LOTFA

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KPMG Afghanistan Limited Management Letter

UNDP Country Office Afghanistan/Law and Order Trust Fund for
Afghanistan (LOTFA) 00061104
II

Management Letter

United Nations Development Programme
Law and Order Trust Fund for Afghanistan (LOTFA)

Award No: 00049760 and 00061104
Project No: 00060964 and 00077273, 00077274
00077275&00078879
Period Covered: 01 J anuary 2011 to 31 December 2011
Date of Report: 30April 2012

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III

INDEX

1. Executive Summary ................................................................................................... 1
1.1 Audit Objectives .............................................................................................. 1
1.2 Scope of the Audit ........................................................................................... 2
1.3 Field work and Reporting ................................................................................ 2
1.4 Background of the Project ............................................................................... 2
1.5 Management Arrangements ............................................................................ 9
1.6 Monitoring and Evaluation ............................................................................ 11
1.7 Project Budget & Funding............................................................................. 11
1.8 Review of Projects Progress ........................................................................ 12
1.9 Review of Monitoring and Evaluation .......................................................... 19
1.10 Field Visits ................................................................................................. 19
1.11 Review of Project Progress and Assessment of Internal Control Systems 19
1.12 Acknowledgement ..................................................................................... 22
2. Detailed audit observations .................................................................................... 23
3. Certified prior year (2010) follow-up action plan (attachment) .......................... 39
ANNEXURE I ................................................................................................................. 40
ANNEXURE II ................................................................................................................ 41
ANNEXURE III .............................................................................................................. 42

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1. Executive Summary

1.1 Audit Objectives

We have been engaged by the United Nations Development Programme (UNDP)
Country Office for Afghanistan to carry out audit of Award ID 00049760, Project ID
00060964 (Phase V) and Award ID 00061104, Project ID 00077273, 00077274,
00077275 & 00078879 (Phase VI)(the Project) implemented by Ministry of Interior
(MoI), for the period from 1 J anuary 2011 to 31 December2011.

We conducted our audit in accordance with International Standards on Auditing
(ISAs). Those standards require that we plan and perform the audit to obtain
reasonable assurance;

Whether the Statement of Expenditure (the CDR) presents fairly, in all
material respects, the expenditure incurred by the Project for the period from 1
January 2011 to 31 December 2011in accordance with UNDP accounting
policies.

Our opinion is limited to the Projects expenditures, which are defined as
including all disbursements listed in the quarterly financial reports submitted by
MoI and the direct payments processed by UNDP through Request for Direct
Payment (RDPs) by MoI.

We are further required to verify the mathematical accuracy of the CDR by
ensuring that all the expenditures described in the supporting documents (the
quarterly financial reports, the list of direct payments processed by UNDP at the
request of MOI) are reconciled to the expenditures, by disbursing source, in the
CDR.

We expressed an unqualified (clean) opinion on the statement of expenditure.

Whether the Statement of Cash position presents fairly, in all material respects,
the cash and bank balance of the Project as at 31 December 2011 in accordance
with UNDP accounting policies.

We expressed an unqualified (clean) opinion on the statement of cash position.

Whether the Statement of Assets and Equipment fairly, in all material respects,
the balance of inventory of the Project as at 31 December 2011 in accordance
with UNDP accounting policies.

We expressed an unqualified (clean) opinion on the statement of assets and
equipment.

Follow up on prior years audit recommendations forms part of our management
letter and is attached with our comments on the status of implementation of
recommendations provided by the management.

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1.2 Scope of the Audit

In addition to expressing an opinion on the statement of expenditure, statement of
assets and equipment and statement of cash position with certification of the follow
up on the prior years audit recommendations, we were further required to carry out:

A general review of project progress and timeliness in relation to progress
milestonesand the planned completion date as stated in the Project Document or
Annual Work Plan. General review is restricted to stating general compliance
with broad covenants such as implementation of project with economy and
efficiency.

An assessment of the Project's internal control system with equal emphasis on: (i)
theeffectiveness of the system in providing the project management with useful
and timelyinformation for the proper management of the project; and (ii) the
general effectiveness ofthe internal control system in protecting the assets and
resources of the project. The internal controls in the following major areas were
covered by us:

Human Resources
Finance
Procurement
Asset Management
Cash Management
General Administration
Information Systems

1.3 Field work and Reporting

We initiated our audit fieldwork on 29 February 2012 and completed our audit
fieldwork on 03April 2012. The preliminary findings were communicated to the
project management and UNDP Afghanistan Country Office on 13 April 2012.
Managements responses to our findings were received on25April 2012. After
considering managements responses on our observations, the reports and
management letter were issued on30 April 2012.

1.4 Background of the Project

In phase-VI of LOTFA, in accordance with the scope and mandate laid out in the
document, the Fund received financial contributions from the international
community (IC) members under 3 consolidated Pillars (windows) to cover the
following prioritized components, over the period 01 J anuary 2011 to 31 March 2013:

Pillar 1: Support to the Police Remunerations and Police Infrastructure

Payment of the police force remuneration;
Payment of remuneration of uniformed personnel employed by the Central
Prisons Department (CPD) through specially earmarked contributions;
Procurement, maintenance and operations of non-lethal police equipment and
supplies; and
Construction, rehabilitation, maintenance and operations of police facilities.

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Pillar 2:Consolidated Capacity Development and Institutional Reform

Capacity development (CD) and institutional reform of the Ministry of Interior
(MoI) at the policy, institution and individual police level;
Linked to the CD component above, gender orientation (recruitment, training and
gender mainstreaming of female police).

Pillar 3: Community Policing: Building of Effective Police-community
Partnerships under Police-e-Mardumi Project

Building of service delivery oriented police-community partnerships under
Police-e-Mardumi project, based on best democratic policing principles.

According to the Terms of Reference (ToRs) for LOTFA (signed in May 2002), the
fund was designed to cover all reasonable costs associated with the start-up and
operational needs of the police force. (Annex-I). The project document, Support to
Law and Order in Afghanistan signed on 03 December 2002, has since provided a
framework for the activities undertaken with LOTFA funding, including prioritization
of proposed expenditures and activities. Subsequent phases of LOTFA have been
developed around this document, with appropriate modifications based on situational
changes.

Phase-I (01 November 2002-31 March 2004)

During phase I -01 November 2002 through 31 March 2004 (covering 5 months of
Afghan Fiscal Year (FY) 1381 and full FY 1382) - LOTFA reimbursed the Ministry
of Finance (MOF) for police salary payments to the amount of USD 44.4 million.
This covered police remunerations in all 32 provinces. J oint Government-UNDP
missions verified the salary payments. The project placed two public finance
management officers in MoI to support the preparation of timely financial reports,
regularization of the payroll system, and training of the Ministrys financial staff.
Activities were also initiated with donor support for the computerization of the
payroll system at MoI. The project, through contributions to the National
Development Budget and other funding windows also procured and made available to
the police 1,100 vehicles with communications equipment and spare parts for a total
of USD 11.45 million. During phase 1, funding limitations prevented LOTFA from
moving substantially beyond its first and second priorities: police salaries and
equipment.

Phase-II (01 April 2004- 31 March 2005)

During Phase II -from 01April 2004 through 31 March 2005 (covering FY 1383) -
LOTFA ensured payment of police salaries in all 34 provinces. A total of USD
54.1million of salary benefits were paid out. In order to establish a more efficient and
accountable scheme for national police salaries, the in-house Electronic Payroll
System (EPS) was configured. The software was prepared and tested in Kabul and
Ghazni provinces. The construction of eight police stations in provinces and highway
police check posts on Torkham-Kabul-Herat highways was undertaken. Non-lethal
equipments were also procured for the police. Regular joint missions to the provinces
were conducted to monitor the effectiveness of police payments. 47 staffs of the
finance department of MoI were trained in financial management systems. An
evaluation of the LOTFA Phase-II was conducted and revealed that expected
outcomes such as reduction in crime, increased security, and public perception of
police were not clear in the absence of measurement mechanisms; that there was a
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need to address issues such as sustainability of recurrent costs; payroll
computerization; strengthening the role of the Management Support Unit (MSU); and
greater leadership of the MOI. It recommended active resource mobilization from
both committed and new donors.

Phase-III (01 April 2005- 31 March 2006)

During Phase III- from 01 April 2005 through 31 March 2006 (covering Afghan
Fiscal Year (FY) 1384) LOTFA reimbursed police salaries in all 34 provinces to the
amount of USD 67.5 million. It funded the construction of highway check posts to an
amount of USD 3 million. Nine police stations in five provinces were constructed or
rehabilitated. LOTFA also provided funding for the construction for border police
office in Torkham. The EPS was further modified and deployed in 14 provinces. The
project continued to build financial and project management capacity within MoI.
Over 100 MoI and provincial HQ staffs were trained in financial management and
reporting, computerization of payroll and personal data entry. Monitoring missions
were fielded to 11 provinces to ensure proper accountability and transparency of
expenditure at the provincial level. LOTFA also contributed to the initiation of the
Pay and Rank Reform of the ANP, including development of the new tashkeel.

