 70 some woredas, at present having no computers or even a manualtypewriter, this will be agiant step into the 21'` century. Govemment of Ethiopia, Decentralization Support Activity Project (2002a) The FGE Accounting System Volumes I and 11 encompassthe modified cashsystem, and Volume I11covers the additional features for full accrualaccounting. 72World Bank (2002b). The credit is for $26.2million over athree-year periodfrom September2002. 94 CivilService Reforms,to be executedby the MCB 9.10.10. Restructuring and empowering local governments (regions and urban and rural woredas), to be executed by Ministry for Federal Affairs (Urban Development Capacity BuildingOffice), and strengthening the MCB, executedby MCB. 9.10.11. The CSR reforms have four sub-components: CSR programme coordination and change management; Resource management and control, which includes the EMCP and HRM pillars of the ongoing CSR programme. The accounting, budgeting and planning reforms supported by USAID, EU, UNDP and Ireland Aid will be supplemented by the roll-out of the Budget Information System and the interim Budget, Disbursement and Accounts System across the federal institutions and the regional finance bureaus, as a transitional step in the development of a fully Integrated Financial Management Information System (EMIS). This sub-component will also include training in procurement at federal and regional levels, strengthening of treasury operations and cash management; Performance and service delivery improvement programme (PSIP). This will be available to 10 selected agencies, including some regional BoFEDs; and Accountability and transparency, which includes strengthening external audit, parliamentary oversight, development of the accounting and auditing profession, and community/civil society participation inpublic sector performance. 9.10.12. The local government reforms include: 0 Federal and regional policy analysis; 0 Deepening decentralization in 2-4 target regions, involving reform of legislative, administrative, fiscal and institutional frameworks, and skills training for regional and woreda staff , by means of contracts with pre-qualified regional training institutions, matching grants and scholarships; 0 Local government restructuring and capacity building in pilot urban and rural woredas; and 0 Pilot investments for infrastructure rehabilitation. 9.10.13. The key criteria for selecting pilot regions will be their relative progress in the decentralization process. 9.10.14. Other donors have expressed interest in the following areas: internal audit (DFID), decentralization training and IFMIS computerization (EU), economic management (GTZ), Amhara woreda strengthening (SIDA), budget and accounting reform (USAID), external audit (CIDA) and accounting professional development and decentralization training (Ireland Aid). 7.11 CONCLUSIONSAND RECOMMENDATIONS 7.11.1. The Tigray Regional Government i s in the midst of a major set of changes. Apart from rapidly relocating staff to the woredas and training them so that they will be able to take on their budget management functions at that level, it i s trying to meet the increased office and other infrastructural needs of woredas, in particular the more remote rural woredas. Necessarily, much of the responsibility for capital construction programmes and associated 95 aid management has been retained at regional and zonal levels. Thirdly, it i s planning to introduce fairly comprehensive changes in its budgetary and accounting systems next year. Short-TermRecommendations 7.11.2. Though there i s a widespread respectfor rules inthe Tigray civil service, this strength may also indicate a weakness - a disinclination to adopt new rules and procedures, at least until these are fully articulated and understood. Expenditure reports used to be submitted within 15 days of the end of each month; the last to be submitted were for May 2002. Priority should be given to finalizing woreda organisation andjob descriptions and staff training, and making staff functional, rather than further recruitment. The proposed accounting reform should be heldback, possibly to EFY 1997, so that the staff and infrastructural needs are first met, and some stability achieved. A good indicator of the staff and infrastructural needs being met would be the resumed flow of timely and reliable monthly expenditure reports to BoFED. 7.11.3. The role of remaining zonal administrative staff should be re-examined. Zones may have the following functions: communication between regional headquarters and inaccessible woredas, including the expediting of monthly reporting; 0 payment of cheques on behalf of woredas that do not have easy access to abank; technical assistanceand trouble shooting; some functions such as Court administration, which are tied to the zonal level. 7.11.4. Solution of these short-term issues should be a pre-condition of direct budget support by donors, together with evidence of commitment by the regional government to an agreed programme of financial management improvement to address the medium and long-term issues listedbelow. Medium-TermRecommendations Revise the woreda subsidy formula to provide incentives for maximizing and disclosing donor inflows as well as local revenues; any offset of donor flows should be based on actual flows of the previous year, not projected flows that may not materialize; Develop a budget timetable (calendar), basedon the federal timetable, that will ensurethe presentation to Council of a recommended budget at least one month before the start of the fiscal year; Develop a rolling medium-term public expenditure plan, based on the federal PEP and subsidy projections; Include all aid inflows, labour contributions and extra budgetary funds in the budget and accounts; Reducethe number of bank accounts to one in each public body, and correspondingly the numberof cash books, general ledgers and specialreports; Without compromising its autonomy, the region should provide regular in-year and end- of-year financial and performance reports to the federal level, as these are needed for country-wide consolidations and negotiations with donor partners, especially with regard to the sectoral development programs; 96 0 Asset registers should be properly maintained; 0 External audit quality assurance should be strengthened using systematic peer review by other regional audit bureaus and the Federal Auditor General; 0 External audit appointment, tenure, remuneration, operational independence and removal should be legislated, based on the INTOSAILima Declaration. Long-TermRecommendations 0 External audit should seek to extend its coverage o f audited each year by building staff numbers and sktlls, particularly in risk analysis, internal control questionnaires and sampling; 0 Inspection officers should be trained in internal audit as a management service and deployed to buildup internal audit inthe sectoral bureaus and woredas; and 0 Institutionalise and strengthen accountability links of local governments to Tabia Development Committees and community-based organizations. 97 Y Ee -8 3 m E 9 n 8. SOMALI REGION EXECUTIVESUMMARY 1. In reviewing some of the challenges faced by this region as financial management is concerned, and especially the recent move to decentralise financial management tasks to Woreda level, it i s important to keep in mind that the region covers a wide area with the regional headquarters located close to one o f its borders with the Oromiya region far from the remote location o f many o f the Woredas not even accessible by road and some beyond the reach o f any inspection due to the security situation which prevails in some o f the areas. 2. A basic legal and institutional framework for financial management is in place in the Somali Region with clearly defined structure and procedures for budget execution, accounting, internal control and external audit. The mainconstraints are related to actual implementation. 3. The lack o f a standard budget calendar and legal provisions setting a final date for the closure o f the budget process with approval by the regional council has led to a situation were the whole budget process i s substantially delayed and the budget being approved to late to serve as an effective expenditure management tool. 4. As the core institution in overall expenditure management and control for all regional, Zonal and Woreda budget institutions, the Regional Bureau for Finance and Economic Development(BoFED) i s facing some constraints in undertaking its role. The main constraints are lack o f adequate tools and procedures for timely reconciliation o f expenditure and constraints inthe system to ensure a timely flow o f information for expenditure control. 5. Weaknesses in human resource capacity, especially at Zonal and Woreda levels, affect the performance o f financial management functions. Staffing and incentives will be key issues to address when introducing block grants to Woredas. 6. Inspections are fragmented (internal inspection o f recurrent expenditure and external inspection o f capital expenditure) and limited (10- 15 percent coverage per year). 7. External audits by the Regional Audit Bureau (RAB) and by the Federal Auditor General are conducted on a regular basis but are limited in coverage and scope. 8. The key institution in budget execution, expenditure management and control, BoFED, has not itself been subject to inspection and audit nor has the revenue collection process been subject to sample inspections, an area which i s by BoFED identified as a problem area especially concerning collection of sales tax on marketed produce. 9. In a response to the above findings there are some recommended short and medium term actions that can be proposed:. 0 In order to make the budget effectively a tool for expenditure management the council and BoFED should develop a standard budget calendar to be implemented prior to each fiscal year. 0 BoFED should institute a procedure for all budget institutions to establish an asset register which should then also be subject to control by internal inspectors of BOFED as well as within the scopeof audit by the RAB. 0 It is recommendedto conduct a functional review of BoFED with an objective to streamline the organisation, establish clear guidelines and systems for budget preparation, budget execution and accounting. Some of the likely outcomes of such a review will be the need for technical assistance over a longer period of time including training of personnel, upgrading of physical infrastructure and computers. 0 For the decentralisation process to be successfully implemented, BoFED requires technical assistancein drawing up an action plan for its implementation, in designing the structure of the Woredas, their organisation and mandate and in elaborating the procedures for budgeting, budget execution and accounting at the Woreda level. For the medium term it will require training of staff to be allocated to the Woreda level which to day i s not aware of the process about to be implemented. 0 The RAB needs to be strengthened to cover a wider number of institutions and the scope of audits widened to include performance audits. 0 Inspections of the Ministry of Finance and Economic Development (MoFED) should be widened in its scope to include recurrent expenditure. Approximately 90 percent of recurrent expenditure and 100percent of capital expenditure is funded by Federal subsidy. 100 8.1 BACKGROUND Objectiveand scope 8.1.l.This report constitutes an interim report to the Country Financial Accountability Assessment in Ethiopia. The report presents the main findings and recommendations of the mission to review the financial management system and procedure of the Somali Regional Government and lower levels of the administration(Zones and Woredas). 8.1.2. The objectives of the assignmentcan be summarised into the following: Describe and assess the public financial management systems, regulations, procedure and extent of compliance in the Somali region including comparison with internationalbest practice and standards; Describe ongoing reforms in the public financial management system inthe Somali region; Assess risks with the current system and level of compliance, and propose actions to mitigate identifiedrisks; The scope of the assessment has covered the planning, budgeting, budget execution, accounting, reporting, internal control and audit at Regional, Zonal and Woreda levels. Approachand Methodology 8.1.3. This report has been prepared by a CFAA regional team for Somali Region. The team consisted of Negussie Teferra, Inspection Department, MoFED, Tesfaye Gushan, Auditor, Getaghew Kassaye & Co. and Jens Claussen, Economist, Nordic Consulting Group. The team was assisted by Wilhelm Wiig, First Secretary at the NorwegianEmbassy, Addis Ababa. 8.1.4. The work was undertaken by a review of documentation, meetings with representatives of Federal Government inAddis Ababa from 16 to 18 September 2002 with subsequent mission to the Somali Region during20 - 26 September 2002. 8.1.5. Most of the work was carried out at the regional headquarter in Jijiga with several meetings with the Regional Bureau of Finance and Economic Development (BOFED) including its various departments, the Regional Bureau of Education (REB), the Regional Bureau of Health (RHB), the Regional Bureau of Agriculture (RBA), the Regional Bureau of Water (RBWS) and the Regional Audit Bureau (RAB). In addition interviews were conducted with the Zonal Bureau of Jijiga, the Finance and Administration Office of the Jijiga Woreda and the Finance and Administration Office of the Kebri Beyah Woreda. In collecting information in the Somali Region the team made use of questionnaires to ensure that all major issues were covered and harmonised with the other regional missions to Somali, Amhara, SNNPR and Tigray regions. 8.1.6. When consulting the various institutions in the region, the team also reviewed various documentation, budget presentations and financial reports for a more detailed assessment of the system and procedures for financial management in the region. Many of these reports are produced in Somali, the official language usedby regional authorities, and in interpretation of these reports the team enjoyed substantial support from the regional authorities. 8.1.7. In the report, the Ethiopian calendar and fiscal year has been used when making reference to time of events and periods. 101 8.2 ASSESSMENT OFPRESENTPOSITION Introduction 8.2.1. The Somali National Regional State has an area of 271,971 km2and a population of 3.4 million, according to the latest census records of 1997. This puts the Somali nation as the fourth in rank at the regional level as far as populationi s concerned. 8.2.2. The region i s administratively divided into nine Zones; namely Jijiga (the regional capital), Shinnile, Fik, Dagah-Bur, Kabri-Dahare, Afder, Wardhere, Gode and Liban. These zones, in turn, have 51 districts (Woredas). Some 85 percent of its population are nomadic pastoralists. 8.2.3. In reviewing some of the challenges faced by this region as financial management is concemed, and especially the recent move to decentralise financial management tasks to Woreda level, it i s important to keep in mind that the region covers a wide area with the regional headquarters located close to one of its borders with the Oromiya region far from the remote location of most the Woredas which are difficult to access due to poor infrastructure and difficult security situation. The distance from the Regional Headquarters Jijiga to the most remote Zonal Departments and Woreda offices, are as much as 700 km, with several Woredas not even accessible by road and some beyond the reach of any inspection due to the security situation which prevails in some of the areas. 8.2.4. The total resources included in the current Ethiopian Fiscal Year (EFY) 1995 budget (2002/2003) constitute some Birr 495 million of which Birr 218 million for recurrent expenditure and Birr 277 million for capital expenditure. Of the total budget an amount Birr 36 million i s projected to be funded by regional revenue (7.2 percent), the remaining part, Birr 459 million (92.8 percent) by Federal subsidy includingexternal loans and grants. According to the Federal Budget, the total amount allocated in Federal subsidy i s Birr 475 million, a higher amount than what was presented to the mission in the preliminary budget. At the time of the mission the budget had not been finalised due to, among others, that the distribution of total Federal transfers as regards external grants and loans were unknown. 8.2.5. The Somali region receives a relatively higher share of Federal subsidy per capita compared to the average for the other regions (the Somali region had an estimated 6 percent of total population, but received 9 percent of total federal subsidy in EFY 1994). This is due to the fact that the regions poverty indicators and level of development are less favourable and thus in the composite index applied by the federal authority gives the Somali region a relatively higher weight. In addition, as will be discussed in sections below, the Somali region also receives "off budget" resources, particularly in the form of Extra Budgetary Funds (EBF) and emergency relief assistance. Legal and Institutional Framework 8.2.6. At the centre of the financial management structure is the Regional Bureau of Finance and Economic Development (BoFED) responsible to the Regional Council. In addition the Somali Region has a Regional Audit Bureau (RAB) to conduct regular financial audits reporting to the council. 8.2.7. BoFED i s divided into five departments; Production and Fiscal Planning Department responsible for among others making fiscal projections; Macro Planning Department; Budget and Accounting Department with the core responsibility for budget preparation, execution and accounting; Social department; and Inspection and Procurement Department. 102 8.2.8. Within the regional structure are 41 budget institutions of which five sector bureaus constitute the main ones; Regional Bureau for Health (RHB), Regional Bureau o f Education and Capacity Building(REB), Regional Bureau for Water Supply (RBWS), Regional Bureau for Roads (RBR) and RegionalBureau for Agriculture (RBA). Each of the sector bureaus intum manages and executes its own budget by implementing own recurrent and capital expenditure directly as well as through respective Zonal departments which inturn undertake the same functions in their respective Zones as well as Woredas subordinated to them. 8.2.9. The Regional Constitution requires BoFED to prepare annual budgets and accounts o f the regional bureaus and the consolidated accounts o f the region (including the accounts o f Zones and Woredas). As per Constitution the Regional Auditor General i s the extemal auditor answerable to the Regional Council. 8.2.10. Like the Federal level, the financial management structure and procedures are guided by Financial Regulations. All functions are compatible with the Federal level (Regional, Zonal and Woreda levels). The same applies to RAB mandated to undertake full scope audits o f Regional, Zonal and Woreda revenue and expenditure for the Regional Council similar to the mandate o f the Auditor General at the federal level. Recent Developments in Financial Management 8.2.11. Recent reforms undertaken in Ethiopia in the area o f financial management have not reached out to the Somali Region. The computerised BDA system implemented in several other regions to assist in more timely reconciliation has not yet been fully implemented inthe region. The software has been installed but without sufficient training, the system has not been put into use. Currently four persons are on additional training and it i s expected that on their retum BoFED will start applying the system. Budgeting, budget execution and accounting is, accordingly a manual process. 8.2.12. The decision to decentralise functions to the Woreda level will gradually be implementedin the Somali Region. Plans are underway to implement the process in two Woredas in each o f the Zones in addition to three Woredas in the Jijiga Zones (the regional headquarter) i.e. 19 out o f 51 Woredas. 8.2.13. The piloting and gradual process o f the decentralisation has proven necessary since most Woredas have few staff with required qualifications for budget preparation and execution. By allocating Regional and Zonal staff trained for their new positions it is anticipated that they will be able to build sufficient capacity in order to undertake the new functions o f the Woredas. 8.2.14. The main constraints are to identify and train sufficient staff, sufficient resources to finance required number o f positions and provide incentives sufficiently to maintain staff in the Woredas. The latter is envisaged as a particular problem when moving to the more remote Woredas in areas with security problems. In the latter case, it also is a major concern that with resources at Woreda level substantially increasing in a cash-based transfer system without access to banks, the risks associated with cash management i s expected to increase compared to today. 8.3 BUDGETING 8.3.1. The budget cycle starts approximately 4 months prior to the fiscal year with the discussion in the Regional Council on priorities for the coming fiscal year. With an estimated global federal ceiling the discussion starts on the allocation o f recurrent and capital expenditure as well as allocation between sectors. Following the discussions, guidelines for budget preparation i s presented to the respective regional budget institutions. The guidelines are basically a letter specifying some basic parameters for adjusting the recurrent budget from one year to the other (estimated salary increase and percent inflationary adjustment o f other operating costs) with an 103 enclosed format for the budget. The ceiling for the respective budget institution is usually not disclosed at this stage. 8.3.2. The budget institutions prepare the recurrent budget with an incremental adjustment on previous year with estimated inflationary change in salaries and other operating costs. For the capital budget, all projects and programmes "on budget" are funded from Federal subsidy (including extemal grants and loans), none by regional resources. Almost 95 percent of capital expenditure i s tied up in ongoing projects thus only 5 percent i s available for new activities to reflect changes in policies/strategies. It is these 5 percent (approx. 12 million Birr) that the various budget institutions compete for. 8.3.3. Some donor funded projects and extra budgetary resources are not captured by the Federal level, nor do they feature in the regional consolidated budget. The volume of this form of funding can not easily be determined since they are negotiated and disbursed directly to regional sector bureaus, and even sometimes directly to Zonal departments. There is limited incentive to disclose these resources in the consolidated budget since it would then be offset by federal subsidy. Based on estimated "off budget" resourcesat the regional bureaus visited, the total amount of "off budget" resourceshowever appears to be limited73. 8.3.4. Although the intention is that the budget process is to be initiated by Woredas, few if any actually prepare a budget, the same applies to the Zonal level. The recurrent budget i s prepared by BoFED while the capital budgets for each sectorAeve1 are prepared by the Regional Sector Bureaus. Thus the budget preparation process is highly centralised which is claimed to be due to limited capacity at lower levels. With the remoteness of the Woredas and even Zones the process would have required a long time frame if a decentralised process was to be implemented. It would also have required substantial support from the regional level inthe budget preparation process. 8.3.5. Some observations that needs attention related to the budget preparation process are related to the following: The total federal subsidy including external grants and loans are communicated to BoFED only one month prior to the fiscal year. The distribution between sectors for external grants and loans are revealed at an even later stage, for EFY 1995 the figures were supplied by this mission. There i s no fixed budget calendar and process, nor any legally prescribed time for closure of the budget discussions in the Council. This has lead to substantial delays in the final approval of the budget. The EFY 1995 budget preparation process had not yet been finalised at the time of the mission (already two months in the fiscal year). For EFY 1994 the budget was approved only three months before the end of the fiscal year. The previous year budget (EFY 1993)was accordingly used as the legal framework for expenditure management for a total of nine additional months inthe following year (EFY 1994). 8.3.6. The centralised process of budget preparation without the active participation at lower levels of the Region means that few of Zonal and Woreda level priorities are actually reflected in the preparation process. The roles of Zones and Woredas resemble more of regional payment offices and monitoring institutions for implementation of regional expenditure. 73In 1994 an estimated amount of 2.5million Birr indonor fundedproject tied aid to the REB was "off budget and accounts" compared to 18,4 million Birr capital expenditure"on" the consolidatedaccounts, inRBA 0,4 million Birr was "off budget grants" compared to the 3.6 millionBirr accountedfor in the consolidatedaccounts 104 8.4 BUDGETEXECUTIONAND MONITORING 8.4.1. Recurrent expenditure consists of mainly two items; (1) salaries (55 percent) funded through a centralised payroll managed by BoFED, (2) "petty cash" to cover other operational costs for budget institutions. The funds for recurrent costs are released in 12 equal monthly instalments. 