September 2014

Vol. 17 No. 1

P A

ACCOUNTANT

(Quarterly Journal of The Institute of Chartered Accountants of Nepal)

Editorial Committee

Contents
Editorial

President's Message

CA. Narendra Bhattarai

CA. Prakash Lamsal
CA. Shrijana Bastola
CA. Chhetra Gopal Pradhan
CA. Ramesh Kumar Dhital
RA. Dev Bahadur Bohara
RA. Shankar Gyawali
Mr. Binod Neupane

Chairman
Vice -Chairman
Member
Member
Member
Member
Member
Secretary

AUDITING
Audit of Project Financial Statements: Expectation and
Peculiarities

Mr. Binaya Paudel

Editorial Support

BANKING
Dynamic Relations of Corporate Social Responsibility,
Corporate Governance and Corporate Reputation in
Nepalese Commercial Banks
- Dr. Mahananda Chalise
13

The Institute of Chartered Accountants of Nepal

Babar Mahal, P O Box 5289, Kathmandu, Nepal
Tel. No. 4269130, 4258569, 2030021, Fax: 977-1-4258568
E-mail: ican@ntc.net.np, Website: www.ican.org.np
Branch Office Biratnagar
Tel: 021-471395, Fax: 021-470077, E-mail: icanbrt@ican.org.np
Branch Office Butwal
Tel: 071-543629, E-mail: icanbtl@ican.org.np

- CA. Nanda Kishor Sharma

Auditors' Integrity and Issues on Ethical Compliance

- CA. Paramananda Adhikari

19

- CA. A. R. Bhattarai

Public Debt Management in Nepal

- Mr. Tula Raj Basyal

Branch Office Pokhara

Tel: 061-537679, E-mail: icanpkr@ican.org.np

- Dr. Basudev Sharma

21

Remittance & its use in Nepal a Critical Assessment

29

MANAGEMENT
Inducting Chartered Accountants (CA) in Civil Service
- Mr. Dev Bahadur Bohara
33

Branch Office Nepalgunj

Tel: 081-525916, E-mail: icannpj@ican.org.np
Designed & Printed By
Print and Art Service, Putalisadak,Ktm.
Tel: 4244419, 4239154

Annual Subscription

10

ECONOMY
What Kind of Economy We Want ?

Branch Office Birgunj

Tel: 051-522660, E-mail: icanbrj@ican.org.np

Subscription Rates

Rs. 600

Taxation
Emergence of Changes & Coverage of VAT Mechanism
- CA. Kaushlendra Jha
37

Rs. 400 (including courier charges for Member)

Rs. 300 (if received by self)

Tax Issues on Defined Benefit Liability Provisions and

Payments: An Employer's Perspective

(including courier charges for Organizations)

Opinions expressed by the contributors in this journal are their own and do not
necessarily represent the views of the Institute. Member Bodies of SAFA may
quote or reprint any part of this journal with due acknowledgements. For others,
solicitation is expected.

Other
A Member in Practice and Service - Opportunities and
Challanges
- CA. Bishnu Prasad Bhandari
49
News

Contributors
Laxmi Bank

First Cover Back

Butwal Power Company Ltd.

Inside Back

Asian Paints

Back Cover

40

- CA. Umesh Raj Pandeya

52

Events and Activities

Member News
Students News
International Participation
Notice
Important Notice

28,32,39,61,62,63,66

Editorial

Editorial
Today, over 100 countries worldwide use International Financial Reporting Standards
(IFRS). The consistent endeavors of ICAN for convergence with IFRS in along with
Accounting Standard Board (ASB) and support from government and regulators we
have able to implement NFRS from 2014/15 in our country. Considering the national
requirement, the ASB with minimum changes has so far developed 32 standards in
line with IFRS and recommended to ICAN for implementation. The NFRS will be
implemented in phased manner. In the first phase, out of the listed companies
manufacturing companies and government business enterprises are expected to
prepare their financial statements of 2014/15 in accordance with NFRS. This phase
of implementation should be taken as pilot exercise and testing time for accounting
community. The convergence process will be completed within the period of three
years.
IFRS unifies the business transaction, better capital market, improve internal
communication, easy performance appraisal attract investors and buyers etc. are
some benefits of adoption.
There many challenges in enforcement of NFRS. These challenges include mainly
the shortage of proper accounting manual, qualified accountants, low level of
awareness among preparers and users of financial statement, regulators, auditors
and other stakeholders. In the last few years the ICAN and ASB either separately or
jointly organized series of seminars/workshops, interaction or training program on
NFRS in order to create awareness and training for members of the Institute,
professionals and other stakeholders. In this connection expert from oversees were
also invited for conducting such programs. In order to lessen the complexities
associated with convergence of IFRS, now the time has come to ICAN and ASB in
conducting the training and skill development program aggressively to better meet
the requirement of corporate sector. Language is also a barrier in enforcing the
standards but in our case all pronounced standards are in the process of translation
in Nepali language which is being undertaken by ASB. It is hoped that these standards
will be available soon for consumption of all concerned users.
In the view of long term perspective, training and education in NFRS is the best way
to make individual accountants ready to use the standards. The ICAN and ASB both
in support of government authorities need to initiate dialogues with universities to
provide proper education in reporting standards. Similarly, the ASB is required to
develop manuals for implementation of these standards. In the context of other South
Asian Countries we have also formally launched the adoption of IFRS which is a
significant achievement in the field of financial management and capital market of
the country. Implementation of NFRS is the responsibility of entire accounting
community and we have to enhance our capacity individually through self-study
and participating in the skill development programs of the conducted by the Institute
and ASB within the country.
We are fully confident that the commitment and support from the government
authorities, Development Partners, business community, membership and other
stakeholders is expected as usual for smooth transition process to new financial
Reporting Standards. We know that even after the convergence the preparer, users
and auditors will continue to encounter practical implementation challenges. In this
context, it is really a testing time for all of us. Let us join hands in this endeavor for
its successful Implementation.
The Editorial Board

ACCOUNTING

President's
Message

Dear Professionals,
I feel greatly honored to take over the baton of Nepalese
Accounting Profession as the 18th President of Institute
of Chartered Accountants of Nepal. I express my heartfelt
gratitude towards the Council Members for reposing the
confidence and electing me unanimously for this prestigious
position. In my personal note, one who is near and dear
to me knows that I have been in this position from the
grass root with a gratifying struggle for an education. I
owe whatever I am today to the almighty, my family,
relatives, friends and seniors who extended every
encouragement and support during my hardship. Many
people might not know that accountancy profession was
my destination in life. To become a Chartered Accountant,
was the dream of my life, which was cultivated when I
was hardly 11 year old and had passed only 5th standard.
Today, I feel proud, privileged and obliged to have actually
lived with this great and noble profession and have
gradually come to become a torchbearer of this glorious
profession in the process. I humbly salute the profession
of accounting. I also salute with profound gratitude to all
the distinguished past Presidents for establishing and
bringing the Institute and the profession to its present
stature.
I am well aware that serving as President of the ICAN at
this time of ever-increasing expectations and challenges
is a daunting endeavor. Being a regulatory body, our
Institute is performing its regulatory functions, in keeping
its members dutiful, disciplined and accountable, in
discharging their professional responsibilities because of
which the profession commands a high respect in the
society. However, because of the expectation gap,
knowledge gap and occurrence of few unfortunate events
some misperceptions have been emerged now and then.
I hope such expectations and knowledge gaps shall be
faded away in due course of time through increased
advocacy role of the Institute in the days to come. I pledge
my submission here that I will put all my strengths and
efforts to put forward one step ahead to promote ICAN
Brand and develop the ICAN as a Centre of Excellence.
Our Vice President
I heartily congratulate my dear colleague CA. Prakash
Lamsal on his election as the Vice President of the ICAN.
I am confident that his new ideas and experience will
greatly benefit the Institute and members at large and also
help in shouldering my responsibilities. I know him as a
young, energetic and dedicated accounting professional

The Nepal Chartered Accountant

June 2013

35

with a 'can do' attitude.

Let me share some of the initiatives of ICAN.
Strategy Plan to Reach New Horizon
Accounting profession has evolved and has undergone a
paradigm shift which requires more pragmatic and
thoughtful strategy and action plan. There are many unmet
aspirations of the society, young generation of the
profession, government and all the stakeholders which
need to be assiduously augmented. We have to cover quite
a distance before we reach our destination across newer
horizons. Considering this fact the maiden Strategic Plan
(SP) 2014/15-2016/17 has been formulated by the Institute
that is made public by Honorable Finance Minister on 18th
July 2014. Effective implementation of the Strategic Plan
requires the support of the all the members of the profession
including council members. In that respect, I invite you
all to be part of our decision-making and delivery processes.
Let's work together, together we can do wonders.
Strategic Planning is a process by which we can envision
the future and develop the necessary procedures and
operations to make the organization productive and
influence and achieve the goals for the future. The Strategic
Plan has been developed identifying and analyzing the
strengths, weaknesses, opportunities and threats (SWOT),
strategic goals and objectives of the Institute with a view
to focus on setting the direction for the future based on
the 7 Strategic Domains identified. I am confident that this
Strategic Plan will address the challenges and demand of
institutional development and to address the increasing
professional demands and pursuing globalization that
ICAN continues to face. I believe that this Strategic Plan
shall pave a path to propagate and promote 'ICAN Brand'
and develop the Institute as a 'Centre of Excellence'. The
7 Strategic Domains and their focus have been depicted
in the following paragraphs.
Domain 1: Public and Government
Develop ICAN as a Centre of Excellence attracting highcaliber individuals to the profession and setting and
enforcing the highest standards of technical and
professional competence and ethical conduct.
Domain 2: Members and Accounting Profession: Ethics
and Capacity Development
Enhance, promote and protect the prominence of ICAN
Brand setting and enforcing the highest standards of
education, professional competence and ethical conduct
in consonance with the international norms and practices.