Phase-IV (01 April 2006- 31 August 2008)

During the extended Phase IV- from 01 April 2006 through 31 August 2008
(covering Afghan FY 1385, full FY 1386 and 5 months of FY 1387) LOTFA
ensured payment of police salaries in all 34 provinces. It transferred USD 316.3
million to MoF towards police remuneration. During this phase, LOTFA also paid for
the temporary Afghan National Auxiliary Police (ANAP) force within the approved
ceiling, to support the police operations in the insecure regions of the country. The
computer-based EPS was deployed in all 34 provinces and made operational in 106
out of 115 payroll stations of MoI. EPS system also played a vital role in introducing
the Electronic Funds Transfer (EFT) process of paying police officers through
individual bank accounts. By the end of Phase-IV, around 32,000 police officers
received their salaries through EFT. LOTFA secured funding for the implementation
of the gender mainstreaming project in MoI and 100 women joined the police force.
LOTFA also commenced providing incentive payments to female recruits undergoing
training. During this phase, important decisions on back pay for ANP, severance pay,
and ANP food allowance parity were taken. In April 2008, the original LOTFA
Terms of Reference (ToRs) were amended to include payment of salaries of
uniformed personnel employed by the Central Prisons Department (CPD) through
specially earmarked contributions, as part of the broader reform supported by the IC
to improve the prison infrastructure and facilities. It was also during this phase that
based on the decision of the JCMB VII (February 2008), LOTFA took over the
payment of salaries and procurement of equipment of the newly established
Disbandment of Illegal Armed Groups (DIAG) cell within MoI to enable it to
continue operations under the GoA leadership and ownership. In response to donor
concerns and to ensure proper accountability and transparency, continued emphasis
was placed on monitoring of expenditures and effectiveness of payments to the police
force.

Phase-V (01 September 2008- 31 December 2010)

During the extended Phase V from 01 September 2008 through 31 December 2010
(covering 7 months of FY 1387, full FY 1388 and 9 months of FY 1389) LOTFA
would have transferred an estimated amount of around USD 873.7 million to MoF
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(USD 715.8 million actual expenditure from September 2008 until September 2010;
and USD 157.9 million anticipated from October to December 2010) towards
payment of police salaries in all 34 provinces. Given the importance of institutional
development within MoI (especially in the financial and personnel management
domains), this was given higher priority in this phase of LOTFA. Remunerations of
uniformed personnel of the prisons department of the Ministry of Justice (MoJ ) was
added as a new activity, based on judicial sector pay and rank reform, and funded
through specially earmarked contributions. By the end of this phase, 99.7% of all
police were brought under the EPS and 79% under the EFT, receiving salaries
through individual bank accounts. Alternate disbursement technologies i.e. M-paisa
mobile salary payment scheme was piloted and expanded to identified districts of
Wardak and Khost. A centralized web-based data application system to link all MoI
payroll and HR sources as well as EPS data with other existing applications was
developed and expanded to Kapisa, Parwan, Panjsher and identified Kabul and Balkh
police units as another effective accountability mechanism. An independent
Monitoring Agent (MA) was deployed in all police zones to conduct fiduciary
reviews and oversight. 1,000 MoI and provincial officials were trained in financial
management, accountancy, HR, administration, new age payrolls, EPS and EFT
systems. 300 police trainers were trained on gender concepts. The number of female
police reached around 934. Procurement and construction activities were up scaled.
An evaluation of LOTFA-IV was undertaken during this phase, and recommendations
relating to prioritization of institutional development in the next phase, imperative of
greater donor predictability of funds, need for specialization of project management
unit, and downsizing of gender unit for being commensurate with the funding at
disposal, were followed-up appropriately. The national Police Perception Surveys-
2009 and 2010 were contracted out to gauge the level of trust in police services, the
results of which formed important benchmarks for institutional annual surveys on
police performance indicators and outputs.

Phase-VI (01 January 2011-31 March 2013)

During 2011, the focus of the LOTFA was on seizing the transition opportunities in
the security, development and governance areas for expansion of project activities in
the transition districts announced in Phase-I. This was particularly true for community
policing, gender enhancement, capacity development and web-based payroll
expansion activities. Phase-VI of LOTFA was operationally effective by 01 J anuary
2011 until 31 March 2013, moving beyond the traditional trust fund management role
into a more in-depth programme. The three-Pillar structure has a more substantive
capacity development component and a new community policing component for more
effective decentralized service delivery. An agreement was also reached between the
donors and UNDP on the reduction of the UNDP-General Management Services
(GMS) fee rate from 5% to 4% as an exceptional measure, in recognition of the larger
volumes of funds committed under this phase. Considerable resource mobilization
work was undertaken for meeting the budgetary requirement of USD 596 million for
Fiscal Year 2011 which was fully met. Funding was also mobilized to bridge the
shortfall for CPD through inclusion of non-traditional donors like J apan and
Germany.

Updated list of donors include Canada, Denmark, European Commission, Finland,
Germany, Italy, J apan, Netherland, Norway, Switzerland, United Kingdom and
United States of America

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Objectives of the Project

The prime objective of the project is fully in line with the National Development
Framework and National Development Budget that envision a professional and
disciplined police force that is loyal to the Ministry of Interior (Mol) and widely
visible to the public, creating a sense of comfort among the population. The project is
aligned with the goals and objectives of the Afghanistan National Development
Strategy (ANDS) and directly supports the "Security" pillar of ANDS.

Project Activities

A better trained and appropriately resourced Afghan National Police is the uppermost
aim of the project that contributes to the law and order across the country, in turn
promoting national, regional and global security.

LOTFA effectively supported the MoI and MoF during 2011 to ensure that it was
able to meet the substantive commitments under Phase VI. Measurable progress
towards the development outcomes was made, impacting on the local populace. An
overview of the performance and progress under its 3 Pillars window is provided
below, in full recognition of the fact that the results were the products of effective
partnerships with all stakeholders (particularly GoA), who jointly contributed to the
achievements.

Pillar I: Support to the police remunerations and police infrastructure:

Activity Results Description Target Progress
Efficiency of police and CPD
functions enhanced for
contribution to more effective
law and order maintenance
throughout the country and
overall stabilization and
security.
More efficient police functioning
and service delivery through timely
and accurate payment of police and
CPD remunerations
(including1,300 female police as
well as incentives to female
trainees in Police Academies) in all
34 provinces.
100%
Greater accuracy,
verification, accessibility and
sustainability of police
payroll and
technical/institutional
capacity of
MoI/(MoJ )strengthened.

Greater accountability, accuracy
and sustainability in payroll
through timely and computerized
EPS reports in all provinces
(exception of Nuristan); expansion
of WEPS in 14 provinces in total
and additional Kabul Units;
provision of regular technical
support to all 161 EPS stations
nationwide for conduct of
independent operations; and
development of on-job skills at
grassroots level (all Regional
commands).
99.2% EPS coverage for
ANP (17.5% increase in
police numbers over
2010) and 83% for CPD
(work in progress) as
per AWP target.

Transparency and efficiency
in individualized police
payments (EFT).

Efficiency and systematization in
individualized EFT payments
through commercial banks; and
utilization of alternative new-age
salary transfer mechanism (i.e. M-
paisa) in inaccessible areas
(expanded to 4 new districts in
Badakhshan during 2011, with total
of 466 police).
81% EFT coverage for
police (18.7% increase
in police numbers over
2010) and 83% coverage
for CPD (5% increase
over 2010) (full
realization still
constrained by external
factor of non-expansion
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of commercial banks at
sub-national level) - as
per AWP target.
Sustainability and ownership
of MoI enhanced with
progressive hand-over of core
project functions.

Strengthened MoI ownership and
sustainability of institutional
systems through progressive hand-
over of core work, particularly EFT
in 2011.
100% (on track as per
target of 60-65% hand-
over of overall tasks in
2011).

Quality assurance through
M&E mechanisms for
effective, efficient and
accountable ground delivery
of Outputs.

Robust oversight over project
deliveries through implementation
of established project monitoring,
evaluation and reporting systems;
LOTFA field missions to 11
provinces and Kabul districts; as
well as coverage of all 34 provinces
by MA(award of new contract in
Aug 2011).
100%

Pillar 2: Consolidated capacity development and institutional reform:

Overall police mobility,
responsiveness and efficiency
improved for better police
service delivery and
operational capacity.
Potential progress on strengthened
police mobility through
procurement of equipment for
PTCs (including for female police)
in Kabul, Adraskan and Herat.
100% progress for PTCs

Working and living
conditions of ANP improved,
resulting in better police
morale and confidence.

Potential progress in improvement
of police training infrastructure
through advancement of admin
process for construction of Ghor
Police Training Centre (project
withdrawn in Sep at request of
donor); potential progress in
improvement of police living
conditions through on-track
progress in construction of housing
complex for families of ANP
martyrs (also for female police).
Admin process
suspended for Ghor
Training centre, at
request of donor; 43%
work completed for ANP
martyrs housing
complex; 100% progress
for proposal formulation
for MoI Admin HQs
Building.

MoI administrative
institutional systems
strengthened for long -term
institution building.