8.4.2. The Woredas access the funds by preparing a statement o f their cash balance to respective Zonal Department who in turn provides them a payment instruction to the bank at the Zonal headquarter, if there is a bank. Otherwise it will be paid to the Woreda in cash. The cash i s kept by the Woreda ina safe at their premises or other means for safe keeping. Cash received by Woredas i s usually disbursed within few days as payment for salaries to respective employees and for procurement o f stationary and other operational costs. 8.4.3. The Zonal departments apply a similar procedure inrespect o f BoFED. Inmost cases this i s done through bank transfers, however, in some Zones it i s also on a cash basis (only five out o f nine Zones have a banlung service). In this case the transaction volume i s significant with an associated increased risk. 8.4.4. Due to the remoteness o f some Zones and many Woredas, requests are sometimes presented on a quarterly basis, in some cases half yearly. In these cases there are significant amounts being relea~ed'~and carried in cash on long distances. 8.4.5. At the Regional level the respective budget institutions receive the budgeted amount by transfers to their respective bank accounts from the main "treasury account" o f the BoFED on presentation o f reconciled financial statements for the previous month or the month before. 8.4.6. In terms of capital expenditure, each budget unit receives an authorisation although the budget at the beginning o f the year. Actual execution is based on request for payment by respective budget institution, in many cases as payments to contractors for implementation o f capital investments. In many cases these are advance payments. Additional resources are subject to the presentation o f financial statements verifying funds utilised for replenishment o f the bank account for the programme or project concerned. 8.4.7. All releases are checked against the budget by the internal auditor of the BoFED and, inthe case o f Sector Bureaus and Zones, by their respective internal auditor or the person maintaining this function. 8.4.8. For external grants to programmes and projects each regional bureau maintains separate bank accounts and release o f funds follows donor specific procedures. These funds do not appear in the budget or the consolidated account. 8.5 ACCOUNTING GUIDELINESAND STANDARDS 8.5.1. Accounting of expenditure for the Somali region i s based on the standard single entry cash based accounting system pending the introduction o f double entry accounting with new chart o f accounts. All accounts are in Somali. Accounts are prepared on a monthly basis based on payment requests from Woredas, Zones and Regional bureaus. 8.5.2. Accounts are to be maintained for each spending unit reconciled on a monthly basis which is, based on our sample, the case for regional bureaus consulted. It also appears to be the case for the Jijiga Zone and Woredas visited, while for other Zones and Woredas, it i s assumed that it i s only partially the case. T h i s i s also confirmed by the findings o f the RAB who claims the main '`Duringthe mission, one Zonal representativereceivedapaymentadviceinmillionsof Birr which couldbe cashedat the nearest bank branch some 259km away from the Zonal Headquarters 105 problem associated with accounting practises are unsettled advances. Payments are received and cash utilised but without substantiating the payments charged against actual documents giving evidence of actual utilisation. This problem is specifically associatedwith petty cash for operational expenditure and advances paid to contractors to implement development projects. For most of the ZonesrWoredas it i s unknown whether it i s actual accounting figures or, the more likely basis, budget execution figures (payments received charged according to budget i.e. advances paid against a specific budget item) which constitute the basis for consolidated accounts at various levels. 8.5.3. The payroll i s centralised and all releases for Regional Bureaus and Zones (and subsequently Woredas) are made against payroll lists presented by each budget institution and presentation o f signed receipts for previous month (every quarter and sometimes every six months for the most remote ZonesrWoredas) by the individual employee. 8.5.4. Accounts are maintained manually by all budget institutions. The lack of a fully functional computerised system at BoFED makes reconciliation a challenging task and,closing o f accounts a time consuming effort which is difficult to implement. There are no financial reports produced on a regular basis to show actual utilisation across budget institutions, or functional or economic classifications, since this would demand a significant reconciliation effort in the current manual system. 8.5.5. Expenditure management and control is maintained by checking each payment request against detailed budget sheets for each institution. The budget i s thus effectively used to control over spending. However, in the case of under spending there is less opportunity to maintain an overview o f total resource use against actual resource availability (since total expenditure i s not reconciled on aregular basis). 8.5.6. The Procurement and Inspection Department of BoFED checks annually expenditure in a sample of regional budget institutions as basis for closing their accounts. Since their capacity and outreach are limited most accounts are closed by the budget institution itself, especially in the case of the remote Zonal headquarters and Woredas. 8.5.7. The accounts presented cover all expenditure funded by transfers through BoFED; domestic revenue and federal subsidy for recurrent expenditure and federal subsidy and external grants/loans (channel 1) for capital expenditure. 8.5.8. Reporting on Channel 2 funds are guided by agreements with respective donors. Channel 2 funds disbursed via federal agencies are sometimes reported to BoFED for information purposes. They are reported separately in a format and at intervals as specified in the donor agreement either directly from the budget institution or through the federal agency channelling the resources to them75.As previously mentioned, from the sample of budget institutions consulted, these resources appearedto account for some 10-15 percent of total capital expenditure. 8.5.9. Inmany cases, like the case of the Health and Education Sector Development Programmes (HSDP and ESDP) the amount of bilateral funds disbursed directly to the federal agency (channel 2) for transfers to the Somali region, i s not known and accordingly not included in the budget preparation process. These funds are treated as extra budget funds accounted for separately as and when the transfers take place to designated bank accounts established for the bilateral programme, inseveral cases one separatebank account per donor. ''Likethe case of the Health andEducation Sector Development Programmes (HSDP and ESDP) which are partially funded by channel lb resources (IDA and ADF), partially by bi-lateral donors (channel 2). Inthe former case they are captured by the regional reconciled accounts while the latter is sometimes reported to BoFED for information purposes, in other cases not. 106 8.6 INTERNAL CONTROLS AND INTERNAL AUDIT 8.6.1. The internal auditors of the budget institutions conduct a pre-audit function. Budget institutions, including Zones and Woredas have a position for the internal audit function. This is a post filled at Regional and Zonal level, less so at Woreda level. The pre-audit function primarily consists of checking authorisation for payment against approved budget and that sufficient evidence i s presented according to the financial regulations. 8.6.2. Post audits are undertaken by the 5 inspectors of the Inspection and Procurement department with a mandateto cover all the 51 Woredas, 9 Zones and 41 regional budget units. They focus entirely on recurrent expenditure and domestic revenue since the Inspection Department of MoFED i s assumed to cover the capital expenditure which is entirely funded by Federal subsidy. The regional inspectors were claimed to cover approximately 10Woredas per year, which would on average mean that all Woredas are subject to inspection once every five years. The inspection focus on validation of recurrent expenditure reconciled against cash-flow. The inspections also include a review of the accounting procedure. 8.6.3. The report from an inspection i s submitted to the Head of the BoFED. The most frequent problem areas observed inthe various budget institutions from the inspections are: 0 Unsettled claims for advance payments, a problem which i s accumulating year by year since limited action appears to betaken to resolve and settle the claims. 0 Low level of capacity and limited qualifications in accounting leading to frequent errors with transactions being chargedto the wrong budget heading. This inturn leadsto under-spending of the budget becausethe budget ceiling for a budget head appears to have been reached. 0 Reliability inrevenue collection. It was claimed that insome cases revenue collected from sales tax imposed on marketedgoods could be as high as 30 000 - 40 000 Birr in a day however a smaller amount actually deposited by the revenue authority. Without frequent surveys of revenue collection to check how much was actually collected combined with the limited incentive for the collectors to declare all revenue collected (with a monthly salary of 300 - 320 birr) it i s assumedthat there are substantial errors inthis field of activity. 8.6.4. The Inspection Department of MoFED conducts full inspections of all capital expenditure for each sector. The last inspections in Somali region cover the 1992 accounts for all sector bureaus except for agriculture which was for 1991. 8.6.5. In terms of submission of end year financial reports, all regional bureaus in Somali region has been closing their accounts within the prescribed time except the Regional Bureau of Agriculture with abacklog of 3 years (1992 - 94). 8.7 EXTERNAL AUDIT 8.7.1. The Regional Audit Bureau (RAB) has two departments; Social and Administration Audit Department and Economic Development Department, headedby one Department Head who reports to the Regional Auditor General. The Regional Auditor General has been appointed by the council and reports to the council. There is no specific "Accounts Committee" charged with the task of reviewing the reports. The reports are presentedto and discussedby the full council. 8.7.2. Each department is supposed to have five teams consisting of three staff, in total 30 staff. However, at present only 10 including the Auditor General are employed. The reasons for the understaffing are stated as lack of sufficient funds and lack of incentives to attract qualified staff to work inthe bureau compared to the private sectors. 107 8.7.3. The bureau has so far been able to cover 12 regional budget institutions, out of the 41, for annual audits in a year due to insufficient audit capacity andlack of adequate logistic (vehicles). 8.7.4. Before the beginning of the year, the Auditor General will prepare an audit plan and the number of bureaus to be audited. The plan is confidential. No one, expect the Auditor General has access to this information. 8.7.5. At random, RAB also conducts an internal control system review to assess the extent of audit work at year end. The findings of these reviews are communicated to the institution subject to the audit for future improvements. Planned audits were performed up to 1993. The 1994 audit is at present inprogress. 8.7.6. The summary of the audit report of each bureau is presented to Council by the Auditor General. The most typical findings in these reports were that in most bureaus significant unsettled advances were revealed during the audit. Fixed assets were not recorded in a fixed assets register nor given an identification number. In many cases purchases were made without following the regulations. Wrong charging of coding was revealed frequently. Because of this, overspending against certain spending items and simultaneous under spending against others are created. Other issues presented were the lack of auditing awareness in the budget institutions. They consider the team member from RAB as a fault finder and are accordingly reluctant to co-operate for the audit work. 8.7.7. Inaddition, internal auditors and accountantsat Zone andWoreda level inmany cases have limited capacity and competencewhich has an impact on the extent of the audit work. . If theft and misuse is detected by the RAB, there is no proper follow-up procedure for prosecution since there are no public accounts committee in the council for this follow-up. In most bureaus the completenessof external donors' resources(channel 2 and 3) cannot be ascertained. 8.7.8. Some remedies proposedby the RAB were: 0 Salarieshave to be improvedto attract competent staff; 0 An appropriate office which should accommodate the existing staff shouldbe obtained; 0 Continuous training to team members should be given to improve the quality of audits; Training should also be given to all audited bureaus, Zones and Woredas to create awareness about the importance of the audit work; 0 A public accounts committee should be formed in the Council to follow-up the cases of misappropriation funds committed; There should be mechanism to identify the complete funds of the donors. 8.8 RISKASSESSMENT 8.8.1. A risk assessment concerning financial management in Somali region needs to take into account the specific features mentioned above; a large region with some spending units in remote areas not easily accessible due to poor infrastructure, limited outreach of banking and other financial services and with a security problem prevailing in many of the areas. These features pose a challenge in the implementation of a financial management system for the 41 regional budget institutions, 9 Zones and 51Woredas. 8.8.2. The main fiduciary risks related to public financial management appear to be associated with the following: 0 The lack of a standardisedbudget calendar leads to a situation whereby the budget i s approved to late to serve as an effective expenditure management tool (this was especially the case for EFY 1994, and for EFY 1995the budget is still not finalised). 108 Although the basic financial system and procedures should provide a reasonable assurance in terms of expenditure management and control, BoFED lacks the capacity and tools to reconcile expenditure returns with total resource flows to the institutions. Accordingly, reconciliation i s not conducted on a monthly basis. The situation may substantially improve when the BDA software i s put into use after training of BoFED staff. The limited capacity at the Woreda level, and some Zonal headquarters, to maintain accounts on a regular basis and in accordance with the financial regulations reduces the quality of the financial information submitted. Itis assumedthat financial reports submittedinmany cases are budget executing figures (payments received and advances paid) rather than actual expenditure based on supporting evidence of actual costs incurred. This observation i s supported by the findings o f the BoFED inspectors andRAB. The inspection function of BoFED has limited capacity. Accordingly, the coverage of budget institutions is limited, especially at Zone and Woreda level. In addition, the approach i s fragmented with MoFED inspectors involved in inspection of capital expenditure while BoFED inspections are limited to recurrent expenditure. Thus compliance with overall financial managementregulations i s not checked in a comprehensive manner. The RAB has limited capacity to achieve a reasonableoutreach of budget institutions subject to audit. For the same reason their audits are so far limited to financial audits and do not include performance audits (value for money). Finally, at the centre of the financial management system, BoFED has not been subject to an inspection or audit by Federal institutions, nor subject to audit by RAB. 8.8.3. The low capacity infinancial management, especially at the Woreda level, the low capacity in RAB and fragmentation in undertakmg control functions pose some of the risks. The risk will increase with decentralisation of financial management functions and allocation of financial resources from Regional and Zonal levels to the Woreda level unless it i s backed with more efforts inbuildinghumanresourcecapacity and training of personnel inthe fields ofbudgeting, accounting and cash management as well as strengthening of the main control and audit functions inthe region. Activitiesto StrengthenFinancial Management 8.8.4. There are two main areas were there are planned and/or ongoing activities to strengthen financial managementcapacity: The decision by the regional authorities to apply a gradual and phased approach to implement decentralisation to the Woreda level. As previously mentioned, two Woredas in eight Zones have been selectedin addition to three inthe Jijiga Zone which also i s the regional headquarter. By identifying and training personnel to be seconded from Regional and Zonal offices as well as recruiting and training new staff, the regional authority has chosen an approach to decentralisation which may reduce the fiduciary risk. This i s being planned for implementation inthe current fiscal year. Training of BoFED staff to implement the BDA system for budgeting, budget execution and accounting. This will significantly improve the reconciliation process and expenditure management. This i s under implementation with four BoFED staff currently undergoing training. 8.8.5. Apart from the above there are no other activities planned or ongoing to strengthen the financial management capacity in the region. 109 8.9 CONCLUSIONSAND RECOMMENDATIONS MainFindings 8.9.1. A basic legal and institutional framework for financial management i s in place in the Somali Region with clearly defined structures and procedures for budget execution, accounting, internal control and external audit. The main constraints are relatedto actual implementation. These constraints can be summarised into the following main observations (a more detailed overview i s provided inthe matrix at the end of this section): The lack of a standard budget calendar and legal provisions setting a final date for the closure of the budget process with approval by the regional council has led to a situation were the whole budget process is substantially delayed and the budget being approved to late to serve as an effective expenditure managementtool. As the core institution in overall expenditure management and control for all regional, Zonal and Woreda budget institutions, BoFED is facing some constraints in undertalung its role. The mainconstraints are related to lack of tools and procedures for timely reconciliation. There i s a lack of human resource capacity, especially at Zonal and Woreda levels to perform financial management functions. Staffing and incentives will be key issues to address when introducing block grants to Woredas including capital expenditures (to date Zones and Woredas serves basically as payment offices for salaries and petty cash to cover minor operational expenditures inrunningthe office). Budgets proposals at Zonal and Woreda levels are prepared by Regional sector bureaus with the final budget determined by BoFED. The final approved budgets for Zonal and Woreda levels are not disclosed to them. Each Zone and Woreda are informed of the ceiling for salaries and gross operational expenditure per month. However, without a detailed budget they are not performing any expenditure management function in terms of each budget item. The detailed budgets for each Woreda maintained by BoFED are accordingly not applied as an expenditure managementtool at the Woreda level. Budget execution i s managed by BoFED without information shared with the Regional Bureaus, thus sector bureaus only conduct expenditure control and management for respective sector at regional level, not Zonal and Woreda levels. The Inspection Department of BoFED carries out post audits of recurrent expenditure in Regional Sector Bureaus, nearby Zonal Headquarters and Woredas. The Inspection Department of MoFED carries out post audits of capital expenditure in Regional Sector Bureaus. Inspections are thus fragmented and limited to10 - 15 percent coverage per year. RAB has carried out full scope financial audit of 5 of 41 regional budget institutions per year and the federal Auditor General has conducted full scope financial audits of an equal number of Regional Sector Bureaus including some nearby Zonal Headquarters and Woredas. The audits are thus limitedin coverage and scope. The key institution inbudget execution, expenditure management and control, BoFED, has not itself been subject to inspection and audit nor has the revenue collection process been subject to sample inspections. The latter is an area which is by identified by BoFED as a problem area especially concerning collection of sales tax on marketed produce. 110 MainRecommendations 8.9.2. Basedonthe above somerecommendations canbe made: The Council and BoFED should develop a standardbudget calendar to be implemented prior to each fiscal year. Even if the Federal subsidy i s not disclosed in time for the process to begin, budgets should be prepared based on an estimated ceiling and adjustments made with supplementary budget when the ceiling has been disclosed. BoFED should institute a procedure for all budget institutions to establish an asset register which should then also be subject to control by internal inspectors of BoFED as well as within the scope of audit by the RAB. There i s a need for a functional review of BoFED with an objective to streamline the organisation, establish clear guidelines and systems for budget preparation, budget execution and accounting. Some of the likely outcomes of such a review will be the need for technical assistanceincludingtraining of personnel, upgrading of physical infrastructure and computers. To ensure that the outcome of the support i s sustained, MoFED would need to provide additional counselling and advise on a periodic basis. The outcome of such a process should enable BoFED to implement a procedure for timely reconciliation of financial information including full use of the BDA software and more clearly define the roles and procedures in the area of sector expenditure managementbetween regional sector bureaus and BoFED. For the decentralisation process to be successfully implemented, BoFED will need technical assistancein drawing up an action plan for its implementation, in designing the structure of the Woredas, their organisation and mandate and in elaborating the procedures for budgeting, budget execution and accounting at the Woreda level. In addition it will require training of staff to be allocated to the Woreda level which to date is not aware of the process about to be implemented. The RAB needs to be strengthened to cover a wider number of institutions and the scope of audits widened to include performance audits. Inspections by MoFED should be widened in its scope to include recurrent expenditure. Almost 90 percent of recurrent expenditure and 100 percent of capital expenditure for the region i s fundedby Federal subsidy. 111 P P .- -B .-' c ." 8 c V00 0 c : .9 9. SNNP REGION EXECUTIVE SUMMARY 1. This year the Southern Nations, Nationalities and Peoples Region (SNNPR) Government has attempted two simultaneous administrative reforms: 0 the first phase of the Budget Reform Program'! budget preparation and execution under a new chart of accounts; budget consolidated on the computer-based Budget Information System (BIS); and 0 decentralisation of staff and duties from the region and zones to woredas. 2. These recent activities have resulted in a number of matters that need a prompt follow- up. This Executive Summary discusses these immediate matters first before dealing with medium term financial accountability considerations. Recent activities and matters needingprompt follow-up 3. The activities carried out under the Budget Reform Program have been highly successful, thanks to the determination of the management team at the regional Bureau of Finance and Economic Development (BoFED), the effectiveness of the Decentralisation Support Activity (DSA) Project, and the training programmes organised in conjunction with the Regional Management Institute in Awasa and other regional locations. The budget for the region was appropriated by the Regional Council on 15 August 2002. It integrates capital and recurrent budgets and i s based on the new chart of accounts, including cost centre analysis. At regional level the budget has been recorded and consolidated using the new computerised Budget Information System (BIS). The first draft of the regional budget reform manual has been produced. 4. However, there are significant reservations about the progress of the decentralisation program, which i s perceived by BoFED to have been carried out very swiftly and without regard to capacity buildingor system building. Under the decentralisation program, zones have devolved accountability to woredas while retaining an advisory status. All 104 woredas, together with the 13 zones, now receive budgets from and account directly to BoFED. 5. The decentralisation program aimed to complete the relocation of approximately 60 percent of zone staff to woredas by 30 September 2002. However, these reassignmentsof staff have not yet beencompleted. 6. The most immediate problem is that delays in re-assignment of staff to woredas have hindered the final agreement of the 2002-3 budget at zone and woreda level, contributing to significant delays in accounting and reporting. Meanwhile recurrent funds are, of necessity, being advanced to zones and woredas. At best the reporting delays are temporary and will be rectified by November 2002 after woreda and zone budgets are finalised. At worst the delays could be signalling the inability of some woredas to cope with the volume of administration work, resultingin a progressively worsening accounting and reporting position. This situation needs careful monitoring. The management ability of BoFED and the continued involvement of the DSA project give cause for optimism, however. 