Domain 3: Members and Accounting Profession: Market

Development
Promote and maintain the pre-eminence of the accounting
profession so that services of accounting professionals are
sought in all the areas in private/corporate and
public/government sectors where accounting professionals
can provide value added services and all the senior financial
positions and advisory roles are filled by accounting
professionals.
Domain 4: Students
Enhance, promote and protect ICAN Brand and stimulate
the students to the accounting profession and impart world
class education, training and professional development
opportunities to create global professionals.
Domain 5: International Relations and Global Positioning
Leverage global opportunities by harmonizing with the
international education and technical standards so as to
broadening reach and influence of the ICAN members in
other countries and to support development of the
accounting profession through MOU/MRA with foreign
Professional Accounting Organizations.
Domain 6: Leadership and Influence
Develop strategic relationships with stakeholders in
government and the corporate sector as a partnering
process for nation building to ensure that national strategic
goal and the marketplace duly value the pre-eminence of
the accounting profession;
Domain 7: Institutional Development and Sustainability
Ensure organizational effectiveness through appropriate
structure, resources and process reengineering
Implementation of Strategic Plan
The main purpose of the Strategic Plan is to set out a
strategic path for the Institute for coming three years which
will be supplemented by annual plan. There are 7 Domains
in the Strategic Plan and has covered 94 activities to be
implemented within the period. The implementation of
the SP shall culminate the ad hoc or arbitrary practice of
preparing annual program and promote carrying out its
activities objectively and transparently. For the
implementation of the activities, the responsibilities have
been designated to the concerned Department which shall
be monitored by the council from time to time.
Shifting to New Building
Flooring and furnishing of the new building is in process

and it is expected that the office of the Institute shall be

formally shifted to the New Building within January 2015.
Review of Nepal Chartered Accountants Rules
The Council has formed working groups for reviewing
the existing provisions of Nepal Chartered Accountants
Rules.
Member Service
The Institute always gives value to the member services.
Hence considering this fact the Institute has made
arrangement of renewal of membership and Certificate of
Practice (COP) from all the branches.
Examination Center
The Institute always gives value to the student services.
Hence considering this fact the Institute has made policy
decision to decentralize examination center for CAP I and
CAP II to all the branches of the Institute in case of the
minimum designated number of applicants opting for that
particular center is reached.
O&M Survey
No organization can perform professionally unless it is
well equipped with competent staff. Recognizing this fact
the institute plans to implement various activities in order
to motivate the staff by enhancing capacity building and
career development opportunities to them which will
eventually enhance the performance of the Institute. I
believe that O&M survey will definitely explore avenues
and provide some suggestions in this regard.
Spoke Person Designated
The Council has designated Executive Director as
Spokesperson of the Institute. This will help to disseminate
the activities of the Institute to the stakeholders.

improving the internal governance of the Institute.

Firm Registration Compulsory
Pursuant to Nepal Chartered Accountants Rules, 2002 the
Institute has made compulsory to the Certificate of Practice
(COP) holder members to get their firm registered till
January 14, 2015 and thereafter members will be ineligible
to provide audit services simply on the basis of COP of
the individual member.
Implementation of NFRS
ICAN has already announced to implement NFRS in
phased manner within a period of the next 3 years. In the
first phase, multinational listed companies and listed public
sector undertakings are expected to prepare their financial
statements of 2014/15 in accordance with NFRS.This phase
of implementation shall be taken as pilot exercise and
testing time for accounting community.
There many challenges in implementation of NFRS. These
challenges include shortage of proper qualified accountants
in all the financial reporting supply chain that include
preparer, auditor, regulator and users. Therefore, the
development of the trained manpower in all the financial
reporting supply chain shall be the priority of the Institute
during the next 3 years.
Once again, I extend my gratitude to the Council members
for electing me to serve as President of the Institute and
look forward for continued support in fulfilling my
Presidential responsibility. I humbly urge to all the
members to provide necessary inputs and feedback in
carrying out the activities of the Institute and matters
related to the accounting profession. We will continue to
keep abreast of ICAN's development activities in the next
issue of our Journal.

ERP
The Enterprise Resource Planning (ERP) system shall be
fully implemented from this year. It is expected that this
arrangement will facilitate to maintain co-ordinations
within Department and Sections which will contribute

CA. Narendra Bhattarai

President
September 30, 2014

ICAN Activities During the Reporting Period

AUDITING

Audit of Project Financial Statements:

Expectation and Peculiarities

The financial audits are mainly

close-ended exercises. This
means that auditors focus only
on verifying the financial
information. Financial audits try
to dig deep into an entity's
financial situation, probing
accounting records, internal
controls policies, cash holdings
and other sensitive financial
areas. Conversely, project audits
are open-ended, consultative
exercises. Project auditors act as
consultants who try to add value
to projects and business by
suggesting improvements and
ways to close gaps

"Subjecting a business for regular

third-party review and evaluation
helps the business successfully evolve.
External reviews allow to observe
problems within the business that
might not have been seen earlier
because implementers are in the midst
of the business. Whether for financial
or project purposes, audits examine
activities against set criteria and
standards objectively."
An attempt has been made in this
article to explain the expectation from
and peculiarities of audit of project
financial statements vis--vis general
purpose financial statements.

Background
An audit is conducted primarily for
the following one or more reasons:

CA. Nanda Kishor Sharma

CA. Sharma is Fellow Member of ICAN

1.

To meet the statutory and

contractual requirement, and/or

2.

To discharge the fiduciary role,

and/or

3.

To settle the disputes, and/or

4.

To identify the areas for

improvement for successful
operations, and/or

5.

To determine fair value of

business for manifold purposes.

The above list, which is though not

an exhaustive one, suggests that the

expectations from an audit vary,
based on an individual's need.
Whatever is the reason behind
conducting an audit, it is for sure that
it helps the business successfully
evolve. However, the current increase
in financial and other frauds,
misunderstanding of the auditing
process and tendencies to shift all the
burden of "correct" financial reporting
to the auditors has shown existence
of a huge "expectation gap" and put
the auditors in tremendous "pressure"
to rethink whether to continue
practicing accounting profession or
not. In general, an audit has now been
perceived as a fraud detecting and
reporting exercise. In fact, that is not
correct.
No doubt, an audit has centric role to
"maintain" financial discipline by
bringing and reporting instances of
"material misstatement" in the
financial statements subjected to
review/audit. In this context, it must
be realized that auditors' roles start
only after the accounting done
through the controls implemented by
the entity's management and enforced
by the regulators. There are more than
auditor who are directly responsible
for maintaining financial discipline

The Nepal Chartered Accountant

September 2014

AUDITING

and reporting faithfully. Further, one must fully apprise

himself/herself about the inherent limitations of an audit,
roles of management in establishing and implementing
financial and non-financial controls and status of corporate
governance within the organization before jumping into
the conclusion about the "main culprit" who failed to
control or report the financial irregularities.
In the context of above deliberations, let us now examine
the roles of an auditor in the audit of project financial
statements (which is specific purpose financial statements)
vis--vis general purpose financial statements so that they
are continued to be respected as an "elite" group in the
society and important contributor to improve the financial
discipline index of the country as a whole.

Financial Statements Audit

Financial audits evaluate financial statements and provide
"independent" third-party opinion on the truthfulness of
these statements. Auditors test various claims (transactions)
against relevant accounting standards or the reporting
framework to provide their opinion. The assertions include
accuracy of the numbers/figures, existence of the assets
and liabilities, completeness of the numbers/figures and
actual occurrence of transactions. In short, auditors check
the entire accounting process through which these
figures/numbers are placed/reported in the financial
statements. Thus, a financial statement audit examines the
entirety of a business's finances, but only its accounting
operations. Also, an audit is audit, whether it is audit of
financial statements of commercial operations or project
activities. However, the expectation from the audit of the
financial statements of a project is far beyond than audit
of the financial statements of a commercial entity. This is
because of the expectation from an audit of financial
statements of a project levelled as entire "project audit".

What is Project Audit?

Projects are short-term efforts, and their ultimate goal is
to create unique outputs/outcomes envisaged. Project
audits, therefore, examine the true status of "project cost",
schedule, scope and quality. The auditors identify issues
and problems that may hinder project's development/
implementation, and then provide solutions to improve
the performance of that project. First, project auditors
identify the success parameters and then conduct interview
with the core project members, relevant investors and
finances. Thereafter, they analyze the issues, challenges
and opportunities using information they gained from

The Nepal Chartered Accountant

September 2014

interviews and project documents. Finally, auditors prepare

reports and submit it to those charged with
management/governance. Project audits involve team
members, which comprises of an "expert in accounting"
and other experts, including quality "evaluator", and
supervisors working together so as to discover problems
going forward and identify successes. Project audits thus
can move a project toward a successful completion or
improve the process for future projects and is beyond
expressing an opinion on their financial statements.