(i) Progress in institutional reform
of MoI through systems
development of identified MoI
departments of finance &budget,
procurement, logistics and
Facilities through provision of
technical expertise; (ii) 300 ANP
officials from across the country
empowered in administrative
disciplines through CD workshops
from Aug-Oct; (iii) 965 provincial
police better capacitated in
identification of payroll risks,
procurement law, inventory
management, through training by
MA provincial teams.
70% implementation of
identified proposals.

ANP next generation
leadership developed.

(i) 500 ANP officers on course
towards becoming potential leaders
of the 21st century through 6-
month leadership training at Police
100% targeted
administrative process
completed.
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Training Centre, Siva, Turkey (ii)
potential for capacity development
of ANP in traffic management,
crime investigation and general
policing duties, under new
proposal of ANP training in police
training institutions in Indonesia,
as part of South-South cooperation.
Media management in MoI
and advocacy for police
improved.

MoI Department of Media and
Public Relations capacitated for
delivering on improved police
advocacy through technical
expertise provided through
LOTFA.
Ongoing

On-job-skills of MoI
Departments in policy and
planning improved.

All MoI Departments better
capacitated for policy making and
developing annual work plans for
implementation of NPS and NPP
through conduct of 3 workshops in
partnership with DFID-UK.
Ongoing

Gender awareness across all
levels of police increased.

Enhanced gender awareness in
MoI through conduct of gender
awareness / mainstreaming
activities, particularly at provincial
level(including transition ones).
70%

Capacity of MoI-GMU and
ANPWA strengthened.

Improved capacity and
independent decision making
ability of MoI-GMU and ANPWA
at central and provincial level
(including in transition provinces)
through provision of technical,
logistics and administrative
support.
Ongoing

Pillar 3: Community Policing: Building of effective police-community
partnerships under police-e-mardumi project:

Police-community relations
strengthened for resolution of
local issues and information
sharing.

Improved security, info sharing
and resolution of cases through
conduct of police-community
meetings in 8 districts of Kabul
and 14 districts of Nangarhar and
Laghman, with participation of
cross section of communities,
including women; Multi-lot RFPs
evaluated for civil society
facilitation of police-community
consultations in identified
expansion districts; lots for
consultations in 38 districts
submitted to UNDP Regional
Bureau for approval. Lots for 14
districts to be re-advertised.
100% administrative
process for evaluation of
RFPs;

Ongoing for future
process
Knowledge and advocacy for
local police work improved.

Advancement in knowledge
building and advocacy through
interaction with civil society, DDA
members, district administration,
80 - 90%

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local parliamentarians and media.
(Contracts awarded for university
outreach, seminars and CP best
practices, which also have
advocacy components).
Womens platform promoted
for building knowledge on
policing issues.

Greater empowerment of women
in policing issues through
continued functioning of women
shuras in some districts of Kabul.
[In response to RFP for
establishment of womens
platforms in Phase-II districts, no
qualified proposal received and
will be re-advertised).
Ongoing

CRCs established and police
capacity improved for better
service delivery.

Public complaints mechanism
strengthened through operation of
CRC (number 100 helpline). RFPs
evaluated for setting up of CRCs in
Herat, Balkh and Nangarhar police
zones.
100% RFP evaluation
process;
Ongoing future process
Police - community
information sharing systems
improved.

Strengthened information sharing
mechanisms through advancement
in establishment of information
desks in police stations in 12
additional districts in Kabul,
Nangarhar and Herat; 6-month
contract awarded for info desks in
31 additional districts.
Ongoing

Public awareness raised of
local police work and for
communities to reach out to
the police.

Reinvigorated public awareness
through re-launch of media
campaign in Kandahar region
covering all southern provinces.
[RFP recalled for public awareness
and education campaign for Herat,
Balkh and Nangarhar regions as
MoI in process of standardizing all
operating systems (helpline No
119)].
Ongoing

1.5 Management Arrangements

The Project was designated to Ministry of Interior (MoI) as an implementing Agency
and Ministry of Finance (MoF) as implementing Partner for the LOTFA under the
national implementation (NIM) modality. The Implementing Agency is therefore
responsible for the overall achievements of the results, for the UNDP - assigned
project and the full involvement of the relevant Departments in the project activities.

Stakeholders of the Project

The Project is implemented through the involvement of following stakeholders:

Implementing Agency

In particular, implementing agency is required to:

a) Assign, in consultation with UNDP, a National Director for the project who
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will support the Project and serve as focal point on the part of the
Government.
b) Identify, designate, and make available on a full time basis among its own
personnel the staff that may be required and will serve as a direct counterpart
to, and work in close cooperation with, the Management Support Unit in
particular within the Finance, Procurement and Construction Departments.
c) Provide adequate office space and facilities, individual identification, and
access to relevant buildings to the Project staff.

Implementing Partners

The MoF acts as an implementing partner for the purpose of reimbursement of
National Budget expenditures and the individualized payment to police
personnel.
Other implementing partners may be selected by the Implementing Agency for the
carrying out of specific activities under the Project.

Project Steering Committee

To ensure co-ordination among the main stakeholders and effective, efficient
and transparent utilization of the inputs made available to the project, a
Steering Committee is already in place. The Steering Committee is chaired by
the Ministry of Interior, with representation from MoF, Ministry of J ustice
(MoJ ), United Nations Assistance Mission in Afghanistan, UNDP and all
LOTFA donors.

Management Support Unit

Management Support Unit (MSU) was established under the supervision of the
Implementing Agency to carry out the tasks that cannot be handled by the existing
Government mechanism and strengthen its capacity, and transfer the necessary
skills to the relevant Government Counterparts. MSU is managed by an
international Project Manager and supported by an International Technical
Advisor/Monitoring & Evaluation expert in support to National Implementation
of the project by the Government and for the coordination of the project
activities, liaise with partners and stakeholders, is focused on qualitative
monitoring of the LOTFA activities, coordinate the activities of the monitoring
sub-committee, ensure actions on findings, prepare reports, support resource
mobilization and donor relations, with a view of ensuring that the necessary
capacity be built within the Ministry. The unit would include national staff.

UNDP Country Office

Under the supervision and leadership of the Steering Committee and in close
consultation and cooperation with the Mol and other technical institutions, the
LOTFA administrator (UNDP) is responsible for the overall fiduciary
management of the project. UNDP supports resource mobilization for the
project, ensuring that the necessary staff and other inputs be available at its
country office in support to the project, as required.

UNDP has appointed a project manager who organizes and lead a project team to
provide management, technical and operational support to the project. The
project manager is responsible for overall project management and ensures
achieving the intended results. Also the increase in the size, scale and complexity
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of LOTFA, the pursuit of reforms by the Ministry of Interior, need for
strengthening accountability systems, together with weak government capacities
have a major impact on how LOTFA is managed. Engaging in all of the stated
requires extensive preparatory work, negotiations, follow-up support, continued
monitoring of additional elements, and expenditure, review of work plans and
reports, coordination as well as dialogue with government partners and donor
agencies. This requires considerable engagement of the UNDP Country Office's
and Headquarters senior international and national staff including operational and
oversight management units.

1.6 Monitoring and Evaluation

Monitoring will be conducted by UNDP on a regular basis to oversee the
quality, quantity and timeliness of progress towards delivering intended results
and benchmarks identified in the Results and Resource Framework and Annual
Work Plan.

UNDP closely monitors the project in line with its Results Based Management
principles and using relevant tools and technical assessments done by other
project and partners. The progress and quality of the deliverables being produced
is assessed based on the quality criteria established in the indicators, targets and
benchmarks as per the planned schedule. If changes are required, the Deliverable
Description and/or schedule is updated in a form of Quarterly Plan and
presented at the Steering Committee meeting.

Any project implementation issues are recorded in the progress report and critical
issues (such as time and resource plan) are brought to the attention of the Steering
Committee members by the Project Manager.

Quarterly progress reports are submitted by the Project Manager to UNDP for
Project Assurance and to the Steering Committee. An annual progress report is
produced with more focus on the extent to which progress is being made
towards outputs.

In order to address the need to monitor and support financial management and
accountability practices until capacity of the Mol is built in these areas, an
independent Monitoring Agent (MA) would be contracted to monitor and review
disbursements, payments, accounting and reporting for LOTFA activities.

The project is also subject to audit in accordance with the UNDP programming
procedures.