7. There are staffing problems at woredas. An unspecified number of skilled staff have left the service rather than relocate. For financial operations, the main shortage of skills will be in the area of planning and budgeting, though there are also likely to be shortages of budget execution and accounting skills in some woredas. On the existing manual system, accounting 76Withinthe framework of the Civil Service Reform, ExpenditureManagementandControl Program skdls are relatively easy for staff to acquire, provided an experienced manager i s available on site. In general, the correctional emphasis should be on training and capacity building rather than increasing staff numbers. Nevertheless, plans need to be developed to recruit replacements for those who have left and to attract staff suitable for training in planning and budgeting. 8. Inconjunction with the DSA project, BoFEDhas developed plans for ongoing training of woreda staff in budgeting, budget execution and accounting, using the facilities of the Regional Management Institute.Additional donorfinancing is being soughtfor this activity. 9. Other planned improvements to regional financial management and accountability which are being implemented over the next few year, and which should be monitored, include the following: 0 The regional consolidated accounts for EFT 1994 (July 2001 -July 2002) will be presented to the SNNP Regional Council and will be available to the Regional Auditor General. 0 Following the successful introduction of the improved system for budget preparation, the DSA project i s now planning to implement the modified cash double entry accounting system inthe region. 0 Preparation of a regional Medium Term Fiscal Framework(MTFF) i s due to start in December. The planning and budgeting processes would be greatly assisted if MoFED could give an indication of the regional block subsidy by December and if donors could likewise provide earlier forecasts of likely available funds. MediumTermFinancialAccountability Considerations 10. Decentralisation of responsibilities from zones to woredas has created a number of general problems that need resolution. The responsibilities of region, zones and woredas need to be defined in more detail. SNNPR has woredas of vastly different population sizes (from 7,000 to 444,000). Partly as a result of this, the formula for allocation of block subsidies to woredas needs to be revised. In the medium term some woredas may need to be combined. The position of zones also needs to be clarified. Inthe medium term, some zones may develop into sub-regions, whereas others may become less important. 11. The budget for the region is a reliable guide to actual expenditure and supports pro- poor activities. In the medium term, a Public Expenditure Programme will be developed. However, the main weakness of the budget i s that it i s not comprehensive, omitting substantial inflows from donors, including aid in hnd. In the medium term it would be beneficial to include these inflows in the budget and to ensure that they are captured by the government accounting system. 12. Budget execution appears to be well controlled. BoFED demonstrates strong leadership and there i s a well documented culture of compliance with regulations at all administrative levels. The new accounting system will assist with tracking commitments and cash advances. Inthe medium term the number of bank accounts needs to be reduced, ideally to one at each public body. There i s no longer any need to keep separate recurrent and capital accounts. 13. Incommon with other regions, timeliness of accounting and reporting, as noted above, i s a potential weakness in the financial management system. There are two distinct problems: 0 Regions report to MoFED only once per year, with the annual regional accounts; there are no monthly or quarterly reports. This i s not the responsibility of BoFED, which has been ready to report more frequently: the EFY 1994 consolidated accounts for the region will be produced on time. 116 0 For E N 1995, monthly reporting of accounts from woredas is, as noted above, showing significant delays. At present it i s too early to tell whether the delays are temporary or whether longer term back-logs are buildingup. 14. There are too many tiers of `audit' operating in the region. There i s too little risk assessment and audit planning and too much duplication of mass checking of transactions. Internal audit staff of public bodies needto be relieved of the duty to carry out pre-audit checks on 100 percent of transactions. In the longer run, there is scope for co-ordinating the SNNP Regional Auditor General (RAG) and the Inspection teams that exist in Finance and Economic Development (FED) offices at regional, zone and woreda level to create an effective pan- regional external audit facility. All audit staff, internal and external, need to be trained in appropriate audit practices and provided with a systemto make it operational. 15. A fiduciary risk analysis gives an overall `B' rating on a scale from `A' to `C'. This implies that there are some significant weaknesses in the system. However, plans are in progress which should be able to reduce most of these weaknesses in the medium term. This report ends with a sequencedlist of recommendations for improvements. 16. BoFED is infavour of a movement towards direct budget support by donors. However, as there are communication difficulties between MoFED and BoFED, caused by legal and structural rules, regional budget support may be more feasible than federal budget support in the mediumterm. 117 9.1 ASSESSMENT OFPRESENTPOSITION Background 9.1.1. Ethiopia's 199477 Constitution mandates a federal structure with considerable autonomy devolved to the regions to plan and manage development programmes. Regions account for approximately 35-40 percent of total national expenditure and, when only the anti- poverty intensive sectors such as health, education and agriculture are considered, the regions' share of total expenditure is about 70 percent.78In the context of the Poverty Reduction Strategy Paper (PRSP), therefore, the regions are the front line in the administration and monitoring of most anti-poverty programmes. In Southern Nations, Nationalities and Peoples Region (SNNPR), as in other regions, local authorities manage programmes in education (primary and secondary), health, rural roads, water supply, agriculture, irrigation and food security. 9.1.2. An important feature of local government in Ethiopia is the high degree of political consensus with the centre on development objectives and strategy, and the trust placed in local authorities, especially at the regional level, to administer large transfers o f funds. Block grants are not earmarked or tied to agreedprojects or purposes. 9.1.3. In March 2002, a further decentralization was federally mandated from regional headquarters to woredas (districts), to take effect from July 2002. Hitherto, woredas paid only salaries: their sectoral programmes were executed by zonal offices, which intermediated between regions and woredas, executing sectoral programmes from zonal allocations of the regional subsidy and consolidating expenditure reports. 9.1.4. The role of zonal offices is now intended to be mainly the provision o f expertise and advice to woredas. They may still have a role in collecting and transmitting data from outlying woredas, or chasing up late reporters, but this i s still under discussion. They have no role in the downward transmission of funds or incontrolling their use. 9.1.5. The region has a large number of different peoples and languages. In the areas we visited, Amharic i s widely spoken and understood except perhaps below the woreda level. Englishis little spokenbelow the regional bureau level. Objectives and Scope 9.1.6. This study forms part of the Country Financial Accountability Assessment for Ethiopia, carried out in September-October 2002, and has two main objectives: 0 Fiduciary Risk Management. To identify the strengths and weaknesses of the region's accountability arrangements and to assess whether there i s reasonableassurancethat proper checks and balances exist, as designed and as practiced, for ensuring intended use of public funds. Development Strategy. To facilitate a common understanding by the country, World Bank, and development partners, of the region's financial management arrangements and provide a basis (short, medium, and long term) for designing and implementing capacity buildingprograms aimed at strengtheningfinancial accountability inacountry. 9.1.7. The scope of the assessment covered the financial planning, budgeting, accounting reporting and audit of all funds usedby the regional bureaus and zone and woreda offices. 77Ethiopianfiscal years run from 8 July to 7 July. EthiopianYear 1994 ended on 7 July 2002. 78PER 2001 Vol. 11, p.2. ProcessUsedand Sources of Information 9.1.8 This report is basedon: Discussions held with the govemment officials at SNNP Regional Bureau of Finance and Economic Development (BoFED), SNNP Regional bureaus for Health, Education, Agriculture and Capacity Building, SNNP Regional Office of the Auditor General, Sidama Zone Finance and Economic Development (FED) office, and the FED office and some sector offices at Siltie andWenago woredas. A list of officials met i s included inAnnex B. 0 The documentation is listed inthe bibliography at Annex A. Administrative Structure of SNNP Region 9.1.9. Southern Nations, Nationalities and Peoples Region (SNNPR) i s subdivided into 13 zones containing 96 woredas. In addition there are 8 special woredas (municipal woredas), making a total of 104 woredas. Because the region covers a number of different nations, nationalities and peoples with greatly differing populations, there are wide variations between both the number of zones in a woreda (from 3 to 13) and the population of each woreda (from 6,600 to 444,400). A list of zones, woredas and populations as at EFY 1993 is attached at Annex 1. 9.1.10. In SNPPR the status of zones i s recognised by legislation. Each zone has a zonal council, with elected representatives. It is expected that, as the decentralisation reform progresses, some zones will disappear and others will stay, assuming the status of `sub- regions'. Notwithstanding this expectation, the number of zones increased recently when Siltie zone was formed as abreakaway grouping from Gurage zone. SimultaneousAdministrative Reforms 9.1.11. In2002, SNNPR has attempted two simultaneous major administrativereforms: 0 With the help of the Decentralization Support Activity (DSA) Project, the Civil Service BudgetReform Program, already introduced at the federal level, has started on a full rollout basis to all woredas. This involves budget preparation and execution under a new chart of accounts, and the consolidation of the budget on the new computer-based Budget Information System (BIS). Since March 2002, decentralisation of staff, duties and accountability to woreda level has been carried out inall zones and woredas. 9.1.12. In both cases, the possibility of the reforms being introduced on a pilot basis has been considered but rejected, for good reasons. However, while the Budget Reform Program has made excellent progress, there are significant reservations about the progress of the decentralisation program, which has been criticised by the SNNP Regional Bureau of Finance and Economic Development (BoFED) as having beencarried out too swiftly and without regard to capacity buildingor systembuilding. 9.1.13. The most immediate problem resulting from the decentralisation program i s that delays in agreement of staffing in zones and woredas have hindered the finalisation of the budget for EFY 1995 (July 2002 - July 2003) at zone and woreda level, and it is feared that this has contributed to delays inthe reporting of monthly financial returns by woredas. 119 General Comments on the Decentralisation Program 9.1.14. Some general comments may be made on the effects of the March 2002 program of decentralisation to woredas: In general, the number of public bodies7' at each woreda has increased from 9 to 15. The total number of public bodies in the region (regional, zone and woreda) i s now 1,833, resulting in a huge increase in the expected number of monthly financial reports arrivingat BoFED. There are rules dividing responsibilities between region, zones and woredas. However, the feeling at BoFED i s that these responsibilities need to be defined more carefully. Even the definition of `what i s a woreda' needs to be revisited, because some woredas are too small. See Annex 1, which shows that the largest woreda, Awasa Zuria in Sidama zone, has a population of more than 444,000, whereas the smallest woreda, Guraferda in Bench Maji zone, has less than 7,000. Populations of zones are similarly variable: Sidama zone has 10 woredas and total population of 2,630,000. Gam0 Gofa zone has 13 woredas and population of 1,389.000. Shakazone has only 3 woredas and a total population of only 170,000. With such large variations in population, smaller woredas are favoured by the grant allocation formula which gives only a 60% weighting to population.'' BoFED believes that the recommended maximum staffing levels for woreda offices are too high, with a possible consequence that, in the context of block subsidies being given to woredas, there i s the potential for overstaffing and consequent wastage of woreda budgets on salary costs. These recommended maximum staffing levels have been set by the Federal Ministry of Capacity Building. Some comparisons of recommended and actual staffing numbers at woredas are given inAnnex 4. However, woredas are free to set their own staffing levels. At the moment, staffing levels at woredas are well below the maximum and also, in the woredas we visited, significantly below the estimated number of staff required to run operations effectively (see Annex 4). Nevertheless, woredas are currently requesting at least 75% of their recurrent budget as salaries. Staff reallocations to woredas have not yet been agreed for all zones and woredas. Staff at zones were given a choice of three woredas but have been told they must either relocate or leave the service. A number of employees have left, usually graduates who could find better positions inthe private sector, where salaries for equivalent positions are estimated at between 25% to 50% higher. One reason quoted for staff losses i s the sense of demotion causedby moving from a zone to a woreda. The delay in agreeing staff reallocations is a major factor in the delays now being experienced in agreeing the 1995 budgets at zone and woreda level and in the receipt of monthly accounting reports from zones and woredas. The deadline for budget agreement was meant to be September 30, but was not achieved. SNNPR BoFED's overall comment is that the decision to reassign responsibilities to woredas and to assign block grants to these woredas has been made without any consideration for capacity building and system building. There should have been a more gradual planned change, in accordance with World Bank suggestions. 79A `public body' is an office responsible for a budget (e.g. the health office at a woreda is a public body) DSA Feb 2002. 120 9.2 BUDGET PREPARATION Progress of the Budget ReformProgram 9.2.1. With the help of the DSA project, the Civil Service Budget Reform Program, already introduced at the federal level, has started on a full rollout basis to all woredas in SNNPR. An assessment report preparedby BoFED, Awasa, dated 30 August 2002" describes the successes and challenges experienced. The strategy has been to improve the budget systems and chart of accounts during the first half of 2002, leaving improvements to the planningprocess (including MTFFand PEP) to start from December 2002. Bearing inmindthe extremely tight timescale (4 months) for implementing the new chart of accounts and systems, and the fact that decentralisation to woredas came into effect soon after the team had prepared the first budget structure, this project has been highly successful so far. 9.2.2. Successes include: 0 This year the region has undergone a full two-cycle budget preparation, approval and appropriation procedure. The 1995 budget (July 2002 - July 2003) was appropriated by the regional council on 15 August 2002. 0 The budget integrates capital and recurrent budgets and i s based on the new chart of accounts (including cost centres based on public body, program, sub-agency, sub-program and project). 0 At regional level, the budget has been recorded and consolidated using the new computerised Budget Information System (BIS). A room at the Regional Management Institute contains a network (server plusten PCs) used for this process. 0 Comprehensive training has been carried out (see human resource implications, below). The first draft of the Regional Budget Reform Manual has been produced. OutstandingProblemsinBudget Preparation 9.2.3. There are a number of outstanding problems in the budget preparation process, relating to the current (EFY1995) budget and to future budgets. 9.2.4. 1995 budget preparation. Zone and woreda EFY 1995 budgets have still not been finalised becauseof the delays in reallocating staff. Revisions to woreda budgets are therefore still being negotiated. The deadline for staff reassignment was supposed to be 30 September 2002 but has been missed. It i s unclear when some of the budgetswill be finally agreed. 9.2.5. Preparation of future budgets. Outstanding problems relating to preparation of future budgetsinclude the following: BoFED needs earlier communication of the regional subsidy and donor funds. The budget i s prepared in two cycles. Cycle 1 relies on forecasts made from previous trends and contains no estimates of donor funds. Cycle 2 can only be started when the regional subsidy i s confirmed by the Federal Ministry of Finance and Economic Development (MoFED) and estimates of donor funds are provided. Ideally, BoFED would like these to be communicated by December, particularly now that the three-year MTFF i s to be prepared. Iffirmfigures cannot begiven, areasonableestimate would suffice. 0 Comprehensivenessof the budget needs to be improved Aid disbursements are classified into three main channels:" Channel 1 funds disbursed through MoFED, which are invariably captured in the budget; Channel 2 donor aid that i s disbursed through sector *'BoFED0812002 For a full descriptionof these disbursementchannels, see PER 2001, Volume 1, page59 121 bodies; and Channel 3 funds disbursed directly by donors without being handled by any donor agency. The government has an express preference for Channel 1on the ground that aid flows through Channels 2 and 3 undermine the integrity of the planning, budgeting and accounting systems. Although Cycle 2 budgets include figures provided by MoFED for donor assistance disbursed through Channel 2 (via sector bodies) and Channel 3 (direct to a project) as well as Channel l(via finance bodies), it appears that sector offices at region, zone and woreda level may also receive other channel 2 funds which are not included inthe budget (e.g. Agriculture Bureau has 22 bank accounts, only some of which seem to represent funds captured by the budget). No one has an estimate o f the percentage of development funds that are not included in the regional budget. It i s widely believed that the offset rules in the budget preparation process create a disincentive to declare sources of donor funds. The BoFED department for NGO and Development Cooperation attempts to coordinate all NGO and development projects. However, it i s acknowledged that coordinationi s not good at present. Some staff members have been to Amhara and noticed a more effective aid coordination department there. There are plans for a workshop to decide plans and to discuss with MoFED. The regional budget calendar has no legal status. This year BoFED will submit a budget calendar to the Regional Council for agreement. Theformula for block grant allocations to woredas needs to be improved. According to BoFED, the formula for block subsidies to woredas has been revised but needs to be revisited. The formula used last year gives only 60 percent weighting to population and 20 percent to development disparity. The effect i s that small woredas could receive more funds than they need and may be encouraged to set up unnecessary administration structures. The budget needs to be set in the context of the three year MTFF. Preparation of the regional MTFFwill be started from December this. The effectiveness of integrating capital and recurrent budgets needs to be determined. When askedtheir opinionon whether the integrationof capital and recurrent budgets would help to avoid the problem of chronic under-funding of non-wage recurrent expenditure, managersinvariably replied that it i s too early to tell. Analysis by cost centre can be improved. BoFED points out that a weakness of the budget at the moment i s that HRDcosts have not yet been allocated to cost centres. Local tax appears to be consistently understated in the budget. Actual revenues collected are slightly higher than budget. Again, the offset rules in budget preparation provide a motivation for conservative estimates of local tax. The magnitude of this problem needs to beinvestigated. BoFEDCommentsonDirectBudgetSupport 9.2.6. The deputy head (planning and budgeting) at BoFED i s in favour of the concept of Direct Budget Support to the region, quoting the various argument^,'^ e.g.: 0 the usefulness of the regional MTFF and PEP reforms for which he i s responsible will be weakened if substantial amounts of donor funds continue to be off budget; 0 spending ear-marked donor funds is a problem for woredas, largely because of the conditionality imposed (e.g. on procurement, where the rules can be too difficult for the woreda to follow). 83For a discussionof sector andbudget support, issues andparadoxesinaidmanagement,see PER 2002, Volume 1,Chapter 4. 122 9.2.7. However, there are serious structural difficulties of communication between BoFED and MoFED. The region reports its accounts only annually to federal government and, apparently, this applies to many other forms of reporting as well. Direct discussion between BoFED and MoFED is impossible. They have to communicate through the Regional Council on all matters (except for the fact that the regional subsidy i s directly notified by MoFED). This stateof affairs has been going on since FiscalDecentralisation to regions, some eight years ago. 9.2.8. As an interim measure, it would therefore seem easier for donors to provide a form of budgetary support to the region, which seems to be the approach, for example, that Ireland i s moving towards: 0 Ireland Aid i s considering moving support towards a regional programme, making a slow withdrawal from direct support to zones; the system is tentatively called `tied budget support': funds would be given to BoFED, which would distribute to woreda offices; woredas would account back through their finance offices to BoFED and also report to the Ireland Aid coordinator at BoFED and to the zone, using a specially designedformat; the finance and development office in each woreda receiving assistance from Ireland Aid would open a pool bank account for the funds. 9.3 BUDGET EXECUTION Executionof the EFY 1995 RecurrentBudget (July2002 -July 2003) 9.3.1. RegionalSector Bureaus. Regional sector bureaus are executing their current budgets in an appropriate fashion by submitting budget requests and monthly accounting reports (see below). BoFED applies a strict rule that no funds are advanced to sector bureaus unless the appropriate requests and accounting report formats havebeen received. 9.3.2. Zones and Woredas. A `pool system' for budget execution and accounting by woreda sector offices was agreed at an inter-regional forudworkshop heldinAwasa on September 2-3. The pool guidelines exist inAmharic and are about to be approvedby BoFED. 9.3.3. The objective of the pool system i s to reduce administration costs by allowing accounting for a group of woreda sector offices to be performed by one `pool representative office' for the group - see Annex 3. There are three pools to cover 11offices and the original intention was that all three pool accountants would be centred in one location with FED accountants. The pool system was observed to be working in both woredas visited. However the accountantshadnot yet beenlocated together. 9.3.4. BoFED has advanced recurrent funds to zones and woredas even though they have not produced the appropriate paperwork. BoFED states unofficially that it will stop advancing funds to woredas which have not started to produce 1995 monthly accounting reports by November. It i s difficult to believe that salaries will be withheld, however. Executionof the 1995 Capital Budget 9.3.5. No public body we visited has started executing its capital budget. This period of the year is used for assessing tenders for procurement. Capital budget execution starts in October- November. 123 Banking Facilities 9.3.6. A number of remote woredas in SNNPR do not have nearby banking facilities. Some are reputed to be as far as 100 kilometres from the nearest bank branch. However, both the woredas we visited were under 12 kilometres from the nearestbranch of the Commercial Bank of Ethiopia (although for Siltie this i s in a different zone). Their FED offices provide cash cheques to large sector offices and draw the balance themselves in cash once or twice per month. No security problems seem to have arisen. A small balance for operating expenses is kept inthe safe. Unclaimed salaries are returned to the safe. 9.3.7. There are separate bank accounts for Treasury funds for recurrent expenditure, Treasury funds for capital expenditure, and for each donor/project. The total number of bank accounts i s not known, but runs into hundreds. The effects of this are: 0 integrated cash management i s not possible; 0 the monthly task of reconcilingbank statements with cash books i s made more onerous. 