Differences Between Audit of Financial

Statements and Project Audit
The differences in financial statements audits and project
audits are in their objectives. Financial audits seek financial
statements' accuracy whereas project audits seek to unearth
and resolve project problems. The methods used in either
case also are largely different. Unlike, project audits,
financial auditing uses a range of substantive testing
procedures.
The financial audits are mainly close-ended exercises. This
means that auditors focus only on verifying the financial
information. Financial audits try to dig deep into an entity's
financial situation, probing accounting records, internal
controls policies, cash holdings and other sensitive financial
areas. Conversely, project audits are open-ended,
consultative exercises. Project auditors act as consultants
who try to add value to projects and business by suggesting
improvements and ways to close gaps. Depending on the
project type, the auditors must have relevant expertise
and skills to provide meaningful output.

Peculiarities and Risks Associated with Audit

of Financial Statements of a Project
Businesses are constantly engaging in reviews, evaluations
and formal audits to ensure that their operations are
moving forward efficiently and in accordance with industry
regulations. Accordingly, the audit is conducted based on
normal industry standards and every attempt is made to
conduct the audit itself and to present the audit findings,
without prejudice. The objective here is to show that any
other person of the same qualifications would reasonably
have reached the same conclusions in the audit report.
The subject matter for financial audit of a project is the
project financial statements. And, the objectives of the
audit of project financial statements are i) to provide
information about the financial position, performance and

AUDITING

resource flows of a project and their concurrence with the

agreed reporting framework (as spelled out in the
agreement between fund provider and project
implementer), and ii) providing assurance to the fund
provider to discharge their fiduciary role that funds are
used for the intended purposes.

General Purpose Financial Statements

Project Financial Statements

There are two issues that are pertinent to mention here.

One, contrary to the financial statements of a commercial
entity where finances are reflected in the subject matter of
audit, i.e. financial statements, in totality [in the form of
input (equity and liability, i.e. all sources of fund), output
(assets, expenses, revenue, balances (in the form of cash,
advances, receivables, stocks, etc.)], whereas the project
financial statements exhibit only input, expenses and
balances in the form of cash/advances only as uses of
fund, and the outcomes of the spending are not stated,
may be the outputs/outcomes of the spending are not
quantifiable. Hence, the subject matter of an auditor's
opinion in the case of audit of the project financial statement
is not as complete as in the case of commercial entity,
where outputs/outcomes of the uses of funds in the form
of revenue and stocks are also reflected and assurance
about the same is obtained by auditors with its full
satisfaction. Thus, to express an opinion on the financial
statements of a project and to meet the second objective
(as stated above) of the audit of the project financial
statements, it is necessary that the auditor shall go beyond
finance (or the project financial statements) to review the
program delivery to ensure that the moneys (against which
s/he is required to form an opinion) were spent for the
intended purposes. This need reformulating general audit
program and include review of project progress and

delivery that's to not limiting in ticking whether the

activities were done but ensuring that it was done in a
manner perceived so as to achieve the project objectives.
This will to some extent address the expectation gap (of
comparing the results with the "project audit" outcome by
the stakeholders) and "confidence" of auditors of covering
the entire project operations to discharge their duties as
per the terms of reference of audit of financial statements
of a project.
Second, the project financial statements are prepared for
a specific purpose in compliance with the agreed (as
prescribed by the fund provider) accounting principles
(such as charging of Property, Plant and Equipment as
expense, accounting for counterpart contribution in kind,
etc.) and hence auditors shall not base their opinion in
accordance with generally accepted accounting standards
but on the agreed reporting framework and specifically
mention that the report is for "specific purpose".

Conclusion
We all know that an auditor cannot make everyone happy,
if s/he tries to do so the audit loses its relevance as well.
But, to regain the deteriorating recognition of the accounting
practices, auditors must first understand our roles,
objectives, peculiarities of each single assignment,
internal/external risks associated with the operation of
the entity, status of the corporate governance, overall
accountability framework of the country, knowing one's
capabilities and expertise to perform attest function and
deliver with full compliance with technical standards, local
laws and terms of the engagement. Verifying only the
numbers/figures stated in the project financial statements
and forming opinion therein will not be complete and this
will not meet the expectation of the stakeholders as well
the terms of project agreement.

The Nepal Chartered Accountant

September 2014

AUDITING

Auditors' Integrity and Issues on Ethical Compliance

This is to make sure they are

compliance with fundamental
principles of professional ethics.
The Code of Ethic provides a
holistic approach that considers
many aspects of the issue related
with fundamental principles to
abide by the auditors and find
out possible threats and evaluate
how it could affect the audit
profession. The code also
provides the safeguards on the
identified threats to reduces them
to an acceptable level.

Introduction
Every professional including
professional accountant shall abide
the Code of Ethics since they hold
positions of expectation that the
society rely on them for their expertise
and integrity of their functions. Now
a days, code of ethics has been in
forefront due to the failures of many
multinational companies across the
globe especially in the western world
after circa 2001. As a result, IFAC has
revised its Code extensively in July
2009, which defines the set of moral
principles that indicates how an
individual should behave.
Independency being the crux point
for the professional auditors. If the
auditors are not independent, the
value of audit as well as credibility of
the accounting profession will be
gradually decreased and ultimately
lost.

IFAC Code: Principles-Based

Approach

CA. Paramananda Adhikari

CA. Adhikari is Technical Director of ICAN

10 The Nepal Chartered Accountant

Over the years, IFAC has realized the

value of independence of the
accounting professionals' specially
after collapses of big corporate giants
in the western world and extensively
revisited its earlier code of ethics in
2009 to clarify requirements for all

September 2014

professional accountants and to

enhance the independence of auditor.
The new code of ethics is premised
on principle-based approach and it
establishes a conceptual framework
for professional accountants and
external auditor to follow. Further,
the members of IFAC has agreed to
adopt in the form of minimum
benchmark, that principle-based are
better compared to rules-based
approach as threats and safeguards
better serves the public interest, which
cannot provide for all circumstances.
This is to make sure they are
compliance with fundamental
principles of professional ethics. The
Code of Ethic provides a holistic
approach that considers many aspects
of the issue related with fundamental
principles to abide by the auditors
and find out possible threats and
evaluate how it could affect the audit
profession. The code also provides
the safeguards on the identified
threats to reduces them to an
acceptable level. In spite of these,
there are many more confusing
provisions that are to be addressed
by the member body in their own
jurisdictions for the proper
application of the code.

AUDITING

Principles-Based Vs Rule Based Approach

The IFAC rule based code of ethics was replaced by a
principles-based approach in July 2009. Rule can be defined

as a formal and widely-accepted statement or fact whereas

principle is an abstract object which shows a point that allows
the concrete formation of a norm, rule or a law. Sometimes
rules can be used as principles because rules are based upon
principles. Despite the principles vs. rules argument, the

IFAC code does contain de facto rules in several instances,

the Code states that the threats are so significant that no
safeguards can be applied to reduce or eliminate threat(s)
to an acceptable level. The IFAC code addresses
confidentiality and marketing also as applicable to all
professionals. External auditors and professional
accountants that are used to comply with rules- based in
Code of Ethics find themselves in a difficulty to switch
over to principles- based. The most important concern is
whether a purely principle-based approach is strong
enough to deal with complicated transactions. Due to the
different cultural practices in country to country, the IFAC
International Codes may not fit all the circumstances and
cannot fully comply with fundamental principles and local
level practice.

Conceptual Framework & Threats

A conceptual framework requires a professional accountant
to identify, evaluate and address threats to compliance
with the fundamental principles rather than merely comply
with a set of specific rules which may be arbitrary. If threats
to ethics are not clearly insignificant, a professional
accountant should apply safeguards to eliminate the threats
or reduce them to an acceptable level. Many threats fall
into Self-interest threats, Self-review threats, Advocacy
threats, Familiarity threats and Intimidation threats.
Compliance with the fundamental principles may
potentially be threatened by a broad range of circumstances
that exist in local level and the professional auditor should
assess the safeguarding of threats before accepting the
professional assignment.

Behavioral Aspect
Although the Code does not specifically spell out the
human behavior however, the framework is built on the
premise of culture and personal behavior. The behavior
of a human being cannot be justified by just following the
Code because personal behavior cannot be controlled
completely by the Code and it depends on how they intent
to behave. The reasons behind why auditors cannot control

themselves, probably due to the characteristic of the

auditors are self-centered and neglecting to follow the
principles, thus this will create a self- interest threat for
them. The word integrity, commonly used buzz word and
familiar to all the professionals, has been interpreted in
their own way and as per their own convenience and
circumstances. In fact, the word integrity reflects the act
of putting all the effort to work towards the vision and
spirit of the profession. Therefore, integrity of the auditor
has been considered the crux point in the framework of
the Code.