1.7 Project Budget& Funding

Original project budget by outputs for the project for the period from J an 2011-March
2013 (Phase VI)is as follows:

Description Budget (USD)
Pillar 1 output 1:
a. Police force remuneration 1,266,891,406
b. Remuneration of uniformed personnel of CPD 36,413,532
Pillar 1 output 2:
a. Procurement of equipments 21,000,000
b. Construction of police infrastructure 16,000,000
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Pillar 2 output 1:
Capacity of MoI developed in identified areas and administrative institutions
strengthened 16,133,135
Pillar 2 output 2:
Improved capacity in police force with enhanced gender balance 3,408,907
Pillar 3 output 1:
Policing community partnership strengthen for enhanced local security,
service delivery and accountability 13,936,680
Others:
Project management support unit 4,767,612
GSM @ 4% 55,142,051
Total 1,433,693,322
(Source: Project Document Jan 2011-March 2013, inclusive of GMS @ 4%)

Funding

The status of the donor-wise financing, transfer of funds from Phase V and interest
earned on funds for the Project is laid out in the table below;

Donor
Name
Amount
Commi t t ed
Amount
Recei ved
t o Dat e
Bal ance
Recei vabl
e
Amount
Transferred
f rom Phase
V- VI
Tot al
Avai l abl e
Funds
Amount US$
Denmark 6,939,844 6,939,844 - - 6,939,844
Canada 12,337,397 12,337,397 - - 12,337,397
EU 54,333,333 51,616,667 2,716,666 48,919,334 100,536,001
Finland 5,442,177 3,500,345 1,941,832 - 3,500,345
Germany 48,511,628 48,511,628 - - 72618722
Italy 1,225,014 1,225,014 - - 1,225,014
J apan 240,000,000 240,000,000 - - 248,659,605
Netherlands 14,666,667 14,666,667 - - 14,666,667
Norway 15,938,297 15,938,297 - - 15,938,297
Switzerland 2,672,832 2,672,832 - - 2,672,832
USA 257,074,432 257,074,432 - 136,396,913 393,471,345
UK 13,319,459 13,319,459 - - 13,319,459
Interest 1,451,019 1,451,019 - - 1,451,019
Total 887,336,547
(Source: Annual Progress report 2011)

1.8 Review of Projects Progress

Delivery status

The Output/ Activity-wise cumulative delivery status of the Project for the period
from 01 J anuary2011 to 31 December 2011is as follows:

Project Output Budget 2011
Expenditure
2011
Delivery
Rate
Pillar 1
Police Remuneration 549,613,520 546,098,882 99.36%
CPD Remuneration 15,642,445 15,639,515 99.98%
Electronic Payroll System 510,000 459,037 90.01%
Procurement of non-lethal equipments 2,247,650 2,194,111 97.62%
Police infrastructure 2,209,132 1,341,786 60.74%
GMS fee @ 4% 22,808,910 22,629,333 99.21%
Total Pillar 1 593,031,657 588,362,664 99.21%
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Project Output Budget 2011
Expenditure
2011
Delivery
Rate
Pillar II
Capacity development 6,186,430 4,179,890 67.57%
Gender mainstreaming 1,130,000 1,129,941 99.99%
GMS fee @ 4% 292,657 212393 72.57%
Total Pillar II 7,609,087 5,522,224 72.57%
Pillar III
Capacity development 660,000 56,340 8.54%
Public- Police relation development 1,449,985 825,297 56.92%
GMS fee @ 4% 84,399 35,265 41.78%
Total Pillar III 2,194,384 916,902 41.78%
Project management unit (PMU) 2,128,215 1,941,535 91.23%
GMS fee @ 4% 27,050 22,229 82.18%
Total PMU 2,155,265 1,963,764 91.11%
Grand Total 604,990,393 596,765,554 98.64%
(Source: Annual Progress Report 2011)

Status of planned activities

We have reviewed progress of the Projects activities and the status of the Projects
implementation as of 31 December 2011. Our review was based on Projects annual
progress reports, Project document LOTFA- Phase-VI, combined delivery report
(CDR)liaisons with implementing partners, Monitoring and evaluation agent report,
our discussions with the Projects management, observation during the course of audit
and supporting information/documents.

Based on our review of the above, the status of project activities as of 31 December
2011is as follows:

Pillar I: Support to the police remunerations and police infrastructure

1. Police force is supported to perform their jobs effectively and efficiently:

a) Ensuring payment of police and CPD salaries

LOTFA reimbursed police remunerations of ANP in all 34 provinces and
ensured that the payments were made in a timely and transparent manner.
During 2011, the combined expenditure for police salaries and food
allowance (as per LOTFA mandate) totaled USD 560.40 million.
Additionally, there was a release of USD 160 million as advance to MoF
forQuarter-1/ 2012 to ensure continuity in payment of ANP remunerations.
The food allowance of CPD was covered by MoF from internal resources.

Further, we understand from our discussions with management that important
agreements have been reached with MoF towards fiscal sustainability of
LOTFA expenditures i.e. MOF taking over 3% of police salary budget and
food allowance of 82,000 ANP in 1390 (commenced March 2011) and 7.5%
of salary budget and food allowance of 98,239 ANP in 1391 (March 2012)
from its own revenues.

b) Computerization of police payroll system and expansion of centralized web-
based (EPS)

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During 2011, EPS remained operational in all 34 provinces, including 65
client payroll stations in Kabul zone and MoI central departments, covering
around 136,080 police personnel. Of this, 20,276 new police were added
during 2011, constituting 99.2% of the total existing police force (17.5%
increase of police numbers over 2010). Additionally, 83% of CPD personnel
were covered under EPS, and work is in progress for covering the remaining
personnel, as management capacity is further developed.

Further, work was considerably advanced during 2011 by the LOTFA-EPS
team on the expansion and monitoring of the web-based database application
system for centralizing payroll and personnel information at one central
server. During 2010, Parwan, Kapisa, Panjsher, Herat provinces had been
covered under the WEPS (all transition provinces except Kapisa). During
2011, 10 additional provinces of Bamiyan, Balkh, Takhar, Kunduz,
Laghman, Nangarhar, Faryab, Kandahar and Baghlan were covered bringing
the total to 14 provinces.

c) Expediting the EFT and Advancement of alternate salary transfer mechanism

During 2011 Electronic fund transfer (EFT) continued to be functional in all
34 provinces not all districts. The number of uniformed police personnel who
received salaries by EFT by the end of 2011 reached approximately 110,728
(17,454 new police), constituting 82%of the total existing police force 18.7%
increase of police numbers over 2010). Additionally,83% of CPD personnel
were covered under EFT (5% increase over 2010). The LOTFAEPS team
continued to liaise with commercial banks for expansion of the branches to
cover more districts, but the instability of the New Kabul Bank situation
having the largest infrastructure at the district level kept the process
somewhat stalled. In parallel, alternative salary transfer mechanism M-Paisa
was advanced particularly for inaccessible regions.

In 2010, M-paisa was introduced to 3 districts of Wardak and 2 districts of
Khost provinces covering 255 police staffs. In 2011, the M-paisa was
advanced to 4 additional districts in Badakhshan with total coverage in all
pilot districts of Khost, Wardak and Badakhshan reaching around 466
personnel (211 new personnel; 83% increase over 2010).

d) Progressive Transfer of EPS/EFT processes and core functions to MoI

The progressive transfer of EPS/EFT was continued in 2011 when 65% of
EPS and 80% of core EFT functions were handed over (i.e. production of
EPS reports at sub-national level, commercial bank liaison, tracking of bank
accounts, data back-up) in keeping with transition goal of GoA ownership.

e) Monitoring and Evaluation

The project undertook various M&E mechanisms for ensuring efficient and
accountable deliverables. These included the services of the independent
LOTFA Monitoring Agent for better oversight on the project expenditure, as
well as capacity development in financial management, fiduciary reviews and
accounting systems for application of better controls in these areas. The MA
team remained positioned in all the police zones and was provided robust
LOTFA oversight. Weekly, monthly and quarterly reports were regularly
shared with all stakeholders.
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Pillar II: Consolidated capacity development and institutional reform of MoI

1. Police force equipped with required equipment and infrastructure for
improved mobility, responsiveness, operational efficiency and morale

a) Procurement of non-lethal police equipment

During quarter-1 the MoI Drug Rehabilitation Centre was officially
\inaugurated in with supply of medicines, vehicles, laboratory as well as
house-keeping equipment. More than 1,400 police were successfully treated
at the Centre, after which they could return to operational duties. Further, at
Police Training Centres (PTCs) in Adraskan, Herat and Kabul; all gym, IT,
stationery, logistics, clothing and training equipments were delivered. The
equipments were considered by the management of PTCs as vital training
assets towards improvement of police operational efficiency and
responsiveness.

b) Construction of police infrastructure

In mid 2011, construction of Ghor Police Training Centre funded by J apan
was cancelled by donor due to change in MoI priorities although the
processes for design and construction contract were finalized in liaison with
all relevant MoI departments as well as the J apanese Embassy. Further, over
2011 43% of the work was completed on construction of housing for families
of ANP martyrs and disabled in District 4 under Italian funding.

2. Capacity of MoI developed in identified areas and administrative institutional
systems strengthened

a) Strengthening of MoI institutional system/administrative enablers

During the year, work was progressed on the long-term skills development of
identified MoI administrative departments for providing enabling
environment for police professionalization, in keeping with the Ministers
key priority. Towards this: (i) Systems development of finance, procurement,
logistics, information and communications technology (ICT) departments
was prioritized for needs-based capacity assessment. (ii) Six technical
specialists were assigned to MoI Departments of Finance & Budget,
Procurement and Logistics for provision of on-the-job mentorship and
sustainable skills development of MoI officials. (iii) Three batches of 100
officials each, ranking from 2nd Lieutenant to Major from all administrative
departments from Kabul as well as regional and provincial police HQs were
provided month-long training programmes from August October, 2011, at
the Kabul Police Academy for consolidated knowledge enhancement in
police administrative disciplines towards more efficient functioning; (iv) As
part of the curriculum, short capsules was delivered on anti-corruption
disciplines by the UNDP-ACT.