9.3.8. The advantages of the Single Treasury Account system have not been r e a l i ~ e dIt~i~ . s recommended that a study of bank accounts be made and that bank accounts are closed down where they are no longer in use, and merged wherever there are no legal reasons not to do so. Donors should support this rationalizationof the treasury function. 9.4 ACCOUNTING AND FINANCIAL REPORTING 9.4.1. Reporting of Accounts by Region to Federal Government. The region reports its accounts to MoFED only once per year. This i s a weakness in the national accounting system that is outside the control of SNNPR BoFED, which, it is claimed, could realistically report quarterly if asked to. We would concur with this view as it relates to previous years (i.e. up to EFY 1994), but are unable to comment on the accounting position for 1995 until the current problems of late reports from woredas are resolved. 9.4.2. 1994 Regional Annual Accounts (July 2001 - July 2002). All public bodies have submitted their monthly accounting returns for the whole of the Ethiopian year 1994. BoFED i s now in the process of consolidating these accounts. The SNNPR consolidated accounts for Ethiopian year 1994 will be completed by October/November 2002, that is, 3 to 4 months after the end of the `grace period' (July) in which books are held open to receive late vouchers. No problems are anticipated. 9.4.3. The SNNPR consolidated accounts for previous years have been submitted only to MoFED. The 1994 accounts will also be submitted to the SNNP Regional Council and the SNNP Regional Auditor General will have access to them. 9.4.4. 1995 Monthly AccountingReports. As at 26 September2002: 0 all regional sector bureaus had submitted accounting reports for July and August; 0 no zones had submitted any accounting reports for July or August; 0 6 w o r e d a ~ ~ ~submitted accounting reports for July but none for August. had 9.4.5. The prompt submission of accounting reports by regional sector bureaus is attributed to BoFED's strict policy of withholding budget funds until proper accounting reports and budget request forms are received. 84This has been adopted at the Federal level, but it i s unclear whether it i s intended to apply at the regional and woreda level. 85Buji special werada, Sylem woreda (Kefa zone), Cheta woreda (Kefa zone), Lanfaro woreda (Siltie zone), Cheha and Sodo woreda (Gurage zone), Abeshgaeand Marka woreda (Gurage zone). 124 9.4.6. This year it was expected that there wouldbe delays inaccounting by woredas, and that consolidation would be more difficult, because: 0 Accounting to BoFED is being performedby 104 woredas for the first time: skill levels are lower than at zones. A set of manual monthly forms mustbe prepared for each of the 1,833 public bodies inthe region. 0 Accounting and reporting is on the new chart of accounts, the most significant effect of which i s that public bodies must analysetheir expenditure by cost centre. 9.4.7. In the one zone and two woredas visited by the reporting team, the main cause of the current delay in submission of zone and woreda accounting reports was stated to be the delay in finalising the budgets. However, this has not stopped budget execution and it was noted that the prime accounting records (e.g. Form 23) were upto date inthe woreda sector offices as well as FEDoffices. The mainreasonsfor the delay could actually be any of the following: I Potential problem I Estimated probability I Minor problems (Theseproblems will quickly disappear once roles and budgetsare conjirmed) Lack of authorisation.ability: staff in a temporary accounting role are Low reluctant to assume the authority to sign accounting report documents. Head o f finance could sign Staff are reluctant to sign returns which include unconfirmed budget High figures. Worseningproblems Insufficient staff to handle both budget execution and accounting: Moderate temporary staff are being used. T h i s wouldsignal the risk o f progressively lengthening delays inaccounting. T h i s problem was observed in Wenago zone IIPotentially serious problems Staff are unable to complete the budget execution and accounting IILow I documentation (This would cause a system breakdown unless training and help was quickly available). It is regarded as unlikely that there are no skilled accounting staff in a woreda 9.4.8. From this analysis the conclusion was that the most likely cause of delay i s the reluctance of staff to sign formats which include unconfirmedbudget figures. 9.4.9. None of the accounting reports that have been received have yet been entered onto the modified Budget Disbursement and Accounts computer system by BoFED. Two members of staff are currently training with the DSA project for the new chart of accounts in Addis Ababa and will commence data input inNovember / December. Conclusion on Late Submission of Accounting Reports 9.4.10. The accounting function at woreda level i s not onerous and most staff have an adequate educational level (see section on human resources). The formats used for budget execution and accounting are user friendly, containing instructions on the back of each format. Training will be offered by the DSA project in the near future - the project has an excellent training record. There i s a good chance that the delays currently being experienced in accounting at woreda level will be corrected by November/December. 9.4.11. However, there was no hard evidence that this will be the case and the risk of accumulating delays inthe accounting system remains highenough to warrant serious concern. 125 BOFEDPlansfor Accountingfor Channel2 and3Funds 9.4.12. The accounting reports provided to BoFED by sector public bodies at regional, zone and woreda level are incomplete because they include only the figures for funds disbursed through Channel 1: i.e. disbursed via BoFED and zone or woreda FED offices to sector offices -seeExhibit1:Channel 1below.86 9.4.13. These accounting reports do not include expenditure on funds passing through Channel 2 (i.e. funds passing from a federal sector ministry to a regional sector bureau and down to a woreda sector office - see Exhibit 1: Channel 2 below) even though at least some of these funds are included in the budget. Neither do they include figures for use of funds disbursed direct by donors to projects (Channel 3). 9.4.14. The reason for this omission i s that accounting for the use of funds i s traditionally reported only to the entity that providedthose funds. Exhibit 1:FundsDisbursementandAccountingReports Channel1 Channel2 MOFED SectorMinistry Sector Ministry BOFED, RegionalSector Bureau - - Woreda Finance 4- ----- WoredaSector Woreda Sector Office Office Office Disbursement Disbursement t -----. Accountingr e p t t------. Accounting report 9.4.15. BoFED has designed a system and formats which woredas may use for reporting on Channel 2/3 funds. These have not yet been implementedbut the intention i s to persuade sector offices to start to use them duringthe coming year. 9.4.16. Taking the example of Channel 2 funds, as shown in Exhibit 2 below, the system requires that a woreda reports its usage of funds through two routes: 0 prime accountability will be upwards to sector bureaus and federal ministries, as before: 0 additionally, BoFED would expect expenditures to be summarised on special memorandum formats and reported to the woreda FEDand hence up to BOFED. 86Forsimplicity, this diagramand the following ones omit zones which are now inthe samereporting position as woredas. 126 Exhibit 2: ProposedSystemfor Reportingfor ChaMel2 Funds m 14 SectorMinistry w 1 yF 1 I + 1 I I I Regional Sector ,Burey - Woreda Finance ................... Woreda Sector Disbursement +------ Accountingreport .I .................... Memorandumaccountingreport 9.4.17. There i s no legal basis for insisting on these reports, but BoFED hopes to implement the system gradually, explaining the reason to each sector bureau, zone and woreda. The main problem i s likely to be that the 'culture' of accountability i s one of only reporting to those who provide the funds. 9.5 INTERNAL CONTROLS AND INTERNAL AUDIT RegulatoryFramework 9.5.1. The SNNP Regional financial rules and regulations have been amended to reflect the decentralisation of duties to woredas and these have been approved by the Regional Council. A manual for disbursement and inspectionhas also been officially approved. 9.5.2. The pool system for budget execution and accounting at woredas has been agreed and i s about to be approved by BoFED. Internal Control 9.5.3. As mentioned in much of the literature concerning government financial management in Ethi~pia,'~there is a strong culture of internal control over the disbursement of government funds. This was confirmedby observation inSNNPR: 0 financial regulations and directives appear to well understood: 0 authority for payments up to different threshold limits i s clear; 0 there i s division of duties between accountants and cashiers: 0 cheques are correctly signed by two authorised signatories; 0 payroll i s prepared by BoFED on a computerised system; changes are authorised by the personnel division and by the bureau head; sections of the payroll are distributed to bureaus with cheques for them to cash and make payments; all staff sign for pay received and any unpaid amounts are returned to BoFED; 0 the role of internal auditors i s still, largely, pre-audit checking of vouchers before payment; they also verify cash balances and do a 100percent reconstruction of bank reconciliation; e.g. EC 0712002 127 there i s also an `inspection' function (effectively another tier of auditors) at BoFED and at zones and woredas, who perform post-audit checks. 9.5.4. Weaknessesin internal control are: 0 fixed asset registers are not maintained rigorously; feedback from accounting reports i s traditionally slow and appears to have worsened, at least temporarily this year; there are large numbers of `suspense accounts' which are reported on regularly by intemal and external auditors: these are cash advances to employees and suppliers which have not been accounted for; some of these lists go back for many years (e.g. education bureau 8 years) and often relate to employees who have left the service or died. These amounts are wrongly included as cash in the accounts (e.g. bureau of education Birr 465,000); 0 understaffing at most offices may lead to a weakening in internal control: the level of control needs to be balanced against the disadvantages of overstaffing, however. 9.5.5. There are too many tiers of `audit' operating in the region. Most of these are understaffed, indicating that there i s scope for rationalisation of the whole approach to auditing. InternalAudit 9.5.6. There are internal auditors at most of the 1,833public bodies inthe region. They report directly to the head of their public body and have nojurisdiction outside the public body. Their main functions are: 0 pre-audit: checking documentation for every transaction before money i s disbursed; this takes up most of their time. 0 post audit: chechng at least a sample of documentation after money has been disbursed. 0 checking monthly bank reconciliation 0 reporting monthly to the head of the public body on: > > movements on bank accounts; bank reconciliation; any irregular items found: most of this taken up with `suspense' accounts. 9.5.7. It can be strongly argued that the pre-audit function i s unnecessary, because all transactions are authorised by appropriate personnel and an audit sample would reveal irregularities as effectively as a 100 percent check. There i s therefore scope for taking at least some of the internal audit staff and retraining them in more appropriate audit techniques. However, some existing internal auditors, especially at woreda level, may not be capable of assumingthe responsibility of this role. It may bebetter to reassign themto accounting jobs. Inspection 9.5.8. Inspection i s an audit role carried out by FED staff at bureau, zone and woreda levels. Their job i s to report to the FED on the accounts prepared by public bodies. As such they are acting as external auditors and shouldbe properly trained as external auditors. 9.5.9. At woreda level they spend much time on detailed transaction checking at the expense of comprehensive coverage. For example, at Wenago the three staff have visited only 3 to 4 out of 9 sector offices per year. Bearing in mindthere i s no travel involved, this represents 9 man months per sector office. 9.5.10. Unlike at thefederal level, the inspectors at regional level show their reports to the SNNP Region Office of the Auditor General, whose staff can use the results for planning their work. A good case could be made for integrating the Inspection teams with the Regional 128 Auditor General's office, which has no zone or woreda presence. The resulting external audit staff would report both to the Head of the FED office (who i s the effective executive head of the woreda or zone) and to the Regional Auditor General. An argument against this is that staff based inFEDoffices are unlikely to act independently of FEDoffice requirements. 9.6 EXTERNALAUDIT AND PUBLICACCOUNTABILITY Officeof the Auditor General 9.6.1. The regional audit bureau i s given the title of Regional Auditor General (RAG). It should be distinguished from the regional branch of the Federal Office of the Auditor General, which also has abranch inAwasa. 9.6.2. The RAGis responsible for auditing every public body in the region and reports to the Council of SNNPR (though this has only recently started - i.e. they have reported on 1993 annual accounts). The 1993 report gives no overall audit opinion. It indicates cash shortages, any misuse of property, any irregular vouchers, and suspense accounts. 9.6.3. Strong points are: The RAG i s responsible for auditing all accounts kept by a public body Le. annual capital and recurrent accounts, and donor funds. Information about donor funds is obtained by writing to the donors directly. The RAG understands the concepts of external audit, including systems audit and evaluation of internal control systems. There is an audit manual in use (the Federal Auditor General's manual - written in Ethiopian year 1988). The RAGappears to understandthe concepts of risk assessment for audit planning. Staff are of a relatively higheducational standard: Total 53 auditors: 1Masters, 14BAS,32 college diplomas (of whom 7 are attending summer school at Makele University to upgrade to BA) and 6 others. There is strong liaison with the work of other audit bodies: P the branch office of the Federal Auditor General send all their reports to the RAGwhen they audit inthis region; P the RAG sees the reports of regional, zone and woreda internal auditors and inspectors, in order to evaluate the system of internal control at each public body. The RAG has lobbied BoFED for a set of regional consolidated accounts to be audited - these will be provided for the first time this year (the 1994 SNNPR consolidated accounts). 9.6.4. Weak points are: Despite the RAG'Sawarenessof good audit practice, it i s not applied: P The annual plan pays lip service to assessing audit risk of all public bodies but in practice the audits concentrate on high-budget nearby locations. Geographical coverage i s minimal. The plan for 1995 i s to audit only 70 high-spending public bodies. Auditors rarely go to woredas or zones. 129 9 Audit reports do not state anaudit opinion. 9 Audits aretoo time consuming, probably resultingfromduplication ofwork carried out by internal auditors and inspectors. Geographical coverage i s therefore severely limited. 0 The office i s understaffed: 53 staff and 46 vacancies for auditors. However, given proper practical training and effective audit planning, a much greater regional audit coverage could be obtained with the existing stafJ: 0 The RAGis not fully conversant with current budgetingand accounting reforms. He quoted the number of public bodies as 900 rather than 1,833 and has been given no awareness training on the new chart of accounts. There is a desire to learn from BoFED but this has not yet been discussed with BoFED. Lack of vehicles acts as a disincentive to go to remote locations. 0 There is no contact with the federal inspection team from MoFED; they avoid each other. Public Accountability 9.6.5. BoFED is accountable to the Regional Council. There i s no regional Public Accounts Committee and no members of the Regional Council are specifically trained in how to evaluate financial statements or how to interpret the report of the Regional Auditor General. 9.6.6. The EFY 1993 consolidated accounts for the region, produced by BoFED, have been submitted only to MoFED. The 1994 consolidated accounts will be submitted to MoFED and, for the first time, to the SNNP RegionalCouncil and to the Regional Auditor General. 9.6.7. Copies of consolidated accounts for SNNPR are not available to the public except as part of the Federal accounts. There are no copies of the Federal accounts available to the public inSNNPR. 9.6.8. It would be possible to place a copy of the SNNPR accounts for EFY 1994 inthe public library inAwasa. It i s unclear whether (or when) this will happen. 9.7 HUMANRESOURCE IMPLICATIONS Leadershipand ManagementAbility 9.7.1. BoFED: The reporting team has been very impressed with the quality of the management team at BoFED, with their determination to implement the budget reform program, and with successes they have achieved. 9.7.2. Regional Auditor General: The RAG understands what his office should be doing, but i s failing to put it into practice. Management capacity building i s needed in this office, in the context of a wider auditing reform program. 9.7.3. Sector Bureaus Financial Management: There seem to be few immediate management problems at sector bureaus, though lack of interest inthe budget reforms has been reported. 9.7.4. Woreda FED management: Strong management at woreda FED offices will be essential to ensure the new budget and accounting reforms are sustained. The two visits revealed significant differences in the levels of interest and determination of the managers. 130 BoFED is embarking on a plan of participative dialogue with all woreda offices, and the trainingprovidedby DSA willbeimportant. Levels of Staffingand Skills 9.7.5. Although on paper BoFED has many vacancies (see Annex 2), there appears to be no general problem with staffing levels inpractice. They would rather invest inleaming new slulls than in hiring more staff. New skills will be required mainly in the area of planning and budgeting. From a financial management point of view, the same comment can be made about staff numbers and skills at regional sector bureaus. 9.7.6. Zone and woreda staffing i s still being finalised. The main concern i s that significant numbers of woredas may be left below the capacity to carry out their duties effectively. This problem has been made worse by the fact that staff who have left the service because they refused to relocate have usually been relatively skilled. Again, from a financial management point of view, the greatest shortage is likely to be in skilled budgeting staff. Accounting at woreda level i s a relatively easy skill to acquire (though not if there i s no senior member of staff from which to get help). BoFED believes strongly that capacity building at woredas should take the form of training rather than increasing staff numbers, a view with which we concur. 9.7.7. However, alternative systems suggested by BoFED to combat the problem of staff losses are: Rotation of staff; 0 Recruiting new graduates for woredas, expecting that they will stay for 2 to 3 years and then leave; 0 Attachment training: talung `work experience' graduatesfor 6 month periods. 9.7.8. Across the various auditing roles there is probably not a serious staff shortage. The main need i s to rationalise the roles of auditors, to re-define their legal duties and to train them inmodemauditing practices. Recent Training Initiatives 9.7.9. There have been a number of recent training initiatives for financial management staff inthe region, which are summarisedbelow: m The Regional Management Institute (RMI), Awasa, has been established for 7 years. Woreda accountants were last trained there two to three years ago. More recently the DSA project has provided funds direct to the RMI for Budget Reform Program training programmes: e.g.: awareness creation training, training of trainers, region-wide training in budget preparation and budget execution for woreda staff, given at four training locations in the region. m The budget preparation at woredas was greatly facilitated by a mobile `Budget Task Force', consisting o f 24 experts from key sectors who provided technical assistance at more than 80 percent of the 104 woredas within 15 to 20 days. Guidelines for training in budget execution and inspection -4 copies have been sent to each woredag8. The Capacity Building Bureau in Awasa, which was established in November 2001, is at the moment mainly concerned with upgrading facilities at Health and Education training institutions. It plays no part in capacity building for planning, budgeting, accounting or auditing andhas no plans to do so. 131 9.8 STRENGTHS AND WEAKNESSES 9.8.1. The strengths of SNNPR financial managementpractices are: Planning 0 Major sector plans are set within the context of Federal Sector Development Programs with planning periods from 3 to 5 years. 0 The first Medium Term Fiscal Framework (MTFF) for the region will be developed by BoFED starting inDecember this year. Budget Preparation 0 The budget preparation systemhas now been revised to align with the Federal system: 0 Capital and recurrent budgets are integrated. 0 The new chart of accounts has been implemented, analysing costs by cost centres, based on public body, program, sub-agency, sub-program and project. 0 At regional level, the budget is prepared in fairly good time (appropriated by Regional Council on August 15 for the year beginning inJuly 2002. 0 The budget gives an accuratepictureof actual expenditure. Budget Execution 0 The regulatory framework for budget execution i s strong. 0 There is a strong culture of compliance with budget execution rules within the region. 0 Under normal circumstances, BoFED will not release funds without receiving the appropriate request and accounting documentation. Accounting and Reporting 0 Accounting analysis now reflects the new more detailed chart of accounts. 0 The manual accounting systemi s generally well understood by personnel. 0 Regional sector offices are 100 percent up to date with accounting and reporting. Internal Control 0 Financial regulations and directives appear to be well understood and are complied with. 0 There i s appropriate division of duties between financial management staff. 0 Internal auditors and inspectors contribute to internal controls (see below). Auditing 0 Internal auditors contribute to the strong culture of compliant budget execution. 0 The Regional Auditor General (RAG) provides a suitable base for building an external audit service. 0 The RAG receives and makes use of reports by the Federal Auditor General, regional internal auditors and regional inspectors. Public Accountability 0 The regional consolidated accounts will be presented the Regional Council and to the Regional Auditor General for the first time (accounts for 2001-2). Leadership and Management 0 BoFED has a strong nucleus of a management team and is determined to implement financial managementreforms. HumanResourcesDevelopment 0 Comprehensive training inbudget preparation has taken place this year. 0 Accounting staff had comprehensive training programs 2-3 years ago. 132 0 Members of the RAGhave fairly higheducational qualifications. 0 The Regional Management Institute i s an effective partner in training of financial management staff. 0 There i s good culture of sharinginformation between staff. 9.8.2. The weaknesses of SNNPR financial managementpractices are: Organisational Problems 0 Definitions of responsibilities of region, zone and woreda need to be clarified. 0 Agreement on personnel to be allocated to woredas i s still not reached. Planning 0 At the moment there i s no overall Medium Term Fiscal Framework (MTFF) or Public Expenditure Plan (PEP) for the region: the first MTFF will be developed at regional level by BoFEDstarting inDecember this year. Budget Preparation 0 Budgetingis still performed on an `incremental' basis. The budget calendar i s not backed by legislation (attempts will be made this year to correct this). 0 Budgeting at the regional level i s delayed (and administration i s increased) because the federal government does not notify the regional subsidy at an early enough stage. 0 This year's budgets are still being amended at zone and woreda level because of delays in agreement of personnel postings under the decentralisation program. 0 The formula for allocation of regional subsidy to woredas needsto be revised. An unspecified proportion of donor funds received (including aid inkind) are not included in the budget. The set-off system discourages disclosure of these funds and also encouragesunder-budgeting of regional revenue. Budget Execution This year, because of delays in agreeing the zone and woreda budgets, execution of the recurrent budget at zones and woredas is taking place without feedback of the appropriate monthly accounting reports. 