Provisions That Need More Stringent

Benchmark
The revised IFAC's code of ethic cannot be perfect and
suitable of all the time and all the jurisdictions, however,
loopholes can be found on its application, as it may not
fully capture the culture, belief and practice that vary from
country to country. Some provisions enshrined in the Code
are debatable and needs certain stringent guidance to their
appropriate application in the jurisdiction concern.
Some of the provisions that require further guidance for
the effective application are commission, referral fees,
lower fees and contingent fees which are in the nature
completely prohibited type of fees and commissions
however the Code allows such fees if the professional
accountant reduce the threats by applying the safeguards
to an acceptable level. In any case this may be arbitrary
issue and needs some clarification in the respective member
body's jurisdictions. Likewise soliciting new work through
advertising or other forms of marketing is allowed in the
Code however making exaggerated claims for services
offered, qualifications possessed or experience gained or
making disparaging references to unsubstantiated
comparisons to the work of another poses threat to follow
the fundamental principles. This may be the next arbitrary
issue and needs clarification to what extent and form of
soliciting are allowed to the members. Otherwise this may
drag the profession into the credibility question.
Further, subject to application of safeguard, the Code also
allows some of the non-assurance services to the audit
client which is completely not permissible in most of the
member body's jurisdictions. This is also another arbitrary
issue and needs proper guidance for clarification. Likewise,
safeguards within the firm's own systems and procedures
are a corporate governance structure, such as an audit
committee, that provides appropriate oversight and

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11

AUDITING

communications regarding a firm's services.

Therefore, without a proper guidance, certain parts of the
organization may interpret the Code differently for their
own convenience and use. In such a case, they should refer
the framework of the code for proper guidance. More
importantly, we should understand that the IFAC codes
are the minimum benchmarks and more stringent
provisions can be adopted by the member bodies in their
own jurisdictions for the proper regulation of the
accounting profession.

Application of Framework to Specific

Situations
The Code of Ethics discusses a principles-based framework
for identifying, evaluating and responding to threats. The
framework establishes principles to identify threats to
ethics principles, evaluate the significance of those threats,
and, if the threats are other than clearly insignificant,
identify and apply safeguards to eliminate the threats or
reduce them to an acceptable level. An accountant may
perform services in a country other than his home country.
If differences exist between ethical requirements of the
two countries, the strictest provisions should be applied.
The IFAC Code allows certain non-audit services for audit
clients, with proper underlying safeguards including bookkeeping, valuation, management decision making
functions, broker-dealer or investment advisor, litigation
support etc. This also needs to clarification by applying
the fundamental principles enshrined in the framework.

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Activities incompatible with Public Practice

A professional accountant in public practice should not
concurrently engage in any business, occupation or activity
that impairs or might impair integrity, objectivity or
independence, or the good reputation of the profession.
The simultaneous engagement in another activity unrelated
to assurance or accounting services, which reduces the
accountant's ability to conduct his accounting practice
according to ethical principles, is inconsistent with public
practice.

At the End
Overall, the IFAC's Code of Ethics, 2010 with minimal
revisions in the year 2012 and 2013 is based on principle
approach which is important for the professional
accountants as the public rely on their responsibilities that
are to be discharged with effectively. However, there are
still some negative aspects of ethical code, which auditor
finds it difficult to comply with but somehow they manage
to resolve it. As such, it is important that auditor and
accountants knows when to apply the ethical code and
not just understanding the principle only. With a strong
ethical behavior, auditors will be able to give a reliable
and credible opinion to enhance the integrity of accounting
profession. Ethical code, which can be taken as guidance,
cannot guarantee to resolve all dispute result from a
personal and professional engagement in practice by the
professional accountant. Before conclude, I would like to
share that self-regulation is the best regulation.

BANKING

Dynamic Relations of Corporate Social Responsibility,

Corporate Governance and Corporate Reputation in
Nepalese Commercial Banks

Corporate governance and

corporate social responsibility are
important factors for the long-term
development of a firm. Sometime
their contents are same, even some
academicians think that the only
difference between them is the way
to speak. Actually, although
corporate governance and
corporate social responsibility are
strongly related, they are different
concepts

Dr. Mahananda Chalise

Dr. Chalise is Associate Professor, Central
Departmentof ManagementTribhuvan
University, Nepal

Abstract
Corporate social responsibility (CSR)
has been the subject of considerable
investigation and debate for many
years among both scholars and
practitioners. Corporate social
responsibility (CSR), corporate
governance (CG) and corporate
reputation (CR) influence the
development of firms mostly. In this
paper, a model of dynamic relations
among CSR, corporate governance
and corporate reputation was
constructed in the theoretical
framework of stakeholder. The model
reflects that corporate reputation is
formed in the dynamic relations
between firms and corporate
stakeholders, and corporate
reputation is the synthesized result
of corporate governance and CSR. For
the purpose of testing the fitness of
the model in Nepal, an empirical
study is conducted on the relationship
between corporate governance, CSR
and corporate reputation. The result
shows that good CSR has positive
effect on banks reputation. It is also
indicated that CG and CR doesn't
have significant relationship, but
coefficient of the intervariable?CG*CSR?is significant and
positive, which reflects that good

corporate governance alone couldn't

bring good reputation, but it could
when it comes with good social
responsibility.
Keywords: Corporate Social
Responsibility, Corporate
Governance, Banks Reputation,
Stakeholder

1. Introduction
At the very beginning of this century,
a series of corporate frauds happened
in developed and underdeveloped
country which makes the corporate
governance become the focus of these
countries. The fraud brought positive
effect to the corporate performance
and stakeholders' interest, and even
made some firms go bankrupt. Under
such background, many experts
thought about the tradition questions
about firms again: what is the goal of
a firm, who is the firm responsible
for, which social responsibility should
a firm take. After rethinking of those
questions, many experts focus on the
effect of and relationship between
corporate social responsibility and
corporate governance. Corporate
governance and corporate social
responsibility are often mentioned
with firm frauds. Especially now, with
the modern media, any frauds could

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BANKING

have negative and even fatal effect on fame and

performance of the firm. Certainly, if a firm does well in
the corporate governance and firm social responsibility,
it will get good reputation (Lev, Baruch, 2006). Good
reputation could bring value added ( Asyraf Wajdi
Dusuki?Humayon Dar?2006); eventually the firm could
benefit its performance and have sustainable development.
With competition between commercial banks turning
strong in Nepal, corporate reputation is to be a main
channel for banks to get competition advantage. At the
same time, more and more attention are paid to corporate
governance and corporate social responsibility in Nepalese
commercial banks, but it is not clear on the relationship
of Corporate governance, corporate social responsibility
and banks reputation. This article firstly analyses how the
corporate governance and corporate social responsibility
affects the commercial banks reputation, secondly describes
the relationship with the Nepalese data, and thirdly gives
results some implications for the Nepalese commercial
banks.

2. The Relationship Between Corporate

Governance and Corporate Social
Responsibility
Corporate governance and corporate social responsibility
are important factors for the long-term development of a
firm. Sometime their contents are same, even some
academicians think that the only difference between them
is the way to speak. Actually, although corporate
governance and corporate social responsibility are strongly
related, they are different concepts. According to the
research on the theory of corporate governance and
corporate social responsibility, it is found both of them
are often put in the same framework of Stakeholder theory.

(1) Stakeholder Theory

Generally the proponents of stakeholder theory posit
that paying attention to the interests, needs and
rights of multiple stakeholders of a business is a
useful way of inculcating socially responsible
behavior among corporations (Goodpaster,2001).The
focus of stakeholder theory is articulated in two core
questions (Freeman, 1994). First, it asks, what is the
purpose of the firm? This encourages managers to
articulate the shared sense of the value they create,
and what brings its core stakeholders together. This
propels the firm forward and allows it to generate

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September 2014

outstanding performance, determined both in terms

of its purpose and marketplace financial metrics.
Second, stakeholder theory asks, what responsibility
does management have to stakeholders? This pushes
managers to articulate how they want to do businessspecifically, what kinds of relationships they want
and need to create with their stakeholders to deliver
on their purpose.
Freeman (1984) distinguishes between primary
stakeholders (owners, management, local
community, customers, employees and suppliers),
those whose continuing participation is necessary
for the survival of the corporation, and secondary
stakeholders (the government and communities that
provide infrastructure and markets, trade unions
and environmentalists), who are not essential to the
survival of the corporation although their actions
can significantly damage (or benefit) the corporation.
Brenner and Cochran's (1991) listing of stakeholders
includes stockholders, wholesalers, sales force,
competition, customers, suppliers, managers,
employees, and government. Donaldson and Preston
(1995) diagram investors, political groups, customers,
employees, trade associations, suppliers, and
governments as stakeholders, which were widely
accepted.
According to the Stakeholder theory, although
shareholders are the most important stakeholder
and the profit is the core objective of a firm, when
a firm try to meet them it must think of interest of
other stakeholders. It is required that corporate
managers understand their stakeholder
environments and manage more effectively within
the nexus of relationships that exists for their
companies. The whole point of stakeholder theory,
in fact, lies in what happens when corporations and
stakeholders act out their relationships (freeman,
2004).