Additionally, 75 training sessions were conducted by the MA for 965 finance,
procurement, logistics and HR officials from all police zones on payroll risks
and controls, accounting, inventory management, contract management and
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regulations, internal controls, storekeeping, human resource management and
procurement law and regulations.

b) Supporting programmes for ANP leadership development

Leadership development is a top MoI priority for building the ANP in the
transition phase for taking on independent responsibilities and leadership
roles. Towards this, 500 ANP cadets were set on course for becoming multi-
faceted leaders of the 21st century through a 6-month leadership training
programme in Sivas, Turkey, which was completed in 2011

3.Improved capacity of police force with enhanced gender balance

a) Undertaking of female recruitment campaigns

Around 300 new female police were recruited during 2011 (9% increase over
2010) bringing the total number of Afghan police women to around 1,300.
Recruitment missions were undertaken to Wardak, Bamiyan, Panjsher,
Parwan, Kunduz, Faryab and Kandahar. The key constraints for enhanced
female recruitments identified by the provincial authorities were; lack of
female accommodation at the regional training centers, insufficient positions
for females in the tashkil and lack of a clear-cut delineation of operational
responsibilities for the female police.

b) Gender capacity and institution development activities

Two 3-month leadership, management and accounting training courses for 42
senior ANP female officers were organized at the Kabul Police Academy in
two phases, one at the level of Lieutenant Colonel and above, and the other at
the level of below Lieutenant Colonel based on needs analysis of female
leadership development. This type of on-the-job training was assessed to be a
key component of that strategy.

c) Conduct of gender awareness and mainstreaming activities
During 2011, supplementary gender awareness material, including1390

calendars on gender themes, posters, brochures, flipcharts, stickers and guide
books were printed and distributed to the provincial police Education
Departments and GMUs.

LOTFA participated in the Elimination of Violence Against Women
(EVAW) campaign led by UN Women thorough publicizing of the theme
through billboards in all 34 provinces, distribution of illustrative notebooks
and talks by senior female police officials in girls schools for building
awareness.

d) Conduct of gender awareness and mainstreaming activities
GMU /MoI was provided sustained logistics support at central and provincial
level, including in transition provinces to further enhance its day-to-day
functional capability. Office and IT equipments were procured for the GMU
units in Kabul and regions, towards regional gender enhancements.

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Over the previous two years, LOTFA had established the Afghan National
Police Women Association (ANPWA) in MoI (Kabul) and targeted regional
zones of Nangarhar, Herat and Balkh as an informal platform for recruited
women police to share experiences and concerns. Monthly meetings of the
ANPWA were facilitated. On-the-job training towards formulation of project
proposals was provided, as a capacity development measure.

Pillar 3: Community policing: Building of effective police community
partnerships under police-e-mardumi project

1. Police community partnerships strengthened for enhanced for enhanced local
security, service delivery and accountability

a) Institutionalization of police-community meetings

Institutional mechanisms were established in the pilot phase in 8 districts of
Kabul for regular police-community interface that continued to be functional
for resolution of local issues and information sharing. For the phase-II
provincial expansion, community consultations in 14 districts / sub-districts
of Nangarhar and Laghman were progressed while the RFPs relating to the
remaining districts were sent up for approval to the relevant UNDP channel
or re-advertised on the account of lack of technically qualified responses.
The results based on periodic assessments by MoI-LOTFA-NTM-A were
encouraging.

Additionally, police and community sports programme to strengthen police
and community relationships and improve police fitness and discipline were
commenced in eight districts of Nangarhar province, six districts in
J alalabad city and one district in Laghman province. As precursors to actual
sports events, information sessions were conducted highlighting relevant
aspects of the constitution, laws and religious teachings that touched on the
need for strong cooperation between the police and the community and the
health and discipline benefits to both the police and community from
participating in sport.

b) Knowledge building and advocacy on community policing issues

Interaction with civil society organizations and media was undertaken for
advocacy on local policing and security issues. Contracts were awarded in
Quarter-4 relating to (i) 5 Universities outreach, (ii) community policing best
practices documentary, and (iii) conduct of series of policy seminars which
have integral components of advocacy. During 2011, awareness building
regional workshops were organized in Balkh, Herat, Panjsher, Parwan and
Nangarhar with participation of regional and provincial police chiefs,
Governors, local communities and civil society. This contributed to
enhanced knowledge about policing roles among the local communities.

c) Promotion of womens platform to build knowledge on

In the pilot phase of this activity, womens shuras were established n 7
Kabul pilot districts. Womens views on security matters were considered to
be productive and taken more seriously by the police towards enhanced
service delivery. A Conference on Women and Security was held on 8-9
October, 2011, which came up with strong recommendations relating to
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gender justice, gender and crime, womens rights, access to 119 helpline and
Afghan law relating to women.

d) Establishment of CRCs and trainings on service delivery for the police

The Kandahar Police Crisis Response Centre (CRC/No. 100 helpline) was
set up and operational trainings on SOP procedures provided for receiving
and following up on complaints. As per the feed-back from MoI, Kandahar
CRC received around 400 calls per day, of which 8-10 were valid cases
relating to insurgency, street fighting and seeking general information on
police services. Building on this, there was proposal for setting up of CRCs
in Herat, Balkh and Nangarhar police zones but there was some delay in this
as MoI was in process of standardizing the 119 number across the country
with more advanced operational technology (regional centers were to use the
same technological applications as the Kabul centre). The contract will be
awarded in the beginning of 2012.

e) Establishment of information desks at police stations

Information desks were established in 12districts (in addition to the 8 pilot
districts), 4 each in Kabul, Nangarhar and Herat -to support a positive
police-community interface as well as to record and follow-up on
complaints. The progress report was shared with all stakeholders.

Another contract for establishment of information desks in additional 31
districts was awarded to the selected firm for a 6-month implementation
period and work is in progress. This was complemented with needs-
assessment trainings on operation of the desks and equipping the centers
with the necessary infrastructure. This led to improved information gathering
and sharing between the police and local communities, resulting in better
security and police delivery.

f) Development of public awareness/education campaigns using multiple
media tools

Public awareness campaigns had been instituted in the pilot phase on ways
for the communities to know about the police work, reach out to the police
for seeking effective assistance and rendering information on local issues
(including on insurgent activity).For the provincial expansion phase, during
Quarter-3, there was a proposal for public awareness and education
campaign for Herat, Balkh and Nangarhar regions. However, the RFP had to
be recalled as MoI was in process of standardizing the central 119 centre and
wanted the same system to be used for all provincial public awareness tools.
A competitive International Police Film Festival was also finalized in which
grants are proposed to be given to 10 best proposals for production of short
films based on police themes specific to local communities. This is expected
to encourage positive developments between police and local Afghans in the
civil security and peace-building process. Apart from showcasing the
perspectives that define the ANP, it will provide a springboard for dialogue
between the MoI and civil society.

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1.9 Review of Monitoring and Evaluation

We reviewed the minutes of the meetings of the Steering Committee and assessed
whether the clear guideline is provided on the implementation of the project activities
and regular oversight is exercised through required quarterly meetings. Regular
steering committee meetings were held during the quarter.

Further, we reviewed the annual work plan, project document and progress reports
and monthly reports of monitoring agent.

1.10 Field Visits

We conducted field visits to Central Ministry Kabul, J alalabad, Kandahar Herat and
Kabul Province and reviewed the documents. Our review included the verification of
expenses at site offices, review of police personnel files and review of procurement
documents. We also conducted visits to police stations on test basis and interviewed
the policemen.

1.11 Review of Project Progress and Assessment of Internal Control Systems

a) Review of Project Progress

We reviewed the management aspects in terms of Project approvals, work plans,
budget formulations, Project resources, monitoring and evaluation of
implementation towards achievement the Project objectives and periodic progress
reporting against planned objectives and work plans.

Findings in this specific area are as follows;

Limited Monitoring of Government disbursements by UNDP LOTFA
Reconciliation for differences between salary records of Ministry of interior
and Ministry of Finance was not prepared at Central Ministry, Kabul office
and J alalabad office.
Continued uncertainty regarding New Kabul Bank, with potential implication
for LOTFA funds as most ANP accounts are maintained in Kabul Bank
risking payment of salaries to ANP

b) Assessment of Internal control

We have assessed the adequacy of operational and internal control systems by
reviewing the following areas:

Human Resources
Finance
Procurement
Asset Management
Cash Management
Information Systems

Results of our assessment of internal control systems in the areas as discussed earlier
are produced briefly along with standard audit ratings as per Annexure 1. Based on
our assessment, overall rating is Satisfactory.

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Finance

We evaluated the adequacy of the accounting and financial operations and
reportingsystems. These include review of controls relating to budget control, cash
management, certification and approving authority,receipt of funds, disbursement of
funds, recording of all financial transactions in expenditure reports, records
maintenance and control.

Specific procedures included the following:

Review the implementing partner accounting records and assess their adequacy
formaintaining accurate and complete records of receipts and disbursements of
cash; and forsupporting the preparation of quarterly financial report.
Review expenditures made by MoI and assess whether these are inaccordance
with project document, annual work plan and budgets; and are in compliance
with theUNDP User Guide on Results Management.
Review the records of requests for direct payments and ensure that they were
signed and approved byauthorised government and UNDP country office
officials.