0 A large proportion of the capital budget is executed outside the mainstream financial management system, through sector ministries or direct from donors. Accounting and Reporting Monthly accounting by zones and woredas is severely delayed this year. This i s caused at least in part by delays in finalising budgets, but the causes need to be followed up. There i s a moderate risk that some woredas are building up a cumulative backlog of overdue accounting returns, because they cannot cope with the work-load. 0 Accounting i s on a cash basis: assets (apart from cash) and liabilities are not recognised: this will be partially corrected when the new double entry modified cash system is introduced next year. There are significant amounts of cash advances to employees that have not been accounted for: these show as cash inthe accounts instead of expenses or write-offs. 0 A large proportion of the capital budget is accounted for outside the mainstream financial managementsystem, by reporting to sector ministries or direct to donors. 0 The Region submits accounts to the Federal Government only once per year. Internal Control 0 Fixed asset registers are not maintained. 0 Suspense accounts are not properly controlled or explained. 133 Auditing 0 There are too many tiers of audit inthe region. 0 Internal audit i s mainly pre-audit checlung. 0 The RAG and Regional Inspection staff do not use effective external audit procedures: they duplicate each other's work and could be integrated: the claimed lack of suitable staff i s not the problem: sufficient audit coverage could be achieved with existing staff by suitable samplingtechniques. PublicAccountability 0 There i s no Public Accounts Committee in the region. Management 0 Management ability at woreda level is variable: this becomes far more critical under the newly decentralised system. Human ResourcesDevelopment 0 Bureau of Capacity Building i s not, at The moment, concerned with financial management staff. 0 There i s a shortageof personnel with skills inplanning and budgeting. 0 Auditors at all levels are inneedof training inmodernaudit techniques. 0 There are virtually no plans for training to be financed with government funds. 0 There is little provision for training of new staff, apart from on-the-job experience. 9.9 RISKS 9.9.1. As indicated above, the fact that regions report their financial results to MoFED only once per year poses a significant problem of accountability for the Government of Ethiopia as a whole. However, this problem i s not the responsibility of the regions. The reporting mechanisms within SNNPR are considerably more timely, with the exception of the current and hopefully temporary situation of late reporting by woredas. 9.9.2. Assuming that aid disbursements are made direct to the region and that they are all made through Channel 1(Le. through BoFED, which passes the funds down to woreda finance offices for distribution to sector offices) it i s possible to make a regional financial accountability assessment (RFAA) separately from an overall CFAA. 9.9.3. Fiduciary risk to public funds in SNNPR i s defined as the expected value of the loss of developmental benefits arising out of gaps between present financial management arrangements and generally accepted international standards. This analysis i s made according to the DFID and OECD/DAC guidelinesg9on managing fiduciary risk when providing direct budget support. These build on the IMF Code of Good Practices on Fiscal Transparency, the IMF/World Bank reviews of 25 HIPC countries, and IFAC/PSC International Public Sector Accounting Standards. In the DFID and OECD/DAC guidelines, developmental benefits are defined (by implication) in terms of pro-poor expendit~res.~'The methodology has been used in pilot assessmentsinMozambique and Eastern Caribbean countries. 89DFTD(2002) andOECDIDAC (2002). These two sets of guidelines are very similar. 90T h i s implication i s drawn from two of the Good Practice Principles, viz. that the budget supports pro-poor strategies, and that the budget is a reliable guide to actual expenditure. 134 9.9.4. There are nine Principles. For each Principle, a rating of A, B or'C has been made: 0 A represents a situation where there is substantial compliance with international good practice, although coverage may not be 100per cent; B indicates that there are some significant weaknesses in compliance or that the rules/procedures need to be changed; C indicates substantial failure to comply with the rules or that the system will require substantial upgrading to meet international good practice. 9.9.5. These ratings represent the level o f seriousness and concern with which any prudential shortcoming is viewed by the team and, inversely, the corresponding level o f benefit expected fromreform. Good Practice Principle and Benchmarks Rating Comment 1. A clear set of rulesgoverns the budget B A budget law specifying fiscal management process responsibilities i s in operation. 1.1A budget law specifying fiscal The regionalbudget timetable has no status in law managementresponsibilities i s in operation yet. 1.2 Accounting policies and account code The regional budget timetable i s delayedb y late classifications are published and applied notification of the federal subsidy. The formula for calculation of subsidies to woredas is not yet finalised. Split of responsibilities between region, zones and woredas needs to be refined. Accounting policies and account code classifications are published and applied. The improvements to account code classifications have been successfully implemented into budgets of all SNNPR public bodies. 2. The budget is comprehensive C Considerable external inflows are not yet brought 2.1 All general govemment activities are into the regional budget. These include aid inkind included inthe budget and community contributions of labour. 2.2 Extra-budgetary expenditure is not material It i s not clear whether all funds and agencies operating inthe region are to be consolidated with the regional budget inthe future. 3. The budget supports pro-poor activities A A high proportion of the budget goes into 3.1 Budget allocations are broadly consistent education, health, rural roads and other pro-poor with any medium term expenditure plans for sectors. the sector or for the overall budget Woreda allocations are made according to a pro- poor formula (though this i s still being refined). Capital and recurrent budgets are now integrated. There i s no Public Expenditure Programme yet, but plans for producing a MTFFwill be commenced inDecember 2002. 135 Good Practice Principle and Benchmarks Rating Comment 4. The budget is a reliable guide to actual A Budget outturns in aggregate tend to be very close expenditure to the totals appropriated by the legislature. 4.1 Budget outturn shows ahigh level of Expenditure controls are effective inpreventing consistency with the budget excess or unauthorized expenditures. Large gaps between capital budget estimates and actual implementationare precludedby including financing. inthe bud et only thoseprojectswith secured f, 5. Expenditure within the year is controlled B There are currently delays in reporting from 5.1 In-year reporting of actual expenditure woredas causedby initial problems instaffing and organization. Virements are closely controlled but 5.2 Systems operating to control virement, not commitments or arrears, pending commitments and arrears implementation of the double entry system. Internalcontrol is generally effective, but internal audit needsmodernisation. 6. Government carries out procurementin B There has beenrapid decentralization without line with principles of value for money and sufficient attention to adequatepreparation, transparency staffing and technical assistance at woreda 6.1 Appropriate use of competitive tendering rules 6.2 Decision making is recorded and auditable 6.3 Effective action taken to identify and eliminate corruption ~~ 7. Reportingof expenditure is timely and C Reportingby woredas and zones to BOFED is accurate delayedby the current problems of staffing and 7.1 Reconciliation of fiscal and bank records is organization. It is too early to determine whether carried out on a routine basis this is a temporary or a longer termproblem. 7.2 Audited annual accounts are submitted to Reports are normally timely, but not parliamentwithin the statutory period comprehensive(as for budgets). Bank reconciliation are normally timely. Annual reports are also normally timely, but consistof only revenue and expenditure statements, without reporting of cash and other financial balances or financing. EFY1994 regional consolidated accounts will be submitted to the regional council and auditedby the regional auditor general. %There is effective independent scrutiny of B Audit is legally independent and has adequate government expenditure powers. 8.1 Government accounts are independently However, audit and inspection offices are under- audited staffed and unable to cover all public bodies each 8.2 Government agencies are held to account year. Modernisation of audit practice would to for mismanagement and criticisms and much to remedy this. recommendations by the auditors are followed There is no parliamentary review of the audited UP. accounts. 91World Bank (2001b)PER,Vol. 11, para. 1.10, "World Bank (1997) CPAR,p.iii. 136 Good Practice Principle and Benchmarks IRatingI Comment 9. The budget process is transparent B Budgets are approved by the Regional Council, 9.1 Information on the fiscal activities of and annual statements are submitted back to the government is available inthe public domain Council. 9.2 Information presented in a way that Consolidated accounts for the region will now be facilitates policy analysis and promotes preparedand audited. accountability Although these are public documents they are not in practice available to the general public in SNNPR. 9.9.6. The average of the above nine ratings i s exactly B. The significance of this cannot be judged in relation to other countries as the methodology i s new and few other countries (or regions) have been assessed this way. It i s not possible to make a distribution of ratings, and compare SNNPR with others. However, the plans described below will help to improve SNNPR's risk rating. 9.10 SUMMARY OFFUTUREPLANS MTFF 9.10.1. The Deputy Head (Planning and Budgeting), BoFED, has prepared instructions to BoFED departments for preparing the regional MTFF (to cover Ethiopian years 1996 - 8). The MTFFpreparation calendar runsfrom December with target completion by 7 January 2003. 9.10.2. The effectiveness of this initiative i s likely to be reduced if reasonableestimates of the federal subsidy and available donor funds cannot be made. Budgeting 9.10.3. A number of activities are planned to improve the budgetingprocess over the next year: 1996 Budget preparation will take place in the context of the MTFF. However, the Budget Task Force, which was essential to the timely and effective preparation of the 1995 budget, will not be available to help. This year will be a test of the sustainability of the activities carried out so far under the Budget Reform Program. The formula for allocation of woreda block grants will be further revised. This i s a difficult task, given the large variation inthe size of woredas. It is planned to improve the information content of cost centre analysis in the budget by allocatingHRDcosts to cost centres. It i s hoped that the DSA project will assist the region to integrate the two computerised systems: the Budget Information System (BIS) and the modifiedBudget, Disbursement and Accounts (BDA) system. There will possibly be automation of budget preparation, usingthe BIS, in sample zones. NGOandDevelopmentCoordination 9.10.4. A workshop will be arranged to planimprovements inthis department. 137 Accounting 9.10.5. DSA plans to introduce the `double entry system' into the region will be commenced. This system i s correctly described as `modified cash double entry system': double entry accounting entries are made from the trial balance included with monthly reports submitted by regional bureaus, zones and woredas. This i s not full accrual accounting: e.g. fixed assets and provisions are not accounted for. However, it is a useful first step in the direction of accrual accounting in accordancewith international public sector accounting standards. 9.10.6. A manual for the double entry system i s at the moment being produced for SNNPR by the DSA project, based on the Federal manual. The system will improve control over expenditure commitments and should `force' action to be taken on suspense accounts - decisions need to be made as to which of these balances are genuine, and which need to be either recovered or written off. 9.10.7. Two members of staff are currently training at MoFED to enter accounting reports submitted by public bodies into the modified BDA system. 9.10.8. BoFED will commence plans to persuade public bodies to account to BoFED for funds passing through Channels 2 and 3 as well as accounting to the body from which the funds are sourced. This will require special formats, which have already been designed, but cannot be properly implemented untilthe double entry system i s properly functional. Training of Woreda FinancialManagement Staff 9.10.9. BoFED has plans for training woreda staff in three modules: budget, planning and accounting. They are working with the DSA project and are considering requesting more aid. It i s proposed that training takes place at the Regional Management Institute (RMI), using the Institute's trainers, assisted by BoFEiD experts. It is estimated that 600 people need training (approx 6 people per woreda). These would be taken 2 at a time from each woreda. The culture of sharing information obtained from training i s said to be good, which greatly assists dissemination of new skills. Strategic Plans 9.10.10. Strategic plans described by BoFED include: 0 improving the expenditure management and control system from resource mobilisation up to expenditure; ensuringthat the roles of region, zone and woreda are properly defined; improving the tax base for the region, which i s poor at the moment: identifying the problem, income potential and future steps; continuous improvement inplanning and budgeting; capacity building:emphasis on training and technical assistance,not staff increases; devising performance indicators for the budget; making provisions for the replacement of assets: this will be partially assisted by the introduction of accrual accounting. 9.10.11. BoFED estimates that these plans will take 5 -10 years to implement. There are no time-bound plans for implementation. 9.10.12. Inpractice, the future plans for improving financial management and accountability in the region will depend on roll-out of initiatives started at the federal level. These will include) reforms under the Civil Service Reform Programme, the chief of which are: 0 Development of a fully Integrated Financial Management Information System (IFMIS); 138 the Performance and Service Delivery Programme; 0 the Accountability and Transparency component, which includes strengthening external audit, parliamentary oversight, development of the accounting and auditing profession, and community/civil society participationinpublic sector performance. 9.11 CONCLUSIONSAND RECOMMENDATIONS Short TermRecommendations 9.11.1. The immediateaction that needs to be taken is as follows: 0 Establish the date at which staffing changes in zones and woredas in the region are finally agreed. 0 Investigate: 9 thereasonsfor thedelay inreceipt of accountingreports fromzones andworedas; 9 the likelihood that various woredas are falling behind with their accounting and allowing arrearsof reports to buildup; 9 the effectiveness of the `pool system' for budget execution and accounting that is now operational inworedas; 9 any corrective actionthat needsto betaken. This information needs to be established as soon as possible. Hopefully the DSA project will organise a tour of woredas to establish the reasons for delay and to assist with any accounting problems that have arisen. An equivalent of the budget task force, which facilitated budget preparation inthe region, would be useful. 0 Consider sources of funding for training of woreda staff in planning, budgeting and accounting at the Regional Management Institute. Monitor this training, which i s a vital underpinningto the ongoingreforms. 9.11.2. Other short term recommendations are: 0 Monitor various ongoing improvements in regional financial management and accountability: 9 submission of EFY 1994 regional consolidated accounts to the Regional Council and access to these accountsby the Regional Auditor General; 9 publicationofthe Regional Budget ReformManual; 9 submission of the EFY 1996 regional budget calendar to the Regional Council for agreement; 9 preparation oftheregionalMTFF(startinginDecember 2002); 9 allocation of HRDcoststo costcentresinthebudget; 0 Establish realistic staffing levels at zone and woredas. Although woredas have autonomy to set their own staffing levels, more realistic guidelines than those issued by the Ministry of Capacity Buildingwould be useful. 0 Estimate the numbers of staff in the region that have left following the decentralisation program. Evaluate plans for recruiting new staff. Continue work on improving the effectiveness of the NGO and Development Cooperation department inBoFED. Agree a suitable model, organise conference, devise action plans. 0 Establish whether any regional bureaus, zones or woredas have started submitting accounting reports to BoFED for channel 2/3 funds. 139 MediumTermRecommendations 9.11.3. Mediumterm recommendations for the region are: Define the roles of the region, zones and woredas more precisely. In addition to allocating responsibility for activities, this may involve broader changes, for example: 9 selecting somezones to effectively act as sub-regions; 9 reducingtheactivitiesof other zones; 9 consolidating some smallworedasintolarger units. Develop a budget calendar, based on the federal timetable, that will ensure the presentation to the Regional Council of a recommended budget at least one month before the start of the fiscal year. This requires earlier notification of the federal subsidy by MoFED. Investigate the effectiveness o f 9 the existing woreda subsidy formula; further refine this formula; provide incentives for maximising disclosure of donor aid flows and local revenues. 9 the integration ofrecurrent andcapital budgetsanditseffect onreducingunder-funding of non-wage recurrent expenditure. Build on the Regional MTFF to develop a rolling medium-term public expenditure plan (PEP), basedon the federal PEPand subsidy projections. Include all aid inflows, labour contributions and extra-budgetary funds in the budget and accounts. Reduce the number of bank accounts to one in each public body, and correspondingly the numberof cashbooks, general ledgers and special reports. Provide regular in-year and end-of-year financial and performance reports to the federal level, as these are needed for country-wide consolidations and negotiations with donor partners, especially with regard to the sectoral development programmes. Maintainasset registers properly at all locations. Take action on suspense accounts. Identify those which need to be reclaimed or written off. Develop plans for rationalisationof the various audit tiers inthe region and improvement in their performance and coverage. This will depend on initiatives undertaken at national level, but the main recommendations of the reporting team in SNNPR are that: 9 there should be only two types of auditor: internal and external; the category of `inspection' should not exist as a separatecategory; 9 existing staff should be reassignedbetween accounts, internal audit and external audit, according to their capabilities, with those of highest capability being assigned to external audit; k bothinternal andexternal auditors shouldbetrained inmodemauditing techniques. Develop plans for improved effectiveness of local tax collection. Plan to set up a Regional Public accounts committee and to train them in interpreting the financial statements of the region. 140 0 Make copies of regional accounts available to the general public (e.g. placed in public library). LongTermRecommendations 9.11.4. Longterm recommendations are: 0 Implement plans for: 9 Rationalisation of auditors andskillsimprovement; 9 Improvementintax collection. 0 Implement IFMIS and full accrual accounting. 0 Develop performance based budgeting. 0 Develop performance auditing (value for money auditing). 141 Annex 1. Zones, Woredas and Populationin SNNPR Zone Woreda ~opulation~~ Total Total Average woredas population populationper woreda Dauro Mareka 84,140 Lema 81,962 Tocha 71,243 Esara 47,93 1 Gena Bossa 66,258 5 351,534 70,307 Wolayita Damot Gale 279,503 Damot Weyde 192,456 Bolosso Sore 321,018 Kindo Koysha 180,929 Humbo 124,286 SodoZuria 258,322 Ofa 143,244 7 1,499,758 214,251 Gamo Gofa ArbaminchZuria 191,472 Bonke 140,746 Boreda 63,091 Chencha 114,962 Deremalo 60,592 Dita 80,097 Gofa 213,547 Kutcha 131,945 Kemba 128,185 Merab Abay 63,372 Melekoza 96,353 Aba Debre 38,532 Zala 59,920 13 1,388,814 106.832 Sidama Awasa Zuria 444,360 Shebedino 292,680 Borcha 248,713 Dale 393,952 Aletawendo 349,091 Dara 135,286 Hula 229,743 Arbegona 174,198 Bensa 239,645 Aroresa 122,075 10 2,629,743 262,974 93Populations are given as at Ethiopian Year 1993 142 Zone Woreda Population Total Total Average woredas population populationper woreda Gurage Abeshege 91,054 Dosse 139,252 Meskan 236,872 Kokir 87,273 Enemo Ener 204,3 15 Endegagne 48,335 MuhurAk 104,837 Gumer 175,25 1 Cheha 149,006 Eja 106,236 Mareko 55,233 Kebena 57,590 12 1,455,254 121,271 Siltie Dalocha 158,573 Aliche Werero 116,459 Lanfaro 102,976 Siltie 151,475 Lankora 74,484 Azernet Berbere 136,350 6 740,3 17 123,386 Hadiya Lemo 245,239 Misha 157,936 Badewacho 226,299 Gihbe 150,388 Shashego 105,715 Soro 235,927 Duna 110,265 7 1,231,769 175,967 Kembata & Tembaro Kedide Gamela 181,177 Kacha Bira 152,528 Angacha 199,127 Omo Sheleko 162,023 4 694,855 173,714 Kaffa Chena 136,777 Gimbo 103,826 Gewata 58,884 Gesho 69,228 Sylem 36,895 Bita 53,688 Menjo 92,048 Telu 59,347 Cheta 29,940 Decha 105,549 10 746,182 74,6 18 Shaka Yeki 110,212 Anderacha 20,355 Masha 39,015 3 169,582 S6.527 143 Zone Woreda Population Total Total Average woredas population population per woreda Gedeo Wenago 238,787 Bule 103,885 Yirga Chefe 176,666 Kochere 206,083 4 725,421 181,355 DebubOmo Bakogazer 216,838 Tseyma Bena 36,954 Hamer 39,155 Kuraz 61,942 Gelila 49,261 Selamago 17,500 6 421,650 70,275 BenchMaji Bench 183,766 Shiko 21,710 Maji 23,486 Bero 7,102 Menit Guldia 38,589 Shewa Bench 69,635 Surma 13,327 Guraferda 6,595 Menit Shasha 18,163 9 382,373 42,486 Special Woredas Konso 202,661 Derashe 115,615 Amaro 126,437 Yem 83,402 Burji 49,829 Konta 67,829 Basket0 43,304 Alaba 166,048 8 855,125 106,891 Total woredas 104 Total population 13,292,377 13,292,377 144 Annex 2. Comparison of Recommended and Actual Staffing Numbers at Woreda FEDand Revenue Offices I I I I Staff numbers I Establishment Actual number Actual number Siltie (maximum number WenagoWoreda 25 Woreda - 24 Sept Team Sept 2002 2002 Finance and Economic Development Planningandbudget 10 3 1 Disbursementsand 3 3 accounts I I Inspection 5 3 1 Internalaudit 1 1 1 Support staff I 4 2 FED sub-total: 29 14 8 Revenue office 18 8 8 Support staff I 3 Unknown Revenue office 25 11 8 + sub-total: Totals 54 25 16+ Woreda's estimate of Total 45 16for FED. Unknown total staff needed to do for revenue office. job efficiently Estimate of total Total 35 staffing after relocation is completed Approximate % 35/45 For FED office, 8/16 stafJing compared with numbers needed = 78% = 50% Approximate % 35/54 For FED office stafing compared with maximum = 65% 8/29 establishment = 28% 145 Annex 3. Pool Systemfor Budget Execution at Woredas For budget execution and accounting purposes, the various sector offices at woredas are grouped into `pools'. The objective of the pool system is that the `pool representative' performs the accounting for all offices in the pool. The original intention was that all pool accountants would be centred inone location. This does not appear to be the case yet, however. The following pool groupings were observedat Siltie woreda. ~~~ Pool representative Accounts for. Capacity building Capacity building Health Education Ruraldevelopment Ruraldevelopment Agriculture Cooperatives Water Community roads Administration Administration Wereda council Civic society and social affairs Finance and economic development Finance and economic development Revenue Offices not inpools (andtherefore self-accounting) are: Court, Police, Militia, Justice, Prison. 146 Annex 4. SNNPRBoFED Organisation Chart IHead I 1 I 1 I 147 PRIVATESECTOR EXECUTIVESUMMARY 1. The book-keeping system usedby the private sector companies and Non-Governmental Organisations (NGO's) in Ethiopia i s the double entry-system prepared on accrual basis. According to Ethiopian law, each enterprise or NGO should keep books of accounts, following generally accepted accounting principles. Since Ethiopian law does not specify the content of the term "generally acceptedaccounting principles", the practitioners have been required to find knowledge from international sources. Duringour survey, we learnt that no company to date has followed any specific generally accepted accounting principles in its entirety. 2. By far, the majority of the private sector companies in Ethiopia are small family operated companies. As a result, companies that maintain proper accounts for purpose of decision-making and reporting are limited. 3. There are twenty-seven licensed private auditors, most of them with international qualifications, and a government Audit Services Corporation. Only one international audit firms i s established in Ethiopia and two of (three) of the private audit firms are associated with major international firms. The private firms are all run by their principals and there are no partnerships. 