(2) Corporate Social Responsibility and

Corporate Governance
There are a variety of definitions of CSR and no
overall agreement. Generally speaking, CSR is
concerned with treating the stakeholders of the firm
ethically or in a responsible manner. 'Ethically or
responsible' means treating stakeholders in a manner
deemed acceptable in civilized societies. Social

BANKING

includes economic responsibility. Stakeholders exist

both within a firm and outside. The natural
environment is a stakeholder. The wider aim of
social responsibility is to create higher and higher
standards of living, while preserving the profitability
of the corporation, for peoples both within and
outside the corporation (Hopkins, 2004). However,
from the perspective of stakeholder, corporate social
responsibility posits on the issues what should the
firm do for the stakeholders, in other words, CSR
means "what to do" for the stakeholders.
As to corporate governance, the OECD provides the
most authoritative functional definition of corporate
governance: "Corporate governance is the system
by which business corporations are directed and
controlled. The corporate governance structure
specifies the distribution of rights and responsibilities
among different participants in the corporation, such
as the board, managers, shareholders and other
stakeholders, and spells out the rules and procedures
for making decisions on corporate affairs. By doing
this, it also provides the structure through which
the company objectives are set, and the means of
attaining those objectives and monitoring
performance." The significance of corporate
governance for the stability and equity of society is
captured in the broader definition of the concept
offered by Sir Adrian Cadbury (2002): "Corporate
governance is concerned with holding the balance
between economic and social goals and between
individual and communal goals. The governance
framework is there to encourage the efficient use of
resources and equally to require accountability for
the stewardship of those resources. The aim is to
align as nearly as possible the interests of individuals,
corporations and society."
According to the analysis above, it is found that the
main goal of corporate governance is to design and
arrange suitable institution to built good relationship
between firms and stakeholders. It concludes that
there is difference between corporate governance
and corporate social responsibility, corporate social
responsibility pays much attention to "what to do"
for the stakeholders, corporate governance pay
attention to "how to do". So firms must deal well
with both of them to benefit stakeholders (see figure
1).

Figure 1 The relationship between corporate governance

and corporate social responsibility

3. The Effects of Corporate Governance and

Corporate Social Responsibility on Firm
Reputation
Corporate reputation is a major and growing concern
globally, and it is increasingly being managed from a
strategic perspective, because both managers and
academicians think the good firm reputation will bring
more interest to firms. Fombrun?1990?indicates that high
reserves of reputational capital give organization distinct
advantages: first?their products and stock offerings entice
more customers and investors - and command higher
prices. Second, their jobs lure more applicants - and generate
more loyalty and productivity from their employees. Third,
their clout with suppliers is greater - and they pay lower
prices for purchases and have more stable revenues. Finally,
their risks of crisis are fewer - and when crises do occur,
they survive with less financial loss?Fombrun, C. and
Shanley?1990?. Meanwhile, Fombrun's (1996) definition
of corporate reputation has been more widely used than
most. Fombrun (1990) defined corporate reputation as "a
perceptual representation of a company's past actions and
future prospects that describes the firm's overall appeal
to all of its key stakeholders when compared with other
leading rivals".

(1) The Source of Firm Reputation

Firm reputation originates from recognition and
comment of stakeholders, and stakeholders often
judge a firm by its behavior on the product and
capital market. These markets are the mail place
for firms to produce and manage, and information
transfer between firms and stakeholders also happen
in the markets. From the performance of firms in
the two markets and relationship with firms,
stakeholders have their own opinions which would
eventually turn to firm reputation.

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BANKING

reputation. In recent years, society's expectations

for CSR have grown with the improvement of
consciousness of CSR in many countries. Many
companies have been working to improve their
corporate reputation by expanding their CSR efforts,
investing in staff, protecting environment, disclosing
more information and integrating CSR into
corporate strategy, which benefit corporate
reputation. According to some survey, the banks
which publish annual social responsibility reports
easily get high evaluation from stakeholders.

(2)
Figure 2 The two sources of firm reputation

In the same way, there are effects of firm reputation

to firm performance in the production and capital
market. Greenley and Foxall (1997) use a broader
approach recognizing firm performance in relation
to various stakeholders. They find that companies
that do not take account of the interests of their
stakeholders, with low reputation, exhibit poor
performance. Roger C, Vergin and M.W,
Qoronfleh(1998) takes a study on the 400 firms with
good reputation. He found not only consumers pay
more attention to the production of those firms,
but also creditors favor those firms. By further
study he concludes that firm reputation has positive
effect on the firm's stock price.

The Dynamic Model Among CSR,

Corporate Governance and Corporate
Reputation
From the above analysis of the effects of corporate
governance and CSR on corporate reputation, a
dynamic model which illustrates the relations
among CSR, corporate governance and corporate
reputation is constructed (figure 3).In this model,
corporate reputation is shaped from the dynamic
relations between stakeholders and firms in
product/service market and capital market, which
decides that corporate governance and corporate
social responsibility is the main source to build
corporate reputation.

In the capital market, investors prefer to buy the

stock of firms with good reputation. And good
corporate governance is a token of good reputation..
A survey from Mckinsey shows that investor will
pay premium for the stock of firms with good
corporate governance, which was regarded as
having high corporate reputation by investors.
Since corporate governance is involved in most of
corporate stakeholders especially investors in capital
market, so corporate reputation was directly
influenced by corporate governance.
In product market, it is difficult to distinguish good
product from bad one because of the increasing
complexity of product. Customers prefer to buy
products from firms of good reputation, which
comes from corporate social responsibility. In other
words, CSR is the typical character of corporate

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September 2014

Figure 3 The dynamic model of relations between CSR, corporate

governance and corporate reputation

BANKING

4. Empirical Study Based on Commercial

Banks
Banking industry in Nepal developed very rapidly since
2003, in this process, more and more attention were paid
in the banking industry reputation, corporate governance
and corporate social responsibility and many commercial
banks try their best to form good reputation to get
competitive advantage. The study is based on empirical
test of theory above on commercial banks reputation,
corporate governance and corporate social responsibility
based on the data of Nepalese commercial banks.

(1)

Empirical Model

literature, the bank size (BS) as control variable has

been used.
As to the sample, first 25 commercial banks from
different level banks in Nepal which was chosen by
the Bankers Association of Nepal (BAN) and NRB
data bank. And then some commercial banks have
been omitted as not to get detailed data and
information, and only 18 commercial banks are taken
as sample banks, the crude data is gathered from
the website and annual reports of those banks.

(3) The Empirical Result

Table 1 The empirical result

According to the theoretical analysis above, it could

assure the banks with good corporate governance
and good corporate social responsibility have good
reputation. Karen et al.?2003?find that commercial
banks reputation is also affected by the banks
scale/size, and the bigger bank scale/size will have
good effect on banking industry reputation. The
model is as follows:
Note: CR --corporate reputation; CG-corporate governance;
CSR-corporate social responsibility; BS-Bank size

(2) Sample, Variables and Data

It is hard to measure banks reputation, which is the
dependent variable in the empirical model. The
value of a key corporate brand and the primary
intangible asset for many companies are often used
to represent the firm reputation (Khermouch et al.,
2001). In this paper, the data has been obtained of
different commercial banks for banks reputation
from famed banks in Nepal.
Corporate governance (CG) and corporate social
responsibility (CSR) are two independent variables.
As to the variable of CG, it was adopted the value
of Nepalese Corporate Governance Index (CCGI),
which was developed by Nepal Rastra Bank. There
are no direct variable to measure corporate social
responsibility (CSR), however, SRI (social
responsibility index) is often used to measure CSR
in the foreign empirical study. The construct has
been made from the Nepalese corporate social
responsibility index (NCSRI ) to represent the
variable of CSR, which reflects the degree of
corporate social responsibility. According to former

Note: *significant at 10%; **significant at 5%;***significant at 1%

Table 1 reports coefficient estimates. The CSR clearly

appears to increase the banks reputation, which
indicates good CSR has positive effect on banks
reputation. It is also showed that CG and CR doesn't
have significant relationship, but coefficient of the
inter-variable?CG*CSR?is significant and positive,
which reflects that good corporate governance alone
couldn't bring good reputation, but it could when
it comes with good social responsibility. So it is
found that reputation of Nepalese commercial banks
in Nepal mostly come from good behavior in service
and product market and good corporate governance
can defend corporate reputation from becoming
worse.

5 Conclusion and Implications

In this paper, the research on the relations among corporate
social responsibility, corporate governance and corporate
reputation was in the theoretical framework of stakeholders,
on the basis of which a model of dynamic relations among
CSR, corporate governance and corporate reputation was
constructed. The model reflects that corporate reputation
is formed in the dynamic relations between commercial
banks and corporate stakeholders, and corporate reputation

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September 2014

17

BANKING

is the synthesized result of corporate governance and CSR.