Limited cases of double Payment of salaries in Kandahar and difference between
number of police personnel as per HR and EPS records
Non-compliance with provisions of Afghanistan Income Tax Law

Based on our assessment of this area our comment on rating for this area is Partially
Satisfactory.

Human Resources

Our review in this particular area covered the internal controls to ensure the
competitiveness, transparency and effectiveness of the recruitmentprocedures for
hiring of personnel and further internal controls relating to performance appraisal,
attendance control and management of personnel records.

Specific procedures included review of the process for recruiting project
personnel and consultants and assess whether itwas transparent and
competitive.
Review of personnel files of project personnel and police to assess proper
management of personnel records

Based on our assessment of this area our comment on rating for this area is
Satisfactory.

Procurement

We evaluated the competitiveness, transparency and effectiveness of theprocurement
activities of the Project in order to ensure that the equipment and services
purchasedmeet the requirement of LOTFA and review the internal controls including:

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Delegations of authorities, procurement thresholds, call for bids andproposals,
evaluation of bids and proposals and approval/signature of contracts
andpurchase orders;
Preparation of receiving and inspection procedures to determine the conformity
of equipment with theagreed specifications and, when applicable, the use of
independent experts to inspect thedelivery of highly technical and expensive
equipment;
Evaluation of the procedures established to mitigate the risk of purchasing
equipment thatdo not meet specifications or is later proven to be defective;
Management and control over the variation orders.

We also evaluated the use of consulting firms and theadequacy of procedures to
obtain fully qualified and experienced personnel and assessment oftheir work before
final payment is made.

Specific procedures included review the process for procurement/contracting
activities and assess whether it wastransparent and competitive.

Satisfactory.

Asset Management

We reviewed the adequacy of the procedures for receipt, storage, and disposal of the
equipment including vehicles and office equipment purchased for the use of the
Project.

Specific procedures included review the use, control and disposal of non-expendable
equipment and assess whether itis in compliance with UNDP User Guide on Results
Management; and also whether theequipment procured met the identified needs and
whether its use was in line withintended purposes.

Satisfactory.

Cash Management

We reviewed the adequacy of the operational and internal controls relating to cash
funds held by the Project and review procedures forsafeguarding of cash.

Satisfactory.


We reviewed the operational and internal controls relating to travel activities, vehicle
management, shipping services, officepremises and lease management, office
communications, and records maintenance.

Satisfactory.

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Information Systems

We assessed the adequacy, efficiency and security of the information systems,
particularly those established and maintained from project funds to meet the
management and reporting requirements of the Project.


Lack of or inadequate information system controls and checks

Satisfactory.
1.12 Acknowledgement

We wish to place on record our thanks and appreciation to the management of the
Project, relevant Government personnel in Ministries and UNDP Country Office of
Afghanistan for the cooperation extended to us during the audit.

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2. Detailed audit observations

Observation No: 1
Audit area: Project Management
Issue title: Limited monitoring of Government disbursements
procedures by UNDP LOTFA

Condition

Salaries of police staff are initiated by Ministry of Interior (MoI) based on records
from Electronic Payroll System (EPS) and province-wise departmental payrolls are
prepared in the form of M-41 together with payment voucher in the form of M-16.
The information is directly submitted to Ministry of Finance (MoF) for its review and
processing. Upon completion of all relevant reviews and approvals by MoF, bank
intimation letters for transfer of funds are circularized to Da Afghanistan Bank (DAB)
with copy to MoI, from where it is forwarded to the concerned departments. The
concerned personnel from all departments approach their relevant banks with details
regarding staff salaries and bank accounts for transfer of payments accordingly.

We observed that a limited review and monitoring is being carried out by UNDP
LOTFA Project over this process from inception to final payment to the police force.

Criteria

As per UNDP Monitoring and Evaluation policy, Monitoring and evaluation are
essential management functions that are interactive and mutually supportive.
Monitoring and evaluation must be continuously strengthened to enable UNDP to
respond to demands for:

Greater accountability in the use of resources;
A clearer basis for decision-making; and
More practical lessons from experience to guide future development
interventions.

Cause

Lack of/or inadequate guidance/supervision at project level

Impact or risk

Limited monitoring of Government disbursement may have the following
impacts/risks;
Funds may be utilized for purposes/activities other than the project objectives.
Funds may be utilized for activities not included in the Annual Work Plan.
Excessive costs may be incurred for project activities leading to inefficiencies.
Financial irregularities at project level may remain unidentified on timely basis.
Payments may be made for activities not actually incurred.

Recommendation

We recommend that LOTFA Project management should continue reviewing EPS
data on regular basis to avoid any human errors and thereby ensure that all the
information from EPS is updated on regular intervals for staff inducted and or
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terminated and the line ministries documentation is complete, in-line with the
government rules and regulations and processed adequately.

Risk level

High

Management comments

LOTFA can only play a limited role in monitoring the government disbursement
procedures EPS data is already updated on monthly basis, and shared with
stakeholders However, LOTFA will assign EPS team to undertake regular checks and
monitor EPS data to ensure further improvement in data accuracy and avoid possible
human errors.

Responsible Manager

Project Manager

Expected Completion Date

31 May 2012

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Observation No: 2
Issue title: Reconciliation of records between MoI and MoF not
prepared on quarterly basis

Condition

While reviewing the information flow of police force salary disbursements, we have
observed differences between salary and food expenses records of MoI and MoF.We
were given understanding by the Project management that these are timing
differences because reports from provinces are received late due to security and
logistics concerns and at times payments are delayed/ rejected by MoF due to non-
availability of budgets or non-compliance of certain procedural activities by MoI.

We were also given understanding that reconciliation is prepared on annual basis.
However, we noted that the reconciliation between salary and food expenses records
of MoI and MoF was not prepared till the date of this report at Central Ministry
whereas in J alalabad, Kabul, Herat and Kandahar offices MoF data regarding police
salaries in the form of AFMIS reports was not available.

Criteria

Since data entry errors or other types of mistakes may occur when information is
recorded from various sources, it is important to identify those errors and make
corrections on timely basis. Account reconciliations are an important component of
internal control strategy designed to reduce risks and ensure quality of financial
information. Timely reconciliation of project records provides effective control over
project activities and also helps to detect mistakes/errors in financial records on
timely basis.

Cause

Lack of/or insufficient human and technical resources

Impact or risk

There is a risk that the timing differences are not reconciled on timely basis; and
There is a risk of overstatement/understatement of salary and food expense in
monthly reporting and risk of inappropriate use of resources of the Project.

Recommendation

We recommend that salary and food expenses reconciliation between records as
per Ministry of Finance (MoF) and Ministry of Interior (MoI) should be
prepared on regular intervals at least on quarterly basis as appropriate.

We further recommend that measures should be taken to get the information
from provinces on timely basis and provinces that lack adequate resources to
submit the required information within the stipulated time should be equipped
with the minimum required relevant support for an efficient and effective
submission of the information.

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Risk level

High

Management comments

The discrepancies are due to timing differences and reports from provinces are not
received by MoI on timely manner due to security and logistics constraints.
Sometimes payments are delayed/ rejected by MoF due to non-availability of
allotment. The final reconciliation is only maintained on annual basis upon receipt of
complete annual data from provinces. Reconciliation for 1389 was shown to the
audit team and the team was satisfied with it. For 1390, the complete MoI data will
be available from all provinces around a month after the closure of the AFY.
However, the full reconciliation has been done with MoF AFMIS. Quarterly
reconciliation is possible but it will not fully accurate and complete. As per GoA
financial management system the reconciliation is due at the end of each financial
year. Besides, transfer of documents from vulnerable provinces is risky practice for
MoI and it is may not be possible to get these documents from remote provinces on
quarterly basis. The recommendation is noted.

Responsible Manager

Project Manager


15 J une 2012

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Observation No: 3
Issue title: Uncertainty regarding New Kabul Bank

Condition

We observed that around 83% of the police force salaries are paid through Electronic
Fund Transfer (EFT) mechanism and as designated disbursement agent, police staffs
have to maintain their bank accounts with New Kabul Bank. It is worth mentioning
that there had been reports in early August 2010 about misappropriations and large
financial losses in Kabul Bank, the operations of which have been taken over by the
New Kabul Bank. No analysis of risks involved has been carried out and documented
to continue maintaining accounts of police staffs in the New Kabul Bank.

Criteria

As per the requirements of Project documents, the Project under its consolidated 3
pillars window has to cover the following prioritized components including but not
limited to;

Payment of police force remuneration.
Payment of remuneration of uniformed personnel employed by the Central Prison
Department (CPD).

Cause

Inadequate planning

Impact or risk

Uncertainty attached to New Kabul Bank due to takeover of operations of Kabul
Bank may affect payment of salaries to Police and Central Prison Department (CPD).

Recommendation

We recommend that Project management should take appropriate steps and encourage
Ministry of Finance to expand the banking base by awarding contracts to other banks
operating in Afghanistan for payments of police force salaries in order to diversify the
risks relating to payment of police remunerations through only one bank.