4. By law audits are required of share companies, private limited companies with twenty and more members only and all NGO's. 5. A national accounting and auditing standardsettingbody should be set up. 6. A national accounting and auditing monitoring body should be set up. 7. Separate accounting and auditing laws should be created. 8. The Commercial Code and Civil Code are both over forty years old and need revision to provide for disclosures and modern concepts of governance. 9. The Ethiopian courts are often accused of being inefficient. The inefficiency can be attributed to shortage of judges and support staff. However, this i s only part of the story. Lack of proper training and experience are also cited as contributing factors. 10. The commercial register needs updating. The monitoring of the private sector, except the financial sub-sector, is weak. The public sector, on the other hand, is well regulated and monitored. 11. NGO's are regulated and monitored by two Government bodies. The smaller NGO's are subjected to full annual audit that can be unnecessarily intensive. These areas need revising. 12. As concerns Community-Based Organisations (CBO's), there are no standards developed, no federal governmental monitoring i s obliged, no auditing i s regulated and no legal framework exists except for the Civil Code. CBO's are not working on federal level, only at regional levels inEthiopia. 13. The quality of education and training of accountants need to be improved. The gap between demand and supply of different levels of accountants i s narrowing but need to be monitored incase the situation changesdramatically. 14. Donors' interventioni s crucial to bringabout the changes recommended in this report. 14% 10. INTRODUCTION Introduction 10.1. The background of the CFAA for the private sector relates to the fact that the importance of the private sector as an engine of economic growth and civil society through the private sector, through community-based organizations (CBO) and non-government organizations (NGO) etc for service delivery, pluralism and advocacy, has been recognized by the govemment and donors. Inthe future, many donors consider channeling increasing amounts of development cooperation through the private sector, CBO's and NGO's. 10.2. Good accounting and auditing practices in the private sector are deemed to be an important ingredient for an enabling environment for private sector development and for attracting foreign investments. 10.3. This report i s ajoint work between Emst & Young and A.A Bromhead & Co, who i s an associatefirm of KPMG. Objectives and Scope 10.4 The two main purposes of a CFAA are Fiduciary Risks Management and Development Strategy: The purpose of the Fiduciary Risks Management i s to identify the strengths and weaknesses of a country's accountability arrangements and to provide reasonable assurance that proper checks and balances exist and are practiced. This i s to ensure that public and donor funds channeled through and to the private sector are properly used. The CFAA can also provide information to a wider group of interested parties, as financial institutions, investors and entrepreneurs about the financial management capacity of the private sector, NGOs and corporate governance. The purpose of the development strategy is to facilitate growing knowledge of the country's financial management arrangements and to provide a basis for designing and implementing capacity building programs aimed at strengthening the financial accountability in a country. 10.5 The objectives of the private sector component of the CFAA are: to take stock of the accounting and auditing environment in Ethiopia's private sector, among NGO's and CBO's, to take stock of the present system for corporate governance and to proposecapacity buildingprojects and programs. Process used 10.6 i s information available regarding the private sector's financial accountability arrangements. As part of the review process relevant reports have been analysed. The documents that have been analysed are listed in the attached Annex. The following documents were of particular interest: Inventory Report of CFAA preparedby the European Union inJuly 2002 0 Report prepared by PWC in 1997. Ethiopia: National Accountancy and Audit Development Programme, Accountancy and Audit Studies Consultancy Final Report, April 1997 0 Project report regardingthe Addis Ababa Stock Exchange inMarch 2001 0 Diagnosis of existing control capacities in Ethiopia inMay 2001 Different types of laws, legal proclamations and regulations 149 10.7. A series of meetings were held with relevant persons from the Ethiopian private and public sectors, the NGO's, the Addis Ababa University and the private audit and accounting firms.A full list of personsconsulted canbefound inthe attachedAnnex. 10.8. The World Bank provided a questionnaire for use in this review. Said questionnaire was used as guidance duringthe review of documents and in meetings. 150 11. PRIVATESECTORACCOUNTINGAND AUDITING PRACTICES Accounting 11.1. The book-keeping system used by the private sector companies and NGO's in Ethiopia i s the double entry-system prepared on accrual basis. According to Ethiopian law, each enterprise or NGO should keep books of accounts, following generally accepted accounting principles. Since Ethiopian law does not specify the content of the term "generally accepted accounting principles", the practitioners have been required to find knowledge from international sources. Duringour survey, we learnt that no company to date has followed any specific generally acceptedaccounting principlesinits entirety. 11.2. By far, the majority of the private sector companies in Ethiopia are small family operated companies. As a result, companies that maintain proper accounts for purpose of decision-makmg, financial management and reporting are limited. However, all NGO's are required to keep proper accounts and to have them audited. The large private and share companies maintain proper accounts. However, the accounting system and the quality of the accounts vary depending upon the particular entity's background and also, whether it i s associated with an international firm and thus, i s required to follow that entity's accounting system. If the entity i s local, then the system very much depends on the person who established it, hisher background, training and practical experience. This is also true for NGO's. 11.3. The NGO's and entities affiliated with foreign businesses maintain accounts in accordance with the accounting standards of the parent entity. These accounts are in most case computerized and the software used i s o f good standard. Their accounting personnel are for the most part, well trained. 11.4. Many of the local businesses and NGO's, on the other hand, maintain accounts that cannot be identified with any given specific accounting standards,because Ethiopia has not yet set its own accounting standards. The accounts of most of the smaller companies and NGO's are not computerized. Also, due to their inability to pay market salaries, their accounting staff are often less than well trained. In some cases small businessesdo not maintain any accounting records at all. 11.5. Due to the fact that all the major banks, by far the largest insurance corporation, most of the major manufacturing sector and businesses in other sectors are still owned by the Govemment, public enterprises in Ethiopia have the lion's share of the business transactions and most of the people employed. The accountability of this sector is of interest to all interested parties becauseof their significance for the economy. 11.6. There are some one hundred and forty-five public enterprises that all have a rather well developed financial accounting system with specified accounting procedures manuals developed for use by each sector i.e., industry, agriculture, service, transport. The Public Enterprise Supervising Authority monitors the enterprises' performance to ensure that the accounts are closed and audited within a specified period after the end of their financial year. The accounts of some of the public enterprises are computerized but manual accounts are by far, the most common. 5.1.2 Auditing 11.7. Until the mid-19607s,private audits in Ethiopia were very limited and dominated by foreign firms resident in Ethiopia. Some of the private sector business enterprises were foreign subsidiaries and thus were audited by non-resident audit firms. In the mid-1960's some international audit firms opened offices in Ethiopia. They were followed by an Ethiopian Certified accountant's firm and later a few others followed suit. However, in the mid-1970, two 151 of the foreign audit firms, auditing most of the private sector, left the country as a result of the then socialist Government's decisions to transfer all the trained staff to the Government's newly established audit corporation, the Audit Services Corporation (ASC). Since the early 1990's, after the change of government, a number of audit firms have been started, mostly by Chartered Certified Accountants (UK) and few Certified Public Accountants (US). 11.8. The Commercial Code of 1960 requires the audit of the annual financial statements of share companies and private share companies with more than twenty shareholders. For private limited companies, irrespective of their size and if the number of their shareholders are less than twenty, no audit requirement exist. However, a number of private limited companies voluntarily audit their annual financial statements. Legal Notice No. 321/66 requires that the annual financial statements of all NGO's be audited. At present, there are twenty-eight licensed auditors, including ASC, practicing in the country. All of them are located in Addis Ababa. The licensed auditors are classified as large, medium and small by the Office of the Auditor General. There are five large, seven medium and sixteen small licensed auditors. 11.9. No legal framework or practical guidelines have been set up by the Government or professional body regarding the appointment of auditors in the private sector. A thorough analysis of the appointment system shows that, as regards the public enterprises and NGO's, competitive procurement i s commonly accepted as basis for appointment. Many of the public enterprises are audited by ASC and small audit firms because of a tendering system based on fee comparisons. The majority of the NGO's were also audited by small firms. This means, that the three internationally associated accounting firms (one established and two associated), only to a minor extent, take part inthe auditing of public enterprises or NGO's. The reason for this is that the audit fees have been cut to a level far below what i s acceptableto their kind of firm. It appears, that low price not high quality i s the reasonbehind the majority of appointments. This development can to alarge extent be explained by the lack of a national monitoring body. 11.10. Proclamation No. 68/1997 Art. 7(14) states the powers and duties of the Office of the Federal Auditor General (OFAG) to promote the auditing profession, issue, renew, suspend and cancel certificates of competence of private auditors. Accordingly, the (OFAG) issues and renews certificates of competence to the private auditors who hold internationally recognized accountancy qualifications from the major countries, such as the United Kingdom and United States, hold practicing certificates from their respective institute/associations and satisfy practical experience requirements within Ethiopia. There has not been any instance of suspension and/or cancellation of certificates. However, two private auditors have been reprimanded so far. 11.11. Based on our discussions with representatives of the public and private sectors, our conclusion i s that the Office of the Federal Auditor General does not have adequate capacity to carry out an efficient monitoring of accountants and auditors. It also appears that no systematic follow-up of performance i s done. No one knows then, whether the paper-work analysis of audits performed are supplemented by a relatively high frequency of field controls to monitor auditors intheir own environment. 11.12. There are no Ethiopian auditing standards enforced by the Government and/or any professional body. The Government expects the practicing licensed auditors to be governed by the high standards of professional conduct and other regulations demandedby their associations and institutes. 11.13. Auditors are not allowed to be involved in the preparation of the financial statements they audit. However, they are allowed to participate inbusiness activities, such as beingaboard member in share companies, if not a client. Generally, this rule i s followed. However, no independenceevaluation of auditors' are made. 152 11.14. Most of the audit reports issued by practicing auditors' state that the audit has been done in accordance with the Generally Accepted Auditing Standards and some indicate that they have audited according to the International Auditing Standards. UN technical assistance had been made available to the Audit Service Corporation through the services of a Training Advisor, who developed in-service training materials for the various categories of the Corporation's audit staff, and also an Unctad Advisor on "Audit Standards, Review and Reporting Procedures under Project ETH/80/020 Assistance to the Audit Service Corporation. An Audit Reference Manual inthree volumes was prepared. However, becauseno monitoring mechanism is in place to ensure the quality of the audits, it i s very difficult to ascertain whether all the reports measure up to the standards they refer to. Our review of the audit files of six audit firms indicated that, in general, the audits are of an acceptable standard. The extent of the documentation of the audits varied from firm to firm. We found a need to improve the risk analysis and also to improve and expand the audit plan. 11.15. In private enterprises performance audit i s carried out only in exceptional cases. In the proclamation for the NGO's it is stated that performance audit shall be carried out, but even in NGO's performance audit is done only inrare cases. 11.16. The Ethiopian Professional Association of Accountants and Auditors (EPAAA) was formed in 1971, but has been dormant for a long time. EPAAA has now started to show some initiativeto contribute to the development of the profession. All licensed practicing auditors are members of EPAAA. The other associations are the Ethiopian Accountancy and Finance Association (EAFA), which i s also presently dormant, and the Institute of Internal Auditors (IIA) Ethiopia Chapter. The last organization has shown someinitiatives to develop the intemal audit profession among its members who are from both the public and private sectors. As the EPAAA and IIA have very limited resources, their possibilities to influence the situation to great extent is limited. 11.17. The absence of legislation and a potent professional body governing the profession has created serious drawbacks to the development of the profession. As a result, there i s no national accountancy body and/or standard setting body setting national accounting standards and/or recommending the adoption of existing standards. The weakness of the profession can be attributed to the political environment from 1974 to 1991, when the development of the private sector was not assisted.The period from 1991to date has seen an improvement compared to the earlier seventeenyears. However, no active initiative or intervention has been taken to promote the accounting and auditing profession by those expected to do so. This includes the Government and the individual auditors andor EPAAA. As a result, nothing of substance has occurred to develop the profession in the past twenty-eight years. The present activities of EPAAA and IIA have yet to show their results. 11.18. The Office of the Auditor General issues a list with the names of Audit firms and Authorized Auditors as well as a list of Authorized Accountants and the names of the firms. The professional denomination used in Ethiopia in connection with Authorized Auditors and Authorized Accountants, usedby OFAG, i s as follows: "Authorized Auditors are entrusted with duties and responsibilities to audit and render opinionon those financial statements preparedby Authorized Accountants and/or organizations. On the other hand services provided by Authorized Accountants include bookkeeping, liquidation, tax advice, designing and installing accounting and internal control system, maintaining cost account records, preparing budget, maintaining and closing accounts, preparing financial statements, financial analysis reports and other related services". There are around 220 licensed Authorized Accountants. 153 Ownership and Structure of Audit Firms 11.19. There are twenty-seven private audit firms run by qualified licensed auditors. All the firms are owned and run by their principals. No partnerships or corporate ownership of the audit firms exist. As a result, some senior individuals upon obtaining their licenses from the Office of the Federal Auditor General, leave their employment and start their own small firms. The present ownership structure causes pressure, a state of affairs that will, by necessity, reflect on the quality of audits. This problem is exacerbatedby the other structural deficiencies o f the profession including the absence of a monitoring regime for auditors. 11.20. With the current ownership structure, it would not be practicalto build large audit firms similar to the situation elsewhere in the world. It should be realized, that sizes of audit firms determine the resources available for professional development of staff and improvement of audit quality. 11.21. The government-owned Audit Service Corporation (ASC) is operating with reference to a separate proclamation "A Proclamation to provide for the establishment of an Audit Service Corporation" (Negarit Gazeta No. 126 of 1977). Even if the ASC operates as an audit firm owned by the Government, they claim that they are an independent body. The Auditor General is the chairman of the corporation. As he i s also deals with the issuance of licenses for authorized auditors, there i s a possibility of conflict of interest. InternalAudit 11.22. The rolethat the internal audit plays inthe realizationof accountabilityhas not yet been recognized in Ethiopia. This can be blamed on the fact that the private sector i s small and has not realized the value or justification of internal audit services. The larger companies do not understandthe value of professional internal audit and what it can add to business performance and control. As a result, with the exception of few companies, modem internal audit service i s non-existent inthe private sector. 11.23. The internal audit i s better organized in the public enterprises. However, in practice, even there it needs to be further developed to reach professional standards. In our survey, we found that in some cases, the internal audit had become mixed up with the controller's function, as the internal auditors are worhng with so called pre-auditing. Therefore, the country needsmore professionally qualified internal auditors. Financial Management 11.24. The financial management of the private sector i s rather weak. No one looks further than the production of the annual financial statements and Financial Management i s not used as a management tool. The use of resources to maximize value to stakeholders by using existing opportunities and further creating opportunities has yet to be explored by the bulk of the private sector companies and the public enterprises. Conclusions 11.25. The following are the major conclusions: There are no national accounting standardsinEthiopia. The accounting system and the quality of accounts differ due to the absence of national standards and entities' background. The standard in the public enterprises is higher because they use accounting procedures manualsissued by their supervising authority. 154 The Commercial Code gives limited guidance on disclosure requirements. Audit are performed by intemationally qualified auditors licensed by the office of the Auditor General. No national auditing standardsexist. Audits are required only in share companies and privatelimitedCompanies with more than 20 shareholders. Audit of public enterprisesandNGO's are tendered andawarded mainly on fee bases. A strong accounting or auditingprofessionalbody is neededbut does not exist. As no proper and adequate monitoring regime exist, the quality of audits may be compromised. The ownership and structure of audit firms does not help the development of the profession. The internal audit function i s at a very rudimentary stage and needs to be developed. Financial managementi s neglected. Recommendations 11.26 . The following are the major recommendations: 0 Ethiopia need national accounting and auditing standards to bring about a greater understanding of financial statements and bring the quality of audit work closer to the intemationally accepted standards. As the accounting and auditing profession needs to be better governed and monitored, the Government should consider taking the initiativeand set up an ad-hoc committee consisting of the Office of the Auditor General, a highly qualified lawyer, professional accountants and the academia. This committee should be tasked to recommend a legal and institutional framework. It should also establish a resource base for a well-structured accounting and auditing profession in Ethiopia with capacity to deliver. The strengthening of EPAAA and IIA must be considered of vital importance to improve accountability. As a minimum, the output of the committee's work should bringabout the following: An accounting law that should includethe following: 9 Company/personrequiredto maintainaccounting records 9 Financialyear 9 Explainthereasonsbehindtherequirements to maintain accounting records 9 Currentrecordingandsupporting vouchers 9 Closingof accounts 9 Filingof accounting materials 9 Contents of the annual accounts 9 Thecontents ofthebalance sheetand theincome statement 9 Valuation principles 9 Supplementary disclosures 9 Consolidated accounts 9 Thepossibility to follow IAS An auditing law that should includethe following: 9 Registrationrequirements 9 Supervision and supervision authority 9 Educationrequirements 9 The auditors' obligations 9 Demandto supply information 9 Ownerships 9 Ethical requirements 155 0 A national accounting and auditing standard setting body should be set up and ought to be composed of the Office of the Federal Auditor General, Ministry of Revenue, professional accountants and auditors associations, academia and the industry. The duties and responsibilities of the standardssetting body should include: 9 Identifyingproper accounting practices and issue standardsfor the benefit of prepares and auditors of accounts and users of financial statementsingeneral. 9 Ensuringthat accounting standardshaveastatutory recognitioninthecountry. 9 Issuingdraft pronouncementindicatingtheir authority, scopeandapplication. 9 Issuing basic Auditing Standards and essential procedures with which auditors are requiredto comply. 9 Givingguidance onthe reporting implications where there are limitations onthe scope of the work undertaken by auditors or where auditors consider it necessary in exceptional circumstancesto depart from AuditingStandards. 9 Issuing: P PracticeNotes to assist auditors inapplying auditing standardsof general applicationto particular circumstances and industries. 9 Bulletinsto provideauditors with timely guidance onnew or emerging issues. 0 A national accounting and auditing monitoring body should be set up and ought to be composed of the Office of the Federal Auditor General, professional accountants and auditors associations, a reputable lawyer and others with knowledge and experience in accounting and auditing. The duties and responsibilities of the national monitoring body should be: 9 Directingthemajoraccountancybodies: 9 to have aproper monitoringsystem for their members, 9 to enquire into apparent failures by their members to observe standards and/or ensure adequatedisclosure of departure from standards. 9 To ensurethat standardsare used consistently so that financial statements show a true and fair view. 9 To ensure that the members of accountancy bodies have adopted all the auditing standards and that apparent failures by auditors to comply with these standards are subject to enquiry by an appropriate committee. 9 To advance the wider public's understanding of the roles and responsibilities of auditors and ensure, public confidence in the auditing process. 9 To consult with those who use of financial information in order to ensure that accounting and auditing standards provide them with an effective and timely response to their developing needs and to issues raised by them. Support and technical assistancedesignated for EPAAA is developed. 156 12. CORPORATE GOVERNANCEAND FINANCIAL ACCOUNTABILITY Legislation 12.1. Laws such as the Civil Code, Civil Procedure Code, Commercial Code, Penal Code, Penal Procedure Code and other non-coded pieces of legislations seriously need to be updated. Most of their provisions do not give solutions to current problems, because they did not exist when they were promulgated more than forty year ago. Succeeding governments have initiated revision of laws at various times. However, the experts entrusted with the assignment were in most cases assembledon an ad-hoc and voluntary basis due to the shortage of funds. Presently, a group of legal professionals i s in the process of revising the laws under the supervision of the Ministry of Justice. The fate of this attempt will be no different from that of its predecessors. The attempt will fail not due to lack of commitment on the part of the Government but due to shortageof money. Therefore, donor support of the programs is vital. 