For the purpose of testing the fitness of the model in Nepal,
an empirical study is conducted on the relationship between
corporate governance, CSR and corporate reputation by
a sample of 18 Nepalese commercial banks. The result
shows that good CSR has positive effect on bank reputation.
It is also indicated that CG and CR doesn't have significant
relationship, but coefficient of the inter-variable?CG*CSR?is
significant and positive, which reflects that good corporate
governance alone couldn't bring good reputation, but it
could when it comes with good social responsibility. The
research implies that banks reputation mainly comes from
its exhibitions in providing services and service market in
Nepal, but banks reputation in capital market is ignored.
Nepalese commercial banks should acknowledge that firm
reputation is not only from service and product market,
but also from capital market. Furthermore, strengthening
corporate governance is the most efficient way to improve
Nepalese banks reputation in capital market.
In a customer driven economy, Nepalese commercial banks
would have to reinvent themselves. CSR can help in the
process by managerial risks, help to avoid scandals, and
help companies to gain a unique selling position. It is
found that government should accept moral responsibility
for the well-being of their citizens and plays a very proactive
role to ensure that CSR is promoted. The role of government
lays in providing clear guidance to the business world
about CSR and corporate governance policies to be
institutionalized in Nepalese commercial banks. It will
take much hard work to develop a comprehensive CSR
approach tailored to current and future needs and situation
in Nepalese organizations. However, partnerships and
good scope of joint activities including government, civil
society, non-profit sector and private sector can significantly
contribute to the success.

Journal?Vol. 22, No. 2, pp. 201-210,

Donaldson, T. & Preston, L. (1995). The stakeholder theory
of the modern corporation: Concepts,
evidence
and implications. Academy of Management Review
20, pp.65-91
Fombrun, C. J. Reputation.(1996). Realizing value from the
corporate image.Boston: Harvard Business
School Press.
Fombrun, C. and Shanley, M.(1990). What's in a name?
Reputation building and corporate strategy.
Academy
of Management Journal , pp. 233258.
Freeman, R. E.(1994). The politics of stakeholder theory.
Bus. Ethics Quart. pp.409-421.
Freeman R. E, Andrew C. Wicks.(2004). Bidhan
Parmar,Stakeholder Theory and "The Corporate
Objective
Revisited", Organization
Science,Vol. 15, No. 3, pp. 364-369
Friedman, M. (1970). The social responsibility of business
is to increase its profits. The New York T i m e s
Magazine, 122-126.
Goodpaster, K. E.(2001). "Business Ethics and Stakeholder",
in. T. L. Beauchamp and N. E. Bowie,
Ethical
theory and business, Prentice Hall Int., Upper Saddle
River, N.J. 6th Edition.
Karen Cravens, Oliver, Ramaroomti. (2003). The Reputation
Index: Measuring and Managing C o r p o r a t e
Reputation?European Management Journal,Vol. 21,
No. 2, pp. 201-212,
Khermouch, G., Holmes, S. and Ihlwan, M.(2001). The best
global brands. Business Week 6 August, pp.
50-64.

Andrews, K. (1980). The Concept of the Corporation.

Homewood, IL: Irwin.

Lev, Baruch, Christine Petrovits, and Suresh

Radhakrishnan.(2006). "Is Doing Good Good for
You?Yes, Charitable Contributions Enhance Revenue
Growth," Working Paper, New York
University Stern School of Business.

Asyraf Wajdi Dusuki?Humayon Dar?(2006)."Does

Corporate Social Responsibility Pay Off? An
Emirical E x a m i n a t i o n O f S t a k e h o l d e r
Perspectives"?Working Paper,Loughborough
University
Department of Economics

Michael Hopkins.(2004). Corporate social responsibility:

an issues paper, working paper, Policy
Integration Department World Commission on the
Social Dimension of Globalization
International Labour Office

Caspar Rose and Steen Thomsen.(2004). The Impact of

Corporate Reputation on Performance:Some
Danish Evidence, European Management

Roger C, Vergin and M.W, Qoronfleh. (1998). Corporate

Reputation and the Stock Market, business
Horizons,
January-Feburary 19-26

References

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September 2014

ECONOMY

What Kind of Economy we Want ?

The gap between intention and

implementation can be quite
wide. Good policy can help
break the vicious cycle of low
expectation: if the government
starts to deliver, people will start
taking politics more seriously
and put pressure on the
government to deliver more,
rather than opting out or voting
unthinkingly for their co-ethnics
or taking up arms against the
government

CA. A. R. Bhattarai

CA. Bhattarai is Fellow Member of ICAN

Today I want to look at the future of

Nepal from a wider perspective. I am
so excited by postelection discussions
about economic agendas. It should
not surprise us that Nepalese are now
more concerned about economy than
politics. Everyone is taking about "we
know what's good for the economy".
We stand at movement of great
challenge and great opportunity. To
create wide spread opportunity and
economic prosperity; we cannot
simply look backward for finding
solution to the complex economic
problems. It is a complex
phenomenon which not merely
concerns the fiscal policy or behaviour
of stakeholders but also touches upon
the very structure of our economic
politic.Millions across the nation
struggling to survive, have two meal
and find jobs. Unemployment, higher
cost of leaving and lost opportunities
specifically topped the list of public
concerns. Economy and jobs now a
days get front page coverage in almost
of the newspapers. Insurgency, fear
of war and politics are getting low
priority for public consumption.
Nepalese families are working harder
and making less. Many Nepalese
families are worry about whether they
will be able to raise their kids in safety
and security and give them better life.
Every family in Nepal has to reconcile
what they spent with what they have,
they must find a way to pay monthly

education bill of their son or daughter,

feed their children in evening, and
keep some saving for rainy days.
Often it's struggle! It is easy to feel as
if that, dream of boundless
opportunity that should be right of
all Nepalese is slipping away.We
need to provide economic
opportunities to the people to fulfil
their dream. Instead, we celebrate
suffering of our countryman talking
about the success of frequent Nepal
Bandh. We fail to fulfil commitments
toward the Nation. It is not result of
accidents of history. To be sure, some
of these failures are result of the
mismanagement
Nepal had implemented 9 Five Years
plans and 3 Three Years plans but
fellow citizens have not enjoyed fruits
of the development. From a macroeconomic perspective, no major
change has taken place, there was
virtually no growth, there had not
been structural changes in economy,
new employment opportunities have
not been created, and there is no
substantial growth in investment.
During those plans period, Nepalese
had not witnessed sustainable
economic development and country
lag behind neighbours. Our plan fails
to address poverty and
unemployment the common enemy
of all. We understand that major
objective of those plans was to
increase economic growth and reduce

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ECONOMY

poverty. This has not been achieved. In essence, we learnt

costly lesson, unless political stability prevails, country
cannot achieve economic prosperity.
Throughout the world history, nation has grown and
prospered when citizens have share in opportunities
created by economy. We must create bottom-up growth
that empowered hardworking families to climb the ladder
of success and raise their children with security,
opportunity, and hope for better future. These hopes are
at the heart of people. Yet despite of the resilience,
optimism, and hard work, their dreams too often have
been frustrated.
Population of Nepal as of census day, June 22, 2011 stands
at 26.6 million. Total addition in the population of Nepal
during last 10 years is recorded as 3.45 million with an
annual average growth of 1.40 percent. This shows that
within next 6-7 years we have to create more than 5-6
million new jobs. Now it is the time, all of us should be
united and work for economic progress of this country.
Government, Lawmaker, Politician, Regulators, Market
Player, Investors, Consumers and every one of us should
think seriously and find a better solution to make the
society prosper. We need to move ahead reinforce rule of
law.
If the government cannot or does not guarantee the rule
of law, then the very basics of trade, economy, and justice
are under threat. If investors cannot trust on laws and
their implementation, then they cannot make long-term
investments.Our nation consistently figure at the lower
rank on good governance. Most of the public transporters
manipulate the fare, either by creating syndicate or by
tampering meter. Most of the traders promote their
merchandise telling half-truth. Most of the health service
provider including hospitals do not meet basic standards.
Food serve at restaurant does not meet food safety standard.
Fresh vegetables are tampered with lethal chemical.
Education standards does not meet national standards. If
truck drivers can pay a small bribe to drive massively
overloaded trucks, billions of Rupees will be wasted in
building roads that will be destroyed under their wheel.If
people see that those who do not follow the law prosper,
they will themselves start deviating from the law. If the
authorities uses its power mainly to reinforce its own
position, then the country cannot progress.
Economic policy need to protect the interest of the working
families that are backbone and the engine of our economic
growth. A person who is poor has to invest all of his

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September 2014

resources into earning his living, and securing survival

for his family. This leaves less time and money to invest
into broader goals such as education, health thereby, poor
people are less available to engage in other activities that
would mitigate poverty. We need to lift up the people at
bottom of pyramid. Poor are becoming poorer mostly
because of 'policy mistakes' or choosing policies that don't
maximise economic prosperity. There are a number of
complex political and legal issues which required to be
solved to ensure economic development. It would be a
grave mistake if we do not act to resolve the current
economic difficulties and we should be confident and
outward looking.
Even the most well-intended and well- thought-out policies
may not have an impact if they are not implemented
properly. Unfortunately, the gap between intention and
implementation can be quite wide. Good policy can help
break the vicious cycle of low expectation: if the government
starts to deliver, people will start taking politics more
seriously and put pressure on the government to deliver
more, rather than opting out or voting unthinkingly for
their co-ethnics or taking up arms against the
government.Corruption, or the simple dereliction of duty,
create massive inefficiencies.
Throughout every transformation economy has made from agriculture to industry, local to international and
war to peace - there has been many constrains, further
there is no guarantee of success. But we believe that if we
work hard, our work will be rewarded. Now imagine a
situation where we create a national climate to think big
and praise every small success which contributes towards
big goal and where any sector which attempted
improvement and succeeds should be recognised
nationally. Economic wounds must be healed by the action
of the cells of the economic body - the producers and
consumers themselves".
But, people still care, truth is hiding somewhere. Poll after
poll nation does not change and no new jobs are created.
Authorities do not necessarily tell the truth and work
mainly for their advantage, and public cannot always trust
what is being said. Therefore, if we are united, we can
compel our government to design and implement rules of
law, and we can really bring change.We feel that "If we
do not succeed in making our economies globally
competitive and generating sustainable growth then
whatever else we do, whatever treaties we sign, whatever
structures we build, whatever declarations we sign, will
all ultimately be irrelevant".