Risk level

Medium

Management comments

The issue has been raised several times with MoF and also raised regularly at
LOTFA Steering Committee meetings. MoF has provided complete assurances for
smooth operations of New Kabul Bank. The salary payments have not been affected in
any manner. In worst case scenario, MoF has alternative Option B of payment by
list but this is not likely to happen. Award of contracts to other banks is fully MoF
decision. However other banks have not yet expanded their branches on provincial
and district level which is a gradual process and require resources, infrastructure
and authorizations from the Central Bank. 4 banks were contracted initially for the
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services of government employees, but apart from new Kabul Bank, only Azizi Bank
was part of EFT initiation and that too, only in Khost and Nanagarhar provinces.
Other banks were have not been able to establish banking infrastructure at provincial
levels for police at provincial levels.

Responsible Manager

Project Manager


30 September 2012

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Observation No: 4
Audit area: Finance
Issue title: Limited cases of double payment of salaries in Kandahar
and difference between number of police personnel as per
HR and EPS records

Condition

During the course of our field visit to J alalabad and Kandahar offices, we noted
certain instances of double payments of salaries in employees bank accounts. We
observed that data of some employees was posted twice in Form M-41 (EPS) which
resulted in double payment of salaries to the employees. Further, we noted certain
instances where EPS contained different employee names with the same bank account
numbers. Instances where double payments of salaries were found in Kandahar Office
are as follows:

Name of Staff Father Name Bank A/C # Department Designation
Amount
(Afs)
Abdullah Rajab 005-66705679

Police Hawza 7
Kandahar
Sarabaz Police
Milli
11,537
Abdullah Rajab 005-66705679

QataGarnizon Q
1 Kandahar
Sarabaz Police
Milli
11,537
Abdul Raziq Amir
Mohammad
005-66689189

Police Hawza 2
Kandahar
Sarabaz Police
Milli
11,537
Abdul Raziq Amir
Mohammad
005-66689189

Police Hawza
12 Kandahar
Sarabaz Police
Milli
11,537
Shafqatullah A.Zahir 005-66723166 Kamarband
officers
11,537
Shafqatullah A.Zahir 005-66723166 KandakKamar
bank shehriNo.1
3
rd
Satanman 13,174
Abdul Karim M. Rahim 1005112005851 Police
TooliQarargah
Sarabaz Police
Milli
11,537
M.Karim Abdul Rahim 1005112005851 Police
TooliQarargah
Sarabaz Police
Milli
11,537
Bashir Ahmed Fida
Mohammad
005-66702643 Q 1 Pinjwai
Kabul Bank
Sarabaz Police
Milli
11,537
Bashir Ahmed Fida
Mohammad
005-66702643 Police Hawza
15 Kandahar
Sarabaz Police
Milli
11,537
Abdul
Hameed
Gul Ahmed 005-66731091

Q 1 maiwand
Kabul Bank
Sarabaz Police
Milli
11,537
Abdul
Hameed
Gul Ahmed 005-66731091

Q 1 maiwand
Kabul Bank
Sarabaz Police
Milli
11,537
Abdul
Hameed
Gul Ahmed 005-66731091

Q 1 maiwand
Kabul Bank
Sarabaz Police
Milli
11,537

Instances where EPS data contained different employee names with same bank
account numbers resulting in double payment of salaries in a single account in
J alalabad office;

Name of
Staff
Father
Name
Bank A/C # Department Designation
Amount
(Afs)
Ningyali Kalamdin 00701481018361 Q 1
WalswaliNazy
an
3
rd
Satanman 11,938

Ningyali M. Zaman 00701481018361

Q 1
WalswaliAche
3
rd
Satanman 11,939

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Name of
Staff
Father
Name
Bank A/C # Department Designation
Amount
(Afs)
en
Auaz Khan Gulroz 00701481033514

Q 1
WalswaliHasar
ak
Sarabaz Police
Milli
10,191
Mir Kalan Khushal 00701481033514

Q 1
WalswaliHasar
ak
Sarabaz Police
Milli
10,191

MujeebUllah A.Rahman 000703103098173 Q 1
WalswaliPajee
ra gam
Sarabaz Police
Milli
10,191

IzatUllah M. Hakim 000703103098173 Q 1 Walswali
Kama
Sarabaz Police
Milli
10,191

Najeeb ShaftaloGul 000703104305366

Lonistar LumriSatanma
n
13,839

Ahmed
Sharif
Abdul Rafu 000703104305366

Lonistar LumriSatanma
n
13,840

We also observed differences between number of police personnel as per HR record
maintained by MOI and EPS records. We noted that EPS record was showing excess
number of police personnel than the number of police personnel appearing in the HR
record. Instances of such differences for the month of December 2011 are as under:

Area/Province
No. of Staff As Per
HR Record
No. of Staff As Per
EPS Record
Excess No. of Staff
As Per EPS
Asmayi Region 37,414 38,523 1,109
Shumshad HQ 202 346 352 4
Nangarhar 3,205 3,405 200
Parwan 1,171 1,262 91
Kapisa 1,003 1,069 66
Nuristan 2,657 2,658 1
Kunar 1,491 1,920 429
Laghman 1,018 1,043 25
Pamir HQ 300 457 989 532
Balkh 2,339 2,357 18
Kunduz 2,054 2,203 149
Badakhshan 1,884 2,103 219
J awzjan 1,047 1,085 38
Baghlan 2,904 2,954 50
Samangan 928 933 5
Daikondy 1,033 1,045 12
Paktiya 1,933 1,980 47
Logar 798 1,094 296
Wardak 1,217 1,235 18
Ansar HQ 606 731 914 183
Badghis 1,786 1,834 48

Moreover, we also observed that EPS contained domain/column for National ID card
number of employees. However employees bank account numbers were used instead
of National ID card number.

Criteria

As per the approved Annual Work Plan the project activities include;

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Page 31

Production/generation of police computerized payroll transparently, accurately
and on timely basis; and
Monitoring and verifying police payments
Provision of quality HR data for payroll report

Cause

Lack of/or inadequate policies/procedures/guidelines;
Lack of/or inadequate guidance/supervision at project level;
Inadequate training
Human error

Impact or risk

Double payment of salaries to staff results in direct financial losses to the
Project.
Differences in personnel records between HR and EPS may have following
impacts/risks:
o Salaries may be paid to persons who are not actually on the payroll.
o Double payments of salaries may be made to staff members.

Recommendation

We recommend that cases of double payments should be investigated and corrective
actions be taken on priority basis.

We also recommend that differences between the captioned records should be
investigated and reconciled on priority basis. Further, employees ID card number
should be used in EPS in specified domain and duplication checks should be
implemented in EPS to detect similar records.

Risk level

High

Management comments

In general, based on MoF procedures, individual checks are not authorized for
unpaid salary from previous month. Payment of previous month salary is recorded in
the EPS separately showing double record. Well established manual HR system is in
place to make sure that salary is not reported twice.

In case of Nangarhar, the audit team revived initial report received from districts
which is filtered and worked to prepare unified M-41 (salary report). However, due
to attack on New Kabul Bank in Nangarhar the salaries in Qous were temporary paid
through pay by list. Copies of evidences of individually signed M-41 for the
mentioned month, where the payments were only made once to these ANPs, were
provided.

In the case of Kandahar, there were indeed, 2 cases of double payments. This is a
very small size for a Kandahar EPS force size of 9,554 by end 2011. But it is well
noted. Directive has been issued by MoI for recovery of these payments. The issue
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will be regularly followed through LOTFA monitoring agent teams in headquarter
regions and provinces.

In the past too, there were limited instances of double payments reported by the
LOTFA Monitoring Agent as well in Kandahar. Soon after receipt of MA report, MoI
deployed its internal audit and the money was swiftly recovered. Proof was provided
to the auditors.

2. EPS team is already doing reconciliation of data on monthly basis. With respect to
use of police ID number in specified domain, ID numbers are indeed, being used in
all cases where these are available. However, the ID card process is being handled
by DynCorps and they have not been able to issue ID cards to all ANP which are
based on physical verification, biometrics, etc. In cased where police ID numbers
have not been issued, national ID (tashkira) or registration number is used as unique
ID. This system is working well but will continue to monitor.

Responsible Manager

Project Manager


30 J une 2012
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Observation No: 5
Audit area: Finance
Issue title: Non-compliance with provisions of Afghanistan Income
Tax Law

Condition

We observed that taxes on salaries of local staff were not withheld and paid to
government authorities as per provisions contained in Afghanistan Income Tax Law
2009 for the Service contract holder staff.

Criteria

Article 58 of Income Tax Law 2009 of Afghanistan states that:

All natural or legal profit and non -profit persons, ministries, state enterprises,
municipalities and other State departments employing two or more employees in any
month of a year shall be required to withhold taxes as provided in Article 4 of this
Law from payment of salaries and wages and pay the amount withheld to the
Government account.

Further, UNDP Service Contracts Policies states that:

The remuneration paid to the SC is not exempt from national or local taxation.
UNDP is not responsible for payment of tax on earnings or other taxes due on the
remuneration of the SC, nor is UNDP responsible for reimbursement of taxes paid by
SC holders in respect of earnings received under SC with UNDP. The payment of
taxes is the sole responsibility of the individual under SC. UNDP reserves the right to
request proof of payment of taxes by the SC holder.