12.2. This situation also applies to the administration of justice. The Ethiopian courts are often accusedof being inefficient and corrupt. The inefficiency can be attributed to shortage of judges and support staff. However, this is only part of the story. Lack of proper training and experience are also cited as contributing factors. It i s common for fresh graduates to be assignedas judges immediately upon leaving higher education. Court clerks are often put on the benchjust because they are believed to have acquired some knowledge of the law during their work in the courts. The damage done by such assignments can be minimized by on-the-job trainings and through workshops and seminars. Government budgets do not allow for luxuries of this type, as they needexternal financing. Registrar of Companies and Corporate Governance 12.3. The companies in the private sector are small. There are probably some two dozen- share companies and some 2,000 private limited companies. Most of the share companies can be found inthe financial sector, banking and insurance business. The private limited companies include few big companies: mostly they are small family operated companies. There is no stock market the country. It is from this point of view that we should examine the corporate governanceregime of the private sector inthe country. 12.4. The regulatory framework for the registration of companies i s embodied in the Commercial Code of 1960, Licensing and Supervision of Banking Business Proclamation No. 84/94, Licensing and Supervision of Insurance Business Proclamation No. 86/94, Public Enterprise Proclamation No.25/1992, Public Enterprises Supervising Authority and the Industrial Development Fund Establishment Proclamation No. 277/2002, Federal Ethics and Anti-Corruption Commission Establishment Proclamation No. 2392001, Anti-Conuption Special Procedure and Rules of Evidence Proclamation No. 236/2001. The framework i s extensive enough to provide for good corporate governance, with the exception of the Commercial Code of 1960. This code does not express the responsibilities that businesseshave as large stakeholdersin society, such as employees, society as a whole or creation of wealth and jobs. This state of affairs was in tune with the prevailing frame of mindduring the period when the code was written. Furthermore, the disclosure requirements in the Code with respect to measurement of performance and governance of the companies need revising. The legal framework ensures the strategic guidance of companies, the effective monitoring of management by the board and the board's accountability to the shareholders. 12.5. In practice, the larger companies do generally observe the basic principles of good corporate governance in their investment decisions. However, it is very difficult to gauge whether that i s the case regarding small companies. 157 12.6. The total number of corporate entities in Ethiopia i s unknown, since the company register has not been updated. The reason for this i s that the regions have not cooperated with the Federal Govemment's demand to send in data. They considered themselves autonomous and refused to comply. However, information obtained at this date, shows that data now i s being collected from the regions andthat a computer network is beingbuilt for this purpose. 12.7. The Ministry of Trade and Industry and the Addis Ababa Trade, Industry and Tourism Bureau were asked to obtain the number of incorporated entities formed during the last three years. The latter agency was chosen because Addis Ababa i s the region where most private companies operate. The number of registered incorporated businesses i s found below. Place of registration for local companies i s optional and can be done either at the Federal or regional offices. Foreign companies must register with the Ministry only. FederalLevel Addis Ababa 2000 266 375 2001 228 364 2002 246 468 No dataexist regarding de-registered and insolvent companies. 12.8. The statutory requirements for the preparation of annual financial statements are promulgated in the Commercial Code of 1960, the Licensing and Supervisions of Banlung Business Proclamation No. 8411994. Licensing and Supervision of Insurance Business Proclamation No. 86/94 and Public Enterprise Proclamation 25/1992. However, neither the Ministrynor the Bureaurequires the filing of financial statements. Thus, the registrars of these two govemment bodies do not enforce compliance with the maintenance of accounting records. The National Bank of Ethiopia monitors compliance with Proclamations 84 and 86/94. 12.9. The Ministry of Trade and Industry and the Regional Trade, Industry and Tourism Bureauare responsible for ensuring compliance with the statutory requirements. Inaddition, the National Bank of Ethiopia regulates and monitors the banks and insurance companies while the Public Sector Supervising Authority monitors the Public Enterprises. The penalties for non- compliance are stated in the legislation. However, compliance with the Commercial Code of Ethiopia is not monitored and information on incidence of penalty for non-compliance does not exist. The National Bank of Ethiopiahas noted no penalty for non-compliance so far. 12.10. The concept of intemal control does not exist in the legislation. Only organizational control i s indicated. External audit i s a statutory requirement in accordance with the Commercial Code of 1960, but the same is not true regardinginternal audit. 12.11. Audit committees are not needed, because of the small size of most of Ethiopia's companies. 12.12. The Federal Inland Revenue Authority does not require audited financial statements of companies as it undertakes tax audits and assessments no matter what the audited financial statements state. 12.13. Companies in Ethiopia are required by law to adhere to the corporate govemance framework as stipulated in the Commercial Code. It protects shareholders' rights and treats all shareholders equitably, including minority and foreign shareholders. Shareholders can obtain effective redressfor violation of their rights.However, the law i s not monitored. 12.14. According to the Public Enterprise Proclamation No. 25/1992 public enterprises shall have a board consisting of at least three but no more than twelve members. The Proclamation 158 stipulates that the Public Enterprise Supervising Authority shall appoint two thirds of the members on the merit of their profession, experience and competence while one third of the members shallbe electedby the general assembly of the enterprise's workers. 12.15. No information exists of any recent donor involvement by way of supportltechnical assistance/studiesinthe area of corporate governance inEthiopia. Conclusions 0 The Ministryof Trade and Industry does not update the company register. 0 The Commercial Code of 1960's Govemance provisions do not reflect the responsibilities of business when it comes to creation of wealth, job and wider modern Govemance concerns. 0 The Ministry of Trade and Industry does not monitor the enforcement of the provision of the Commercial Code. Recommendations 0 The Commercial Code must be revised and modemized in a way appropriate for the circumstances and development situation of Ethiopia's private sector. 0 The Ministry of Trade and Industry should monitor the compliance to the Commercial Code and other pertinent laws. 0 A workable systemfor monitoring the private sector should be developed. Adequate provisions to enhance and sustain the system after its introduction must be provided. 159 13. NON-GOVERNMENTALORGANISATIONS(NGO's)/COMMUNITYBASED ORGANISATIONS(CB0's) 13.1. The regulatory framework for the registration and establishment of NGO's and CBO's in Ethiopia is embodied in the Civil Code of 1960 and Regulations No. 321/66 and Proclamation No. 4/1995. In accordance with Civil Code, Art. 470, The Office of Associations shall keep in alphabetical order a register of associations. A new legislation of NGO's i s under preparation and i s expected to be passed during 2003. 13.2. There are, at present, some 1,200 NGO's registered with the Ministry of Justice. However, the Ministrydoes not register CBO's. Apparently, nobody registers and regulates the CBO's. The Ministry of Justice handles all registrations manually. MoJ states that the number of NGO's is increasing every year, which has to be considered when judging the future activities of supervision of NGO's. 13.3. NGO's can be international, local or religion based. The international and religion basedNGO's are financially and organizationally stronger than the localNGO's. 13.4. All NGO's file their audit reports with the Christian Relief and Development Association (CRDA). All members of CRDA adopted a code of conduct in 1985, a code enforced by an independent body, the NGO'S Code Observance Committee. CRDA members finance the Committee with their contributions. 13.5. The Civil Code, Article 478 states: 0 The Association shall communicate every year to the Office of Associations its balance sheet approved by the general meeting. 0 The Ministry of Interior may prescribe such rules as it thinks fit with a view to ensuring a good presentation and the truthfulness of such balance sheet. 0 Associations Registration Regulations No. 321/66 requires that every association shall submit an annual report to the Office of Associations, not later than one hundred and twenty days after the end of the preceding financial year. The report shall include the following informationas of the last day of the said preceding financial year: A balance sheet for the Association showing the assets and liabilities; The auditor's report in respectof said preceding financial year; and 0 A description of the major activities of the Association during said preceding financial year. 13.6. The Guideline issued by the Federal Disaster Prevention and PreparednessCommission (DPPC) on 4 February 1999 states that NGO's are required to prepare financial statements that show true and fair view in all material respects in line with generally accepted accounting principles. 13.7. The law does not require internal audits and audit committees. However, the DPPC Guideline provides for an Audit Review Committee to be established by both the NGO's and DPPC. This committee shall be composed of DPPC senior staff and the Finance Head of the NGO whose accounts are audited. 13.8. There are two Government bodies responsible for ensuring compliance by NGO's to laws and guidelines, viz. the Ministry of Justice and DPPC. The current initiative for reform and development has the goal to revise the relevant articles of the Civil Code of 1960 with respect to Associations. The draft legislation i s at an advanced stage. According to information obtained, this draft legislation assigns the registration, regulation and monitoring of NGO's to one Government body. 160 13.9. In accordance with Regulation No. 321/66 and DPPC's guideline, NGO's prepare annual financial statements in accordance with generally accepted accounting principles as appropriate to their circumstances. It should be noted, though, that no national GAAP for Ethiopia exist at present. International NGO's comply with the donor country's GAAP. Furthermore, NGO's comply with donor's requirements to account for the funds received when the donor so demands. 13.10. The NGO's sector i s regulated and monitored. It can be said, with reasonable assurance, that proper checks and balances exist and are adhered to in practice. All NGO's annually file audited financial statements with the Ministry of Justice and DPPC. The penalty for non-compliance can be loss of license to operate as an NGO. The Ministry of Justice cited cases o f recently withdrawn licenses. 13.11. In Ethiopia there are at least two NGOs' working with capacity building of other NGOs'. One i s the Christian Relief and Development Association (CRDA), established by international, religion based and local NGO's. At present, it has some 213 members and some 80 are inthe processof becoming members. The Association assists particularly the small local NGO's and provides them with a forum that enables them to address common problems. The local NGO's, for the most part, do not have skilled or professional personnel and, therefore, use mostly part-time accountants. As a result, audit reports are not presented within a reasonable time after the financial year-end. This, in tum, creates a problem with the annual license renewal. In response, CRDA offers training in bookkeeping and accounting once or twice a year. Capable accountants are in demand in the private sector, which causes a large turnover problem. 13.12. PACT, an NGO focusing on capacity buildingof small NGO's, provides, among other things, targeted accounting procedures manuals. PACT also contributes to the payment of salaries of accountants and project officers for a period of three years. PACT also contributes to the payment of Audit fees in their member NGO's. 13.13. Stakeholders consult with each other, including the Government, to avoid overlap of the Government and NGO's interventions. According to CRDA, the interaction happens at meetings where the parties discuss the three-years strategic plan. This forum and other informal consultations are usedto discuss donor and government priorities. Conclusions 0 There i s a lack of resources for implementing the laws and monitoring compliance from the government bodies concerned. 0 The full audit requirement would be onerous for the small NGO's. 0 Although the DPPC guideline refers to performance audit, no such audit is performed. 0 NGO's presently are regulated and monitored by two Government bodies. 0 There is no federal registration of CBO's. The register with the Ministry of Justice i s a manual system. 0 CRDA and PACT are two important NGO's working with capacity building of other NGO's. 161 Recommendations 0 The regulating and monitoring body for NGO's should be assigned to a single Government body for better results and ease of administration. 0 The Ministry of Justice should prepare for future computerization of all registrations. 0 Training resources should be made available for government officers dealing with the NGO's concerning: 9 Project preparation 9 Project evaluation 9 Projectmonitoringandsoon 0 Consideration should be given as to how the audit of the smaller NGO's could be made less onerous. One way could be to reduce the scope of the audit required of them. 0 Performance audit should be introducedfor selectedNGO's basedon selection criteria. 0 A federal register of CBO's should be created. 0 The work carried out by CRDA and PACT should be supported by further funds from donors inthe future. 162 14. EDUCATIONAND TRAINING 14.1. Ethiopia's quality of education is, in general, rather low. Therefore, the accounting courses that are available must be improved. The Addis Ababa University i s the major player in the training of accountants in the country. They have informed us that they have lost most of the senior teaching staff to either the private sector or higher quality education and employment abroad. As a result, no PhD holder teaches in the Accounting Department. The University also indicatedthat there is a serious shortage of teaching aid materials, particularly computers. As a result, students graduate from the University without knowledge of, or training in, accounting or other application software. The coursesthemselves needrevising as only one auditing course i s offered to accounting degreegraduates. 14.2. Internship opportunities for students do not exist. Such internships would enable the students to interact with the real world and help them build confidence when they seek employment. 14.3. On-the-job training is given to most accountants of larger private companies and public enterprises. However, small company accountants may not get the similar opportunities for training, as there are few accountants in house with the capacity to train. Small companies are seldom willing to pay for staff training. 14.4. Formal training i s rarely given to external auditors due to work and fee pressure as discussed above. However, on-the-job training exists for senior auditors and managers. Furthermore, students and members of professional associations such as the Association of Chartered Certified Accountants (ACCA) receive student and professional journals that enable them to update themselves with new developments within the profession. 14.5. Accounting diploma and degree courses can be pursued within Ethiopia. However, those who look for professional qualifications in accounting need to look abroad. Presently, ACCA courses are the most popular. Currently, ACCA has more than 800 registered students in Ethiopia. 14.6. At present, the gap between demand and supply of accountants of different levels and auditors appears to be narrowing. The Accountancy and Audit Studies Consultancy report of 1997 on this subject needsrevision under the current circumstances as a number of diploma and degree holders in accounting are finding it difficult to get employment. 14.7 As audits are not legally required of private limited companies with less than twenty shareholder, the number of licensed auditors covers the existing demands. However, a potential expansion of the audit requirement to other private companies and businesses would result in a gap between demand and supply. It i s expected that already professionally qualified accountants starting their own audit practices will fill the shortfall insupply. Conclusions The quality of education and training needs improvement. The opportunity to pursue an accounting qualification i s not within the financial means of those who have the interest and intellectual capacity to do so. Studentsjoining ACCA can get help from them and buildassociations with other students for mutual aid. A potential expansion of the number of audits will result in a gap between demand and supply. However, if the circumstances change, the demand can increase dramatically. 163 Recommendations 0 The education and training of accountants must be improved and the weaknesses in the education system mustbe determined and acted upon. 0 The students association of ACCA should receive assistance, at least in the short term, to help those who want to pursue their accounting qualification. In the long term, though, local accounting qualification systems should be implemented. 0 The gap between the demand and supply of accountants should be studied, especially if it i s believedthat the demand will grow duringa period of one to two years. 164 Annex. Planof Action Issue Action I Timing A needfor an improved Governance of the To be formed by setting up an ad-hoc committee which should be One year accounting and auditing profession tasked to come up with recommendationsthat set up well- structured accounting and auditing standardsin Ethiopia. A needfor aNational accountingandauditing Establish aNational accountingandauditing standardsbody Three years standardsbody which should identify proper accountingandauditing practices and standards. A needfor a National accountingandauditing Establish a National accountingandauditing monitoring body Three years monitoringbody which shouldbe taskedto set up a well strncturesmonitoring svstem. Accounting and auditing laws lhplement new separate accountingandauditing laws. IThree years Strengthening EPAAA andIIA IFind resourceswhich helps to strengthenthese organisations. lone year I (proper training andexperience,such as work-shopsandseminars, I lis required. Register of Companiesand Corporate Governance (Update of Companyregister ]A project to collect data has beenset up by the Ministry of Trade. One year I Commercial code of 1960 Update the commercial code to reflect the responsibilities of One year businessfor creation of wealth, job andwider modem governance concerns. lcompliance of laws The Ministry of Trade needto set up a proper systemfor non- Son-Governmenrd Organisationss(.YGO's)/Communit).Based Orgunisations (CBO's, Regulations dndmomtoring bod! for hGOs lThe regulaungand monitoring bod) for UGOs should be assignedlhe )ear to a single Governmentbody for better resultsandease of administration. Computerized registrations The Ministry of Justice should prepare for future computerization One year of all registrations. Audit requirementsfor NGOs Consideration shold be given to make the audit of the smaller One year NGOs less onerous by reducing the scope of the audit requiredfor them. Registration of CBOs Consideration should be given to a federal register of CBO. One year Education and Training Improvement of quality ineducation Findresourceswhich helps to strengthenthese organisations. One year Purchaseof materials, i.e computers Assistanceto student associationof ACCA Adequate assistanceto all accountants andstudents, offer suchas One year on-the-job training. Assistanceto the students associationof ACCA should be considered inthe short term to help those who pursuetheir accounting qualification. 165 ANNEX A: BIBLIOGRAPHY a EuropeanCommission (EC): Diagnosisof Existing ControlCapacities inEthiopia.May 2001; a EuropeanCommission(EC) :Ethiopia. Country FinancialAccountability Assessment (CFAA) Inventory Study, July 2002 (the study was draftedby ADE, Belgium); a European Commission (EC): Integrated Financial Management System for Govt of Ethiopia - Draft FinancingProposal2002; a Federal Democratic Republic of Ethiopia (FDRE) : Civil Service Reform Program Activity Report Ministry of Finance and Economic Development (MOFED) - -decentralization Support SNNPR Budget Reform February 2002; a Federal Democratic Republic of Ethiopia (FDRE) : Civil Service Reform Program - Assessment of the Implementations of the Budget Reform in the Southern Nations, Nationalities and Peoples Regional Government, Awassa, August 30, 2002; a Federal Democratic Republic of Ethiopia (FDRE) : The National Capacity Building program. (Paper for Aid HarmonisationWorkshop), 17September 2002; a Federal Democratic Republic of Ethiopia (FDRE) : Capacity Building Programs/Major Activities to Date and Plannedfor Next Three Years. 2002 a FederalDemocratic Republicof Ethiopia (FDRE) : An Overview of Capacity Building ProgrammeinEthiopia July 2002 a FederalDemocratic Republicof Ethiopia (FDRE) :MOFED ExpenditurePlanningReformFY199.5 (2002/03) Work Plan (Chart) 2002; a FederalDemocratic Republic of Ethiopia (FDRE) : FY 2001/02 Approved Budget, 2 Volumes (Budget Summary & Budget Details), August 2001; a FederalDemocratic Republic of Ethiopia (FDRE) : MOFED Summary of Govemment Budget for FiscalYear 1995 (2002/03); a InternationalMonetary Fund (IMF`): Ethiopia. Second Review under the three-year arrangement under the Poverty Reductionand Growth Facility, Requests for Augmentation of Access and for Waiver of PerformanceCriterion, and SecondAnnualProgram, African Dep., IMFWashingtonDC, March 2002; a InternationalMonetary Fund (IMF):Aide MemoireEthiopia- Improving Fiscalreportingunder Decentralisation, by CSchiller, MDavies& DLast, FiscalAffairs Department, WashingtonDC July 2002; a Ministry of Finance (MOF)/Ministry of Economic Development and Cooperation (MEDaC)/DSA project : Budget ReformDesignManual, Version2.1, February 17, 2000; a Ministry of Finance and Economic Development (MOFED)/DSA project : Brief on the Budget, Accounting and Expenditure PlanningReformby the DSA under the CivilReformProgram,April 2002; a World Bank (WB) : Country Financial Accountability Assessment (CFAA) Guidelines to Staff, Financial ManagementSector Board, WashingtonDC, September 2002; a World Bank (WB) : Draft Terms of Reference for a Country Financial Accountability Assessment (CFAA), WashingtonDC, September 2002; a World Bank (WB) :Ethiopia.Country Profile of FinancialAccountability, July 1998; a World Bank (WB) : Ethiopia. Focusing Public Expenditures on Poverty Reduction, Vol I. Washington DC, December2001; a World Bank (WB) :Ethiopia.Public Expenditure Review 2000, August 2000; a World Bank (WB) : Ethiopia. InitiatingMemorandumfor a Country FinancialAccountability Assessment (CFAA), WashingtonDC, March 2002; a World Bank (WB) : Project Appraisal Document (...) for the capacity Building for decentralized Service delivery Project, Washington, June 2002; a World BanWIMF : Background Paper for "Actions to Strengthen the Tracking of Poverty-Reducing in Heavily Indebted Poor Countries", WashingtonDC ,January 2002; a World Bank/IMF: Ethiopia. Tracking Poverty Reduction Spending in HIF'C's, Assessment of Budgeting Systems, 2001; 0 CFAA Guidelinesto Staff, - World Bank, September 2002 0 Diagnosis of Existing Control Capacities, - EC May 2001 a RevisedInternalAudit ProjectDocument(February 2000) Civil ServiceReformTask Force a I F M S for the FGE, Pilot Phase,Draft FinancingProposal, - EC, January 2002 a Ethiopia.FocusingPublic Expenditureson Poverty Reduction, Vol I. - World Bank, December 2001 a Ethiopia.FocusingPublic Expenditureson Poverty Reduction, Vol 11.- World Bank, December 2001 a Ethiopia.FocusingPublic Expenditureson Poverty Reduction, Vol 111.