ECONOMY

Public Debt Management in Nepal

The debt management, fiscal, and

monetary authorities should,
along with clarity and
understanding of the respective
objectives, recognize the
interdependencies between the
different policy instruments. Debt
managers should convey to fiscal
authorities their views on the
costs and risks associated with
government financing
requirements and debt levels.
Where the level of financial
development allows, there should
be a separation of debt
management and monetary
policy objectives and
accountabilities

Mr. Tula Raj Basyal

Mr. Basyal is Former Executive Director, Nepal
Rastra Bank, and Former Senior Economic
Advisor, Ministry of Finance, Government of
Nepal

1. Objective
Public debt serves as a crucial
component for mobilizing resources
for development financing. At the
same time, it is a contentious subject
which, if not managed competently,
could be a potent cause of crisis. As
the public debt is raised and used for
and on behalf of the people and the
nation, the debt authorities should
discharge their function quite
efficiently, credibly, transparently,
and effectively. Toward this end,
application of suitable skills and
insights coupled with appropriate
technological back-up on the subject
is necessary. Because debt is a means
of financing development and debt
has to be serviced along with interest
in the days ahead, it has to be
deployed productively in the priority
fields of the economy. Public debt has
to take into consideration intergenerational equity and implications
also. If improperly carried out, debt
function could trigger financial and
economic crises. We have seen that
some of the countries in Europe are
still suffering from the effects of the
debt crisis. So, the public authorities
should carry out the debt
management responsibility with
utmost care, caution, and dexterity.
Public debt management is the
process of establishing a strategy for
managing the government's debt in

order to raise the required amount of

funding, achieve its risk and cost
objectives, and meet any other
sovereign debt management goals
the government may have set, such
as developing and maintaining an
efficient market for government
securities. The main objective of
public debt management is to ensure
that the government's financing needs
and its payment obligations are met
at the lowest possible cost over the
medium to long term, consistent with
a prudent degree of risk. Besides
having the clear debt management
objectives, the principal components
of sound debt management comprise:
(a) proper coordination between debt
management and monetary and fiscal
policy, (b) prudent risk management
framework, (c) effective institutional
framework, and (d) strong
operational capacity enabling efficient
funding and sound risk management
practices. Besides expressing the
primary objective of debt
management in terms of expected
cost and risk, development of the
domestic debt market is also often
included as a prominent government
objective, as stated above. This
objective is particularly relevant for
countries where short-term debt,
floating rate debt, and foreign
currency debt are, at least in the shortrun, the only viable alternatives to
extensive borrowing from the central

The Nepal Chartered Accountant

September 2014

21

ECONOMY

bank. Clear and transparent objectives make the debt

manager more accountable and less subject to external
political pressures resulting in poor debt management
decisions, including undesirable trade-offs between cost
and risk. With prudent macroeconomic policies and a
sound regulatory framework with respect to the capital
market, clarity of debt management goals and adoption
of policies and practices that ensure that they are being
met are important for reducing uncertainty among
investors and attracting their support. In situations where
the objectives for debt management have not been clearly
defined and governance framework and legal authority
are vague, substantial uncertainty among government
debt managers, investors, and intermediaries could be the
eventual outcomes.

2. Guidelines
A government's debt portfolio is usually the largest
financial portfolio in the country. It often contains complex
and risky financial structures, and can generate substantial
risk to the government's financial position and the country's
financial stability. Sound debt structure is associated with
desired amount, currency composition, interest rate,
duration, maturity structure, and debt servicing. Risky
debt structures are often the consequence of inappropriate
economic policies-fiscal, monetary, and exchange rate, and
if macroeconomic policy setting is poor, sound sovereign
debt management may not by itself prevent any crisis.
Even where there is sound macroeconomic policy setting,
risky debt management practice increases the vulnerability
of the economy to economic and financial shocks. However,
sound debt management policy reduces susceptibility to
contagion and financial risk by playing a catalytic role for
broader financial market development and financial
deepening. Therefore, the need for developing a sound
debt management policy is absolutely essential. The
guidelines for the development of sound debt management
could be briefly discussed as below.
The debt management, fiscal, and monetary authorities
should, along with clarity and understanding of the
respective objectives, recognize the interdependencies
between the different policy instruments. Debt managers
should convey to fiscal authorities their views on the costs
and risks associated with government financing
requirements and debt levels. Where the level of financial
development allows, there should be a separation of debt
management and monetary policy objectives and
accountabilities. Debt management, fiscal, and monetary

22 The Nepal Chartered Accountant

September 2014

authorities should share information on the government's

current and future liquidity needs and plan for prudent
cash and debt management accordingly. (The objectives
for debt management should be clearly defined and
publicly disclosed, and the measures of cost and risk that
are adopted should be explained. Roles and responsibilities
of the public agencies with respect to debt management
should be clarified. Materially important aspects of debt
management operations should be publicly disclosed. The
government should regularly publish information on the
stock and composition of its debt and financial assets,
including their currency, maturity, and interest rate
structure. Debt management activities should be audited
annually by external auditors. Debt management activities
should be supported by an accurate and comprehensive
management information system with proper safeguards.
Staff Involved in debt management should be subject to
code of conduct and conflict of interest guidelines. The
risks inherent in the structure of the government's debt
should be carefully monitored and evaluated. These risks
should be addressed, to the extent possible, by modifying
the debt structure, taking into account the cost of doing
so). In order to help guide borrowing decisions and reduce
the government's risk, debt managers should consider the
financial and other risk characteristics of the government's
cash flows. Debt managers should carefully assess and
manage the risks associated with foreign currency and
short-term or floating rate debt. A framework should be
developed to enable debt managers to identify and manage
the trade-offs between expected cost and risk in the
government debt portfolio. To assess risk, debt managers
should regularly conduct stress tests of the debt portfolio
on the basis of the economic and financial shocks to which
the government-and the country more generally-are
potentially exposed. In order to minimize cost and risk
over the medium to long run, debt managers should ensure
that their policies and operations are consistent with the
development of an efficient government securities market.
Debt management operation in the primary market should
be transparent and predictable. To the extent possible,
debt issue should be based on market-based mechanisms,
including competitive auctions. Government and central
bank should promote the development of resilient
secondary market that can function effectively under a
wide range of market conditions. The systems used to
settle and clear financial market transactions in government
securities should reflect sound practices. Debt management
practices including institutional arrangements should be

ECONOMY

seen in the light of these guidelines.

The outstanding debt of the Government of Nepal (GON)
has increased at a higher pace over the years. It increased
from Rs. 3.31 billion (domestic Rs. 1.50 billion and external
Rs. 1.81 billon) in 1979/80 to Rs. 540.4 billion (domestic
Rs. 207.0 billion and external Rs. 333.4 billon) in 2012/13.
During this period of 33 years, GON's outstanding debt
increased by an annual average of 16.7 percent (domestic
16.1 percent and external 17.1 percent). As percent of GDP,
outstanding debt rose from 14.2 percent (domestic 6.4
percent and external 7.8 percent) in 1979/80 to 31.9 percent
(domestic 12.2 percent and external 19.7 percent) in
2012/13. GDP at prevailing price rose from 23.35 billion
in 1979/80 to Rs. 1,692.6 billion in 2012/13, registering an
annual average growth of 13.9 percent, lower than the 16.7
percent annual growth recorded in the total outstanding
debt. During the 33 years, annual inflation averaged at 8.7
percent and Nepalese rupee vis--vis the US dollar
depreciated by an annual average of 5.9 percent.
Of the total outstanding debt in mid-July 2013, 38.3 percent
(Rs. 207.0 billion) comprised outstanding domestic debt
and 61.7 percent (Rs. 333.4 billion) constituted outstanding
external debt. External debt outstanding comprised 90.0
percent (Rs. 300.1 billion) from multilateral sources, mostly
from Asian Development Bank (ADB) and the World
Bank's International Development Association (IDA) and
10.0 percent (Rs. 33.3 billion) from bilateral sources. During
the last decade (2003/04-2012/13), total outstanding debt
increased by an annual average of 5.9 percent, of which
domestic debt rose by 9.8 percent and external debt
expanded by 4.1 percent.
Debt service (principal repayment and interest) is increasing
over the years. Out of debt service in 2012/13 at Rs. 48.8
billion (principal Rs. 35.1 billion and interest Rs. 13.7
billion), the share of principal was 71.9 percent and that
of the interest was 28.1 percent. Domestic debt service
amounted to Rs. 31.6 billion (principal Rs. 20.9 billion and
interest Rs. 10.7 billion) and external debt service amounted
to Rs. 17.2 billion (principal Rs. 14.2 billion and interest
Rs. 3.0 billion). This debt service comprised 64.8 percent
(principal 42.9 percent and interest 21.9 percent) on account
of domestic debt and 35.2 percent (principal 29.1 and
interest 6.1 percent) on account of external debt. The
respective share of principal and interest in the debt service
was 66.1 percent and 33.9 percent in domestic debt and
82.6 percent and 17.4 percent in external debt. In 2012/13,
the share of principal repayment was 59.6 percent in