Cause

Inadequate guidance/monitoring at UNDP country office level

Impact or risk

Non-payment of taxes may lead to tax penalties and additional taxes. Moreover, for
all income taxes, including staff salaries, provisions of Afghanistan Income Tax Law
2009 supersede any other contractual obligations. Therefore, the liability to withheld
and deposit staff taxes rests with the employer and mere insertion of clause in staff
contracts cannot eliminate employers liability.

Recommendation

We recommend that the Services Contract holders should comply with the provisions
of Afghanistan Income Tax Laws and UNDP service contracts policies whereas
measures should be taken by UNDP to resolve all tax related issues with the
government authorities.

Risk level

Medium

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Page 34

Management comments

This is a UNDP management issue. LOTFA will follow up on any directive issued
from the CO senior management.

Responsible Manager

Project Manager


31 J uly2012

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Observation No: 6
Audit area: Information Technology
Issue title: Lack of or inadequate information system controls and
checks

Condition

We observed a number of control discrepancies while reviewing the adequacy,
efficiency and security of the information systems in terms of meeting management
and reporting requirements of the Project. As Electronic Payroll System plays vital
role in initiation, processing and recording of police staff salaries and other relevant
payments, we deem it necessary to bring all shortcomings in the system for
management to address. These are detailed below:

Consolidation of reports from EPS including financial reports comprising of staff
salaries and food allowances records, HR reports etc is prepared manually. EPS
System does not provide the options for integrating the offline branches data in a
central location to generate the consolidated reports.
The project is using two versions of EPS, of which one is standalone and the
other is web based. However there is no integration between both versions of
application. Central Office manually prepares the consolidation on the basis of
both application data separately.
The MoIis using a decentralized, legacy-based application and security controls
are not implemented.
Physical access controls are not implemented by the project to detect, prevent and
or mitigate unauthorized access to EPS.
Approvals for user ID are not obtained. IT support staff provides access to the
branches staffs as per their requirement after visiting the remote office.
User IDs of Electronic Payroll System does not meet standard practice naming
conventions.
In certain branches salary is paid to the staff on cash basis. However, there is no
option in the EPS to record the cash payment made to the staff.
MoI does not have the documented backup policy, and periodic testing of backup
is not properly documented. Further, periodic backup restoration is not being
performed to ensure the effectiveness of the backups and the quality of backup
media.
Daily application log is not being generated by the application to monitor the
activities especially in offline branches where finance staffs authorize changes
and use administrator ID to archive the monthly data and make the changes in the
parameters.

Criteria

Individual criteria are detailed below:

As per approved Annual work plan, the project activities include implementation
of centralized web-based EPS system to cover all the provinces.
According to risk analysis carried out at project level, the project document raises
question regarding security/confidentially of information and provides assurances
to protect the confidentially and security of projects information by
implementing following control techniques:

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Identify clear communication nodal points in each department so that
confidential information regarding personnel is not leaked out or available to
unauthorized persons under any circumstance; and
The implementation of advance centralized web-based (more secure) EPS
payroll

As per standard Information technology practices, following system controls and
checks should be adopted:

There should be integration between various systems used by the
entity/project and system should have capability of generating the
consolidated reports instead of preparing them manually.
Allocation of user IDs and system access rights should be backed by
appropriate approvals to ensure user accountability and
integrity/confidentially of information.
User IDs in Information system should follow the standard naming
conventions such as allocated employee ID number, National ID number
Information system should have the capability to record and trace the
payments
The entity/project should have a documented backup policy as a part of
overall information technology policy
The system should have built in monitoring controls and should have the
capability to provide logs in respect of user activities to ensure integrity of
information

Cause

Lack of/or inadequate policies/procedures/guidelines
Lack of/or insufficient technical resources

Impact or risk

Lack of adequate and adoption of standard procedures in information based system
critical to the financial reporting and limited monitoring controls and checks might
lead to the following substantial risk:

Preparation of manual reports may result in under-utilization of the system and
un-necessary overhead expenses. Additionally the manual work increases the risk
of human errors as compared against the system automation.
Non-integration of the web-based and standalone applications may have the risks
of data redundancy, duplication and vulnerability to manipulation whereas
erroneous reporting and human errors might also be caused leading to waste of
resources in terms of time, efforts and costs.
Legacy-based applications provide insufficient and ineffective controls over
application security and expose entitys critical data to loss or limiting its
confidentiality, integrity and availability.
Lack of proper approval for issuance of user IDs might lead the project to the
risks of limited user accountability, inconsistency in assignment of access rights
and difficulties in tracking user activities.
In cases where information system does not meet the naming conventions, the
project might fail to observe proper accountability of users accessing into the
system besides inconsistency in user-ids.
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Not recording cash disbursements to staffs in the EPS might lead to duplicate and
or unauthorized to staff and difficulties in tracking payments.
Without regular testing of the backup tapes and cartridges, there is a risk of
accidental loss of backup data. Further, in the absence of documentation of
backup test results management may not be able to know the errors and problems
faced during the restoration process.
Without completion of Logs, there is no assurance that correct changes are
implemented, correct data is entered and authorized and parameters are defined
according to the instructions.

Recommendation

We have provided detailed recommendations as follows:

In order to ensure the effective reporting, as well as to reduce the manual
overheads, the consolidation process should be automated in EPS and same
system should deploy throughout the regions.
Management should consider integration between web based and standalone EPS
application.
The project should deploy WEPS Application covering the current security
requirements and standards that fulfils the entitys medium to long-term business
requirements.
Project management should ensure that allocation of users ID assigned to each
user on application are properly approved and documented.
Project management should establish procedures to ensure that user IDs created in
the applications should comply with the best practice naming convention
standards.
Management should incorporate appropriate check and balance in system to
ensure effective operations of the project activities and to avoid risks relating to
cash payments.
Backup data, tapes and devises should be regularly tested to prevent accidental
loss. It is prudent to attempt a restore of the system from backup tapes at regular
intervals, in order to ensure that the data stored is both usable and appropriate.
Test results should be properly documented and authorized by management and
backup should be stored in taps and moved to offside location and IT staff should
maintain the inventory of media with proper label showing the time stamp along
with backup type.
Project management should consider introducing changes in the system in order
to ensure that logs are available for review to verify that the changes are made in
data according to the given instructions. Further Logs should be reviewed
periodically in order to ensure the compliance of the given instructions.

Risk level

Medium

Management comments

1. LOTFA developed the new central version payroll for MOI which is under
implementation phase at national and sub-national levels. The subject issue will
be resolved soon after full implementation of WEPS.
2. There is full synchronizations between both systems, making data integration
easy and efficient.
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3. The system has been built taking into account the role-based security model and
only the WEPS administration have the full privilege to give access to end-users.
4. Security logs are regularly maintained by the WEPS/EPS system to monitor the
end-user activities.
5. In every payroll station only two end-users are authorized to access the
EPS/WEPS: finance officer and EPS Operator.
6. The security naming convention maintained by the system matches the naming
convention and it is case sensitive.
7. EPS maintains records for those ANPs which are paid by cash and separate
reports prepared on monthly basis.
8. The backup policy is developed and maintained by the MOI ICT and LOTFA is
complying with that policy. Besides that, LOTFAEPS has the licensed backup
software installed in WEPS main server, which makes back-up the complete
image of SQL Server data on timely basis (as per the schedule set by the WEPS
administrator) and it is stored in three separate physical locations to ensure the
data restoration in case of any disaster.
9. User trace utility is configured and reports generated by the WEPS. However,
only WEPS administration have the privilege access the reports.

Responsible Manager

Project Manager


30 J une 2012

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3. Certified prior year (2010) follow-up action plan (attachment)

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ANNEXURE I

Definition of Standard Audit Ratings

Standard Rating Definition

Satisfactory Internal controls and risk management practices were
adequately established and functioning well. No high
risk areas were identified. Overall, the office objectives
are likely to be achieved.

Partially Satisfactory Internal controls and risk management practices were
generally established and functioning, but needed
improvement. One or more high and medium risk
areas were identified that may impact on the
achievement of office objectives.

Unsatisfactory Internal controls and risk management practices were
either not established or not functioning well. The
majority of issues identified were high risk. Hence, on
the overall, office objectives are not likely to be
achieved.

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Page 41

ANNEXURE II

Categorization of Audit Findings by Risk Severity

Priority Definition

High Action that is considered imperative to ensure that
UNDP is not exposed to high risk (i.e. failure to take
action could result in major consequences and issues).

Medium Action that is considered necessary to avoid exposure
to significant risks (i.e. failure to take action could
result in significant consequences).

Low Action that is considered desirables and should result
in enhanced control or better value for money.

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ANNEXURE III

Classification of Possible Causes of Audit Findings

1. Lack of/or inadequate policies/procedures/guidelines

2. Lack of/or inadequate guidance/supervision at the project level

3. Inadequate guidance/monitoring at UNDP country office level

4. Lack of/or insufficient resources (financial, human or technical resources)

5. Inadequate planning

6. Inadequate training

7. Human error

8. Intentional overriding of internal controls

9. Inadequate management structure

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KPMG Afghanistan Limited Management Letter

During 2011, supplementary gender awareness material, including1390

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