- World Bank, December 2001 a Ethiopia -PublicExpenditureReview Vol IWorld Bank -August 2000 a Ethiopia-Public ExpenditureReview Vol I1World Bank -August 2000 a Ethiopia. Tracking Poverty Reduction Spending in HIPC's, Assessment of BudgetingSystems, - World BanWIMF, end2001 a Ethiopia.Country Profile of FinancialAccountability, World Bank, July 1998 - 166 I F M S Scope, Objective andBroadStrategy, Main report EC December2001 - FifthCountry Portfolio PerformanceReview, - World Bank, October 2000 Background Paper for "Actions to Strengthen the Tracking of Poverty-Reducing in Heavily Indebted Poor Countries", World Bank/JMF, January 2002 FGE Accounting SystemVolume I, Accountingfor ModifiedCash BasisTransactions,- FGE, January 2002, FGE Accounting Systems, Vol 11, FGEChart of Accounts, - FGE January 2002, FGE Accounting Systems, Vol 111,Accounting for OtherAssets and Liabilities, - FGE January 2002, Brief on the Budget, AccountingandExpenditure PlanningReform Implementedby the DSA Project underthe Civil ReformProgram, - FGEDSA Project,April 2002, EducationSectorDevelopmentProgramme, ImplementationManual,- December 1998, Proclamation57/1996 Regulations 131997 Vietnam CFAA October 2001 CFAA Guidelinesto Staff, - World Bank, September 2002 Diagnosisof Existing Control Capacities, - EC May 2001 Ethiopia. FocusingPublicExpendituresonPoverty Reduction, Vol I. Bank, December 2001 - World Ethiopia. TrackingPoverty Reduction Spending in HIPC's, Assessment of BudgetingSystems, World BanWlMF, - end2001 Ethiopia. Country Profile of FinancialAccountability, - World Bank, July 1998 IFMS Scope, ObjectiveandBroadStrategy, Mainreport- EC December2001 FifthCountryPortfolio PerformanceReview, - World Bank, October 2000 I F M S for the FGE, Pilot Phase, Draft Financing Proposal, - EC, January 2002 Background Paper for "Actions to Strengthen the Tracking of Poverty-Reducing in Heavily Indebted Poor Countries", World Bank/MF, January 2002 Extemal Audit Project,RevisedProjectDocument, - FGEEMCP, January 2002, - FGEAccountingSystemVolume I,Accounting for ModifiedCash Basis Transactions, - FGE, January 2002, FGEAccountingSystems, Vol 11, FGEChart of Accounts, - FGE January 2002, FGEAccountingSystems, Vol 111,Accountingfor Other Assets and Liab es, - FGEJanuary 2002, Brief on the Budget, AccountingandExpenditure PlanningReform Implementedby the DSA Project under the Civil ReformProgram, - FGEDSA Project,April 2002, EducationSector DevelopmentProgramme, ImplementationManual, - December 1998, Proclamation 57/1996 Regulations 1511997 Federal Democratic Republic of Ethiopia (1995), Proclamation of the Constitution of the Federal Democratic Republicof Ethiopia-proclamationno.1/1995 FederalDemocratic Republic of Ethiopia (1997), Office of the FederalAuditor GeneralEstablishmentProclamation -proclamationno. 6811998 Federal Democratic Republic of Ethiopia (1996), Federal Government of Ethiopia Financial Administration Proclamation-proclamationno.57/1996 FederalDemocraticRepublicof Ethiopia(1995), Definition of Powers of andDutiesof the Executive Organs of the FederalDemocraticRepublicof Ethiopia, proclamation no. 4/1995 Proclamationto providethe establishmentof an Audit ServicesCorporation-proclamationno. 126/1977 FederalDemocratic Republicof Ethiopia (2002), ExtemalAudit ProjectRevisedProject Document FederalDemocratic Republicof Ethiopia, Intemal Audit ProjectRevisedProjectDocument EU(2001),Diagnosisof existingcontrolcapacitiesinEthiopia OFAG (1994 E.C.) 1993EFY annual reportsof the OFAG World Bank (1998), CountryProfile Financial Accountability-Ethiopia CIDA (2002), Auditors Capacity Enhancement Project ADE (2001) Tigray National RegionalState PublicExpenditureReview,draft, March DFID(2002) ManagingFiduciaryRisk WhenProvidingDirectBudget Support, London,March EuropeanCommission (2001a) Public Expenditure MunagementAspects of Food Security, ResalEthiopia, April European Commission (2001b) Diagnosis of Existing Control Capacities in Ethiopia, ProvisionalReport, 2AC, May EuropeanCommission (2002) Ethiopia:Country FinancialAccountability Assessment, Inventory Study, ADE, July Governmentof Ethiopia, Ministry of Education(1999) EducationSector DevelopmentProgrammeandAction Plan Government of Ethiopia, DSA Project (2000) Assistance to the Expenditure Management and Control Sub- Program,November Government of Ethiopia (2001) Expenditure Management and Control Programme, Extemal Audit Project Secretariat.Study ReportonLegal Basisof the ExternalAudit Institutions, July Government of Ethiopia, DSA Project (2002a) Manual 3: FGE Accounting System, in 3 volumes. Vol. I: Accounting for Modified Cash Basis Transactions; Vol. 11: FGE Charts of Accounts; Vol. 111: Accountingfor Other FixedAssets andLiabilities,January Government of Ethiopia, DSA Project (2002b) Civil Service Reform Programme: SNNPR Budget Reform - DevelopingaFormulafor Budget Allocationsto Woredas.Paper by PerranPenrose, February 167 e Government of Ethiopia, DSA Project (2002~)A Strategy for Implementing the Budget, Accounting and ExpenditurePlanningReformsdevelopedby the Civil ServiceReformProgramme,April e Government of Ethiopia, DSA Project (2002d) Report of the DSA Project Activities: April 1 - June 30, 2002, August e IrelandAid (2001) Ethiopia: Review of FinancialControl Capacities and Systems and Elaboration of Programme ExpansionProposals, Part 2, Offset, paper by BernardMcLoughlin, August e Lister, Stephen(1998) ImplementingSectorDevelopmentProgrammes inEthiopia, draft, January e OECD/DAC Task Force on Donor Practices, Sub-Group on Financial Management and Accountability (2002) DevelopmentPerformanceMeasuresfor Public FinancialManagement, Paris, March. e SNNP Regional Government, BOFBD (2002) Civil Service ReformProgram: Assessment of the Implementationof the BudgetReforminthe SouthernNations, NationalitiesandPeoplesRegionalGovernment, Awassa, August e Tigray HealthBureau(2002) Tigray RegionHealthSector DevelopmentProgramme 199.5-1997EC, draft, Sene 13, 1994EC, Makele e UN-DESA (2000) Civil Service Reform Programme: Final Report of the Mid-Term Evaluation of the CSRP Components Supported by UNDP, January. Author - John-Mary Kauzya [incl. legal FM reform, regional computerization, HRM,servicedelivery, ethics] WorldBank (1997) Country ProcurementAssessment Report (CPAR) World Bank (1998) Country Profile of FinancialAccountability World Bank (2001a) EthiopiaWoreda Studies, Vol. 1: The Main Phase, draft, November World Bank (2001b) Ethiopia: FocusingPublic Expenditures on Poverty Reduction(public ExpenditureReview), in3 volumes, Vol. I:MainReport, Vol. 11:Appendixes and StatisticalTables, Vol. 111:PublicExpenditure Reviewof Oromiya Region. ReportNo.233.51-ET.December20 e World Bank (2002a) Fiduciary Arrangementsfor SWAps. April 2. e World Bank (2002b) Project Appraisal Document on a Proposed Credit to Ethiopia for the Capacity Building for DecentralizedServiceDelivery Project, ReportNo. 23901-ET,June 27 e BOFED, SNNPR, Aug 2002, Assessment of the Implementation of Budget Reform in the SNNPR Government,BOFED OW002 e ADE (for EuropeanCommission) Jul2002 Ethiopia: Country FinancialAccountability Assessment: Inventory Study, EC 07/2002 DFIDMar 2002ManagingFiduciaryRisk WhenProvidingDirectBudgetSupportDFID03/2002 P Penrose -DSA Project, Feb 2002, SNNPR Budget Reform: Developing a Formulafor Block Grant Allocations to Woredas, DSA 02/2002 e Government of Ethiopia, DSA Project, 2002, FGE Accounting System, in 3 volumes. Vol. I:Accounting for Modified Cash Basis Transactions; Vol. 11: FGE Charts of Accounts; Vol. 111: Accounting for Other Fixed Assets andLiabilities World Bank, Dec 2001, PER 2001: Ethiopia -FocusingPublicExpenditureson Poverty Reduction World Bank Nov 2001, Ethiopia Woreda Studies, Vol. 1:The Main Phase(draft) Governmentof Ethiopia, Ministry of Education, 1999, EducationSector DevelopmentProgramme andAction Plan StephenLister, 1998, ImplementingSectorDevelopmentProgrammes inEthiopia (Draft) World Bank 1998, Country Profileof FinancialAccountability World Bank, 1997, Country Procurement Assessment Report (CPAR) Federal Democratic Republic of Ethiopia (199.5), Proclamation of the Constitution of the Federal Democratic Republic of Ethiopia-proclamationno.U199.5 e FederalDemocratic Republic of Ethiopia (1997), Office of the Federal Auditor GeneralEstablishmentProclamation -proclamationno. 68/1998 e Federal Democratic Republic of Ethiopia (t996), Federal Government of Ethiopia Financial Administration Proclamation-proclamationno.57/1996 e FederalDemocratic Republicof Ethiopia (199.5), Definition of Powers of andDuties of the ExecutiveOrgans of the FederalDemocraticRepublicof Ethiopia, proclamation no. 4/1995 e Proclamationto providethe establishment of an Audit ServicesCorporation-proclamation no. 126/1977 e FederalDemocraticRepublicof Ethiopia (2002), ExternalAudit Project RevisedProjectDocument e FederalDemocraticRepublicof Ethiopia, InternalAudit Project RevisedProjectDocument 0 EU(2001), Diagnosisof existingcontrol capacitiesinEthiopia 0 OFAG (1994E.C.) 1993EFY annual reports of the OFAG 0 World Bank (1998), Country Profile FinancialAccountability-Ethiopia e CIDA (2002), Auditors Capacity EnhancementProject e ADE, EthiopiaCountry FinancialAccountability Assessment, InventoryStudy, draft report, May 2002. 0 Lister, S., ImplementingSector DevelopmentProgrammesinEthiopia, Final Draft, December 1998. e MEDaC, FederalBudget Grant FormulaRevised,Focus, Vol. 5, No. 3, October 2000. e Ministry of Finance, Budget Reform Design Manual, Chart of Accounts, Budget Preparation and Presentationfor Federal Government, Version 2.1, February 2000, Civil Service Reform Budget Design Team in co-operation with MEDaCandthe Decentralisation Support Activity (DSA) Project. e Schiller, C., M. Davies and D. Last, Ethiopia, Improving Fiscal Reportingunder Decentralisation, Aide Memoire, IMF,July 2002. 168 Roberts, N.,Ethiopia,Woreda Studies, Vol. I,the mainphase, World Bank, November 2001. Schiavo-Campo, S. and D. Tommasi, Managing Government Expenditure, Control, Allocation Efficiency and Due Process, AsianDevelopment Bank, 1999. World Bank, Ethiopia, Focusing Public Expenditure on Poverty Reduction, Public Expenditure Review, Vol. I,I1 and111,December2001. World Bank, Country Financial Accountability Assessment, Guidelines to Staff, Financial Management Sector Board, September 2002. CFAA Guidelines to Staff, - World Bank, September2002 MOFED Summaryof GovernmentBudgetfor Fiscal Year 1995 (2002/03) BudgetReformDesignManualVersion 2.1 Ethiopia. FocusingPublicExpendituresonPovertyReduction, Vol I. - World Bank, December 2001 Ethiopia.FocusingPublic ExpendituresonPovertyReduction, Vol 11. Ethiopia.FocusingPublic ExpendituresonPovertyReduction, Vol 111. World Bank, December 2001 --WorldBank, December 2001 European Commission. Integrated Financial Management System for Govt of Ethiopia -Draft FinancingProposal 2002 EuropeanCommission.Diagnosis of ExistingControlCapacities inEthiopia. May 2001 Ethiopia. Tracking Poverty ReductionSpendingin HIF'C's, Assessment of BudgetingSystems, - World BanWIMF, 2001 Ethiopia.Country Profileof FinancialAccountability,- World Bank, July 1998 Brief on the Budget, Accounting and Expenditure Planning Reform by the DSA under the Civil Reform Program, - FGEDSA Project, April 2002 Ethiopia.PublicExpenditureReview 2000. World Bank August 2000 FGE. The National Capacity Building program.(Paper for Aid HarmonisationWorkshop (17/09/02) FGE.Capacity BuildingProgramslMajor Activities to Date andPlannedfor NextThree Years. 2002 FGE. An Overview of Capacity BuildingProgramme inEthiopia July 2002 FGE. MOFEDExpenditurePlanningReformFY1995 (2002/03) Work Plan (Chart) 2002 Background Paper for "Actions to Strengthen the Tracking of Poverty-Reducing in Heavily Indebted Poor Countries", World Bank/IMF, January 2002 ExtemalAudit Project, RevisedProjectDocument, - FGEEMCP, - January 2002, FGEAccountingSystemVolume I, Accountingfor Modified CashBasisTransactions, - FGE, January 2002, FGEAccountingSystems, Vol 11,FGEChart of Accounts, - FGEJanuary 2002, FGEAccountingSystems, Vol 111,Accountingfor Other Assets andLiabilities, - FGEJanuary 2002, I F M S Scope, Objective and BroadStrategy,Mainreport - EC December2001 Fifth Country PortfolioPerformanceReview, - World Bank, October 2000 IFMS for the FGE,Pilot Phase, Draft FinancingProposal, - EC, January 2002 Ethiopia: National Accountancy and Audit DevelopmentProgramme, Accountancy and Audit Studies Consultancy FinalReport, April 1997 ProjectReportRegardingthe Addis Ababa Stock ExchangeinMarch2001 Vietnam Country FinancialAccountability Assessment, 1.5October 2001 Accounting Standards and Guidance for-Members, The Institute of Chartered Accountants in England & Wales, 2002 Auditing Standardsand Guidancefor Members,The Institute of CharteredAccountants in England& Wales, 2002 EthiopianProfessionalAssociationof AccountantsandAuditors Statutes PenalCode 1957 The Commercial Code Proclamation of 1960 The Civil Code Proclamationof 1960 Public Servants PensionProclamationNo. 209/1963 As Amended The RevisedSpecialPenalCode ProclamationNo. 214/1981 Public EnterprisesProclamationNo. 25/1992 MonetaryandBanking ProclamationNo 83/1994 Licensingand Supervisionsof Banking Business ProclamationNo. 84/1994. Licensing andSupervisionof InsuranceBusinessProclamation No. 86/1994. Definition of Powers and Duties of the Executive Organs of the Federal Democratic Republic of Ethiopia ProclamationNo. 4/1995 InvestmentProclamationNo. 37/1996 CommercialRegistrationand BusinessLicensingProclamationNo. 67/1997 Property Mortgaged or Pledgedwith BanksProclamationNo. 97/1998 FederalDisasterPreventionandPreparednessCommissionAudit Guidelines, 4 February, 1999 Public Enterprises Supervising Authority and the Industrial Development Fund Establishment Proclamation No. 277/2002 IncomeTax ProclamationNo. 286/2002 169 ANNEX B :LIST OFPEOPLEMETAND CONTACTED Gebre Getachev : State Minister of Finance, Ministry of Finance and Economic Development (MoFED), Addis Ababa, Ethiopia; Gito Mamu Ato : Chief, Treasury Department, Ministry of Finance and Economic Development (MoFED), Addis Ababa, Ethiopia; Haile SellassieAster: Chief, Central Accounts Department, Ministry of Finance andEconomic Development (MoFED), Addis Ababa, Ethiopia; Haimanot Teshome Tekle : General Manager, Getashew Kassaye & Co., Chartered Certified Accountants, Addis Ababa, Ethiopia ; HardleyJim :Deputy Chief of Party, USAIDfinanced DSA Project ; Kifle Melaku Ato: Coordinator of the Budget, Ministry of Finance and Economic Development (MoFED), Addis Ababa, Ethiopia; Boer de Allard J.: Controller, RoyalNetherlandEmbassy, Addis Ababa, Ethiopia; Mulugeta Tedla Ato: Chief of Data processing, Department Ministry of Finance and Economic Development (MoFED), Addis Ababa, Ethiopia; Noble Kayo: Senior consultant on the decentralisationreform, CPA, IrishAid, Addis Ababa, Ethiopia; Nes vanRed: SecondSecretary, Economic Advisor, EUEuripeanCommissionDelegation, Addis Ababa, Ethiopia; Teffesse Mesfin Ato: Director, External Relation & Resource Mobilisation, Ministry of Capacity Building, Addis Ababa, Ethiopia; PetersonSteven :Chief of Party, USAID financedDSA Project, Addis Ababa, Ethiopia; Yehualshet Worku Ato: Director, District Level Decentralisation Program, Ministry of Capacity Building, Addis Ababa, Ethiopia; BelaynehW Michal, MoFED -HeadInternalAuditor Aiilla Zeberga, MoFED Higher InternalAuditor Almaz Alemu, MoFED InternalAuditor Kifle Teferra, MoFED HeadInspectionDepartment --- Tedla Mulugeta, MoFED - Data Processing Teferi HagosDesta, MoE - HeadPlanning andProjectDepartment Sititora Yunan, MoE - Planning adProject Department Girmay Amare, MoE HeadInternal Auditor - Jim Yardley, DSA - ProjectConsultant Aster Haile Sellassie, MoFED, Central Accounts Department Tedla Mulugeta, MoFED,DataProcessing Melaku Kifle, MoFED, Budget Consolidation Mamo Gitto, MoFED, Treasury Ato Gelana, MoFED, AdministrationDepartment PatrickEmpey, Embassy of Ireland MesfinTeffesse ,MinistryofCapacityBuilding Jim Yardley,DSA Project Ato Haile Gebre Yohannes, SeniorDeputyBureauHead Ato Mekbib Alemu, DepartmentHead, Planning, Budget ConsolidationandMonitoringDept. Ato MasreshaAyale, DepartmentHead, Inspectionand Govt.ProcurementDept. Ato Mekbib Alemu, DepartmentHead, Planning, Budget ConsolidationandMonitoringDept. Ato Kassaw Woldie,DepartmentHead, DisbursementandAccount Dept. Ato Molla Kebede, TeamLeader, Policy Analysis and Study Dept. Ato Endeshaw Mulatu,Expert, Development CooperationDept. Ato Tilahun Yimaldu, Acting Head, Planning andProgramming Service Ato Alemkeve Ayalew, Civil engineer Ato KebedeAli, Accountant, FinanceDept. Ato EshetuAyele Abay, DeputyHeadEducation Ato Setu Aynalem, Head, PlanningandInformation Service Ato SeyoumZewolde, Head, FinanceService Ato Semachew Kassahun, Department Head, Planning & Agricultural Information System, ANRS Agricultural Bureau Ato Bifew Melesi, Deputy Bureau Head, Crop Production Technology Promotion and Protection Dept., Agricultural Bureau Ato GeneneWorkineh, Deputy Auditor General Ato SimachewNigatu, Chairmanof the Budget andPublic Accounts Committee Ato Andualem Teshome, Account Expert, FinanceDepartment Ato EyasuTekie, Head, RuralDevelopment Office Ato Asmamaw Wagaw, Agricultural Desk Officer Ato Getmet Engdaw, Acting Head, FinanceOffice Ato Ahmed Seid, Acting DepartmentHead, Budget, DisbursementandAccounts, FinanceOffice Ato DemisieDamitew,FormalEducationOfficer, EducationOffice Ato MeketeBoyalew, Acting Head, FinanceOffice Ato WonwossenAssefa ,BudgetClerk, FinanceOffice 170 Ato Wodaje Desalegne, Administration and General Service Head, Information Office Ato DejeneMary Eshetie, Administration and Finance ServiceHead, Administration Office Ato Kifle Teferra Head Ministry of Finance and Economic Development, InspectionDepartment, Ato Belayneh W. Michael Head Internal Audit, Inspection & Control Service, Head W/o Aster Haile Selas Acting Head Accounts Department Ato Melaku Kifle Head Budget Consolidation & Follow Up Ato Tedla Mulugeta Information System Admin Centre At0 Teferi Hagos Desta Head Ministry o f Education, Planning & Programming Department Ato Artamu Ababiya Head Project Finance Unit Embassy of Ireland, Charge d'Affaires Pauline Conway; IrelandAid, Patrick Empey; Administrator/Counsellor, Kayo Noble; Tigray Deputy Coordinator, W/o Aynalem Gessesse World Bank Country Office, Financial M g t Specialist, Eshetu Yimer; Consultant, Menbere Taye Testa Tigray Bureau of Finance and Economic Development, Finance, Head, Fekadu Berhe; Economic Development, Head, Haile; Macroplanning Dept, Head, Yemane Yosief; Disbursement & Accounts Dept, Head, W/o Zafu G/Hwot; Acting Team Leader; Berhe Alemie; Inspection & ProcurementDepartment, Head, Abebe Aynalem; Financial & General Services Department, Head, Goiton Tetemke; F&GS Dept, Finance & Budget Division, Head, Ghebreyesus Ghebremichael Office of the Regional Auditor General (Bureau of Audit), Regional Auditor General, Tesfay Belay; Deputy Regional Auditor General, Gebremedhin Tesfay Tigray Capacity BuildingBureau, Head, Abadi Zemo; Head, CSR Programme, Guiday Gluohannes; EMCP Coordinator, Amanuel Gebretinse Tigray Health Bureau, Head, Tedros Adhanom Ghebreyesus; Financial Services Department, Head, Bizayene Hadush; Audit B Inspection Service Department, Head, Meresa Berhanu Tigray Education Bureau, Head, Adhana Haile Tigray Agriculture Bureau, Deputy Head, Belete Tafere; Financial Services Department, Head, Mulu;Planning & Programming Department, Head, Tsegu Gesredsadik Makele Zonal Administration Finance Department, Head, Mengistu WMariam: Planning Department, Head, Alamseged Dimitsu Education Department, Acting Head, Mitbarak Meles Wukro Woreda Finance & Economic Development Office, Head, Tsegay Hadgu Wukro Woreda Capacity BuildingPool, Head, Atakilty Abebe; Finance & Admin Officer, WRufaal G/Michael Waneh; Finance & Budgets Officer, Aragay Meresa Tewadu Hawsien Woreda Finance & Economic Development Office, Acting Head, W/o Milite Haile; Finance &Budgets Officer, W/o Tsehaynesh Nega Ato Solomon, Accountant, Jijiga Zone, Finance and Administration Department Buznashe Yvald, Head of Accounts, Jijiga Woreda, Finance and Administration Office Makom Latew, Accountant, Jijiga Woreda, Finance and Administration Office Sa'ad Yousuf, Admin. and finance, Jijiga Woreda, Finance and Administration Office C Abdel Yakmin, Finance and administration, Kabri Bayax Woreda, Finance and Administration Office Aster Haile Sellassie, Head, Central Accounts Department, Ministry of Finance and Economic Development Mamo Gitto, Head, Treasury Department, Ministry of Finance and Economic Development Melaku Kifle, Head, Budget Consolidation Department, Ministry of Finance and Economic Development Tedla Mulugeta, Head, Data ProcessingDepartment, Ministry of Finance and Economic Development Ahmar Tahir, Auditor General, Regional Audit Bureau Girma Jenna, Accountant, Regional Bureau of Agriculture Jamal Abdillahi, Head of Planning Section, Regional Bureau of Agriculture Omar Alwad Farah, Statistics Unit,Regional Bureau of Agriculture Yasin Hussein, Finance and Administration, Regional Bureau of Agriculture Zarahun Desta, Member Planning Section, Regional Bureau of Agriculture Abdul Kadir Iman, Production and Physical Planning Department, Regional Bureau o f Finance and Economic Development, Somali Region Abdullah Hossein, Inspector, Regional Bureau of Finance and Economic Development, Somali Region Bekele Hailu, Inspector, Regional Bureau of Finance and Economic Development, Somali Region Ismail Mohammed, Head of Budget and Accounting Department, Regional Bureau of Finance and Economic Development, Somali Region Ismail Mohammed, Head o f Budget, Regional Bureau of Finance and Economic Development, Somali Region Muhjadin Odorsa, Head of Regional Bureau for Finance and Economic Development, Regional Bureau of Finance and Economic Development, Somali Region Muhyadin Odorse, Head of Bureau, Regional Bureau of Finance and Economic Development, Somali Region FahranA1Rahman, Act. Head Finance and Administration, Regional Bureau of Water Supply Yimer Yassin, Accountant, Regional Bureau of Water Supply Abdulrahman Lh.Al, Head of Administration, Regional Education Bureau Mohammed Said, Head of Accounts, Regional Education Bureau Shewabega Wedaio, Accountant, Regional Education Bureau Zeyad Ahmed, Head of Finance and Administration, Regional Health Bureau 171 BoFED TesfayeWoldemichae1,Deputy Head(Planning andBudgeting) Sahle Gebre, DeputyHead(DisbursementandControl) KedruAbza, System andData Analyst (Accounts Compiling) Ambachew Daresse, RegionalCoordinator: IrelandAid and SNNPR Zewudie Janka, Headof support pool Ayehu Kasahun, Headof personnel administration Tadele Teklu, Budget expert Health Bureau BassamoDeka, Acting head of healthbureau WerdwosenAbate, Accountant AlemayehuBelayneh,Planning andprogramming service Asegid Zeleke, Headof internalaudit EducationBureau BerhanuBelayneh,DeputyBureauHead Hailu Wolde, Acting HeadFinanceandManagementDepartment MuluWondimu, Accountant Semegnew Kassaye, PlanningandProjectsHead Arega Yesuf, Internalauditor Agriculture Bureau Jemal Ahmed, FinanceServicesHead Tsehay Shire, Senioraccountant Altaye Abiret, Senior expert-planning Capacity Building Bureau Gumachew Kussie, HRDexpert RegionalAuditor General Shiteraw Suisutie, SNNPRGAuditor General Sidama Zone Wudineh Solomon, DeputyHeadFED(Finance) Sinbo Shiburu,DeputyHeadFED(Planning andBudget) Siltie Woreda RedwanNuri, WoredaHeadof FinanceandDevelopment Tsegaye Arussi, Woredafinance accountant Awe1Reshid, Planningandprojecthead- Education Hassen Yesuf, Healthoffice administrator Melese Fantu,Headof budget educationoffice - Gedeozone AregashDamtew, Gedeo zonefinance bureauaccountant Wenago Woreda Kifle Jisso, Headof Financedepartment Tsegaye Gedo, Accountant Yosef Tago, GedeoZone HealthBureaupersonnel H.E.Ato Getachew Gebre, StateMinister-Finance-MoFED H.E.Ato AssefaDesta, DeputyAuditor General H.E.Ato Debebe Barud, Vice-chair man of the Budget and Finance Affairs Committee in the House of Peoples' Representatives H.E.Ato MohammedShrif,SeniorAdvisor to the Speakerof the Houseof Peoples' Representatives W/o Almaz Abebe, TeamLeader, InspectionDepartment-MoFED Ato BelaynehW. Michael, Headof InternalAudit Unit-MoFED Mrs.Jacynthe Rivard,First Secretary (Cooperation)TheCanadianEmbassy 172 Mr. HailemeskelAbebe DeputySecretary Generalfor Trade Information Addis Ababa Chamber of Commerce Mr. Michael Asfaha Special Assistant to the Minister Ministry of Trade andIndustry Mr.Wolde Tsadik Someno Head,RegistrationandLicensing Ministry of Trade andIndustry Mr.Andualem Demsachew Head, LegalDepartment Ministry of Trade andIndustry Mr.GebrekidanWoldesimonBureauHead A.A. Trade, Industry& Tourism Mr.Lakew Lemma Manager, SupervisionDepartment NationalBank of Ethiopia Mr.WoldegebrielTewoldu VP, Marketing&CorporatePlanning CommercialBank of Ethiopia Mr.KefletsionMamo AssistantVP, Credit Analysis & Appraisal CommercialBank of Ethiopia Mr.AmensisaDebela VP Domestic Banking Awash InternationalBank S.C. Mr.Adane Shiberu Head, FinanceDepartment ChristianRelief & Dev Association Mrs. B.W/Medhim Officer for MembershipAffairs ChristianRelief & Dev Association M r s . MulumebetJembere FinanceandAdministration Manager PACT Ethiopia Mr.Zenebe Burka Head, LegalDraftingDepartment Ministry of Justice Mr.Getachew Gonfa NGO RegistrationOffice Acting Head Ministry ofjustice Mrs. Almaz Abebe GeneralServices Auditing TeamLeader Ministry of FinanceandEcon. Dev Mr.GebreegziabherTesfay Chief IntemalAuditor IrelandAid Ethiopia Mr. Abraha Gebreyesus Headof FinanceDepartment Public EnterprisesSupervising Authority Mr.AhmedNuru Headof PrivatisationPreparationDept. EthiopianPrivatisationAgency Mr.W/GebrielNaizghi General Manager FederalInlandRevenueAuthority Mr.NebeyouSamuel OperationManager FederalInlandRevenueAuthority Mr.Getachew Abebe Manager,Accounting& FinancialManagement EthiopianManagementInstitute Mr.AssefaDesta H.E.Deputy Auditor General Officeof the Auditor General Mr.SolomonGizaw President EthiopianProfessionalAssociationof Accountants & Auditors Mr.A.W. Thomas Principal A.W. Thomas & Co., Chartered Certified Accountants Mr. Teshome Mulugeta General Manager A.W. Thomas & Co., Chartered CertifiedAccountants Mr. GetuGemaneh Lecturer Addis AbabaUniversity Mr.Getachew Kassaye Principal Getachew Kassaye& Co., Chartered Certified Accountants Mr. Teshome T. Haimanot General Manager Getachew Kassaye& Co., Chartered Certified Accountants Mr. Gizaw Mamo General Manager Audit Services Corporation Mr.Awoke G/Sellasie Principal Awoke G/Sellasie & Co., InternationalAccountants Mr. TesfayeMengesha Principal TesfayeMengesha andCo., CharteredCertified Accountants Mr.A.A. Bromhead Principal A.A. Bromhead& Co., Chartered Accountants 173