domestic debt and 40.4 percent in external debt while the

share of interest payment was 78.1 percent in domestic
debt and 21.9 percent in external debt.
In 2012/13, interest on total debt averaged 2.54 percent,
of which the interest on external debt was 0.90 percent
and that on domestic debt was 5.19 percent. Thus, interest
cost on domestic debt is far more expensive compared to
that on the external debt. However, the impact of the
depreciation of currency has to be borne in the case of the
external debt servicing. During the last decade, Nepalese
rupee vis--vis US dollar depreciated by an annual average
of 1.22 percent. So, this must be added to the annual rate
of cost, which means that the annual rate of cost would be
2.12 percent (i.e., 0.90+1.22= 2.12). So, domestic rate is
expensive by 3.07 percentage points more than the external
debt. During the last 20 years, the devaluation averaged
3.23 percent per annum. Average devaluation per annum
was 5.97 percent during the last 30 years. Accordingly, the
annual rate of cost would average 4.13 percent (i.e., 0.90+
3.23= 4.13) during the 20 years and 6.87 percent (i.e.,
0.90+5.97= 6.87) during the last 30 years. The latter annual
rate of cost exceeds domestic interest rate by 1.68 percentage
points.
The domestic debt outstanding as at mid-July 2014
amounted to Rs. 201.8 billion, of which Rs. 136.5 billion
(67.6 percent) comprised the treasury bills (with maturities
of one year or less). The development bonds (Rs. 47.1
billion) and national saving bonds (Rs. 16.6 billion) shared
23.3 percent and 8.2 percent respectively. The share of
citizen saving bonds and foreign employment bonds was
at 0.8 percent and 0.1 percent respectively.
Of the treasury bills outstanding in mid-July 2014,
commercial banks, development banks, and finance
companies (i.e., A, B, and C category financial institutions
respectively), held a total of 83.8 percent share while the
NRB's share was 16.2 percent. The treasury bills are
normally renewed. The A, B, and C category financial
institutions thus owned a significant share of the treasury
bills, heavily exposing the domestic debt to the uncertainties
associated with the money market conditions including
the liquidity situation at the time of renewed issue.

4. Issues
The banking institutions in Nepal are experiencing
unaddressed excess liquidity situation during the past
couple of years. The cash reserve requirement (CRR) of
the commercial banks was brought down to 5 percent in

The Nepal Chartered Accountant

September 2014

23

ECONOMY

2011/12, increased to 6 percent in 2012/13, and then

reduced to 5 percent in 2013/14. The fluctuation brought
about in the CRR shows that the concerned quarters are
least bothered about the excess liquidity, its adverse
impacts, and the need to manage it, as evidenced by the
following facts. Commercial banks had deposited in the
NRB amount in excess of CRR, and this excess reserve
was Rs. 60.0 billion in 2011/12, Rs. 50.9 billion in 2012/13,
and Rs. 87.7 billion in 2013/14. The excess reserve as
percent of domestic deposits in the commercial banks
represented 7.5 percent in 2011/12, 5.4 percent in 2012/13,
and 7.9 percent in 2013/14. This shows that commercial
banks have been flooded with unmanaged extra reserve
for a considerable period of time. Likewise, the weighted
average deposit rate of commercial banks came down
from 6.17 percent in July 2012 to 4.68 percent in January
2014. The weighted average lending rate of commercial
banks also fell from 12.40 percent in July 2012 to 11.53
percent in January 2014. The discount rate on 28-day, 91day, 182-day, and 364-day treasury bills which respectively
averaged at 7.11 percent, 7.41 percent, 8.31 percent, and
8.35 percent in 2010/11 came down crashing since then
and averaged, respectively, at 0.07 percent, 0.14 percent,
0.51 percent, and 0.76 percent in 2013/14. The inflation
during the three years (2011/12-2013/14) averaged at 9.1
percent against the respective targets of 7.0 percent, 7.5
percent, and 8.0 percent during these three years. There
should be proper liquidity management for sound debt
operations. One of the responsibilities of monetary
management constitutes liquididity management, but it
seems that the authorities prefer the situation of excess
liquidity unaddressed. They implicitly assume that excess
liquidity is good for the economy. In fact, excess or shortfall
liquidity is bad for the economy as it undermines the
objective of the monetary policy besides creating chaos
and mismanagement in the monetary sector. Monetary
indicators can move in the right direction if liquidity
position is right, neither excess nor short. Justifying excess
or short liquidity that automatically emerges in the
economy by one excuse or other instead of adopting
measures for managing it and bringing it into right size
will erode trust and confidence in the monetary
management. Conducting debt operations without
addressing volatility in liquidity will reduce credibility
among market participants. The debt management
operations that work under the shadow of, and are
subservient to, the fiscal and monetary policies would
hardly succeed in the intended objectives of reducing the

24 The Nepal Chartered Accountant

September 2014

cost of debt servicing within a given risk scenario.

Less priority attached to debt management function is
reflected in the narrow growth and inefficient operations
of debt function. There are no active and efficient primary
and secondary markets for government securities.
Innovation and modern technology-based operations in
debt operations are scarce. Training and skill enhancement
among the debt personnel is lacking. Retention of
experienced and skilled manpower in debt function is
difficult because of the least importance attached to the
work. There is no encouragement and support for
developing specialist function in debt management. There
is a large gap between the way mature market economies
apply sophisticated tools of financial economics for the
purpose of devising optimal strategies for debt
management and the state of affairs prevailing in Nepal.
The Nepal Rastra Bank Act, 2002 has granted the NRB the
autonomy for formulating and implementing the monetary
policy while the Public Debt Act, 2002 and the Public Debt
Regulations 2003 involve the NRB in the domestic debt
management function, thereby making the NRB
responsibility dualistic and accountability enforcement
difficult. This constitutes a complex burden for the NRB
as there often arise severe conflict of interest between
conducting monetary management operations in the
process of maintaining price and external sector stability
(i.e., the objectives of monetary policy) and successfully
managing the domestic debt of the government. When
possibilities exist for using the instruments of debt
management for attaining other policy goals, the goals of
debt management would hardly be met.
Public debt management has been severely constrained in
its capacity and effectiveness because of the problems like
the debt operations dispersed across various institutions,
weak data-base and limited information flows, insufficient
coordination, inadequate analysis, and negligible effort
toward improvement, When the debt management function
is scattered along a number of legal, regulatory,
institutional, and operational structures, debt management
loses a focus and unity of purpose. There is no one agency
in the country where there could be a full data-base of all
the liabilities of the GON. Hence, there are constraints in
using this information for risk management and
optimization of the financial burden of the GON.
Specifically, the weaknesses identified in Nepal's debt
management are: (i) inadequate legal and regulatory
framework, (ii) conflicting institutional interests among

ECONOMY

the agencies lacking effective coordinating mechanism,

(iii) absence of appropriate electronic link among the
concerned agencies (Financial Comptroller General Office,
Ministry of Finance, and Nepal Rastra Bank), (iv) inability
to institutionalize the debt management function in any
of these three agencies, especially attributed to lack of
system to retain trained staff, (v) weak staff capacity,
particularly in the area of debt analysis, and (vi) lack of a
monitoring mechanism for debt management activities.
Likewise, the Three-Year Plan (2010/11-2012/13) listed
the debt management problems as (i) lack of prioritization
for the investment of the public debt proceeds, (ii) reduced
capacity for debt utilization, (iii) inability to receive
loans/grants as per the commitments of the
bilateral/multilateral sources, and (v) increased interest
rate risk at the time of renewal due to higher debt liability
of short-term nature.

5. Suggested Measures
Though Nepal has possessed more than a half-a-century's
experience with respect to the public debt management,
its practice has been conditioned by different legislative
and institutional frameworks and operational rigidities,
thereby lacking the growth of a streamlined, unified, and
modern technology-based system. Appropriate legal,
institutional, structural, operational, and technological
improvements are, therefore, needed. The risks and
vulnerabilities associated with the unstable liquidity
situation need to be reduced for making the debt
management smooth, stable, and efficient for the GON.
Making the public debt market competitive through
institutional, trading, and regulatory reform is of utmost
importance.
It is crucial to foster the depth and diversity of the public
debt markets and ensure enhanced liquidity, transparency,
reliability, attractiveness, and diversified risk and maturity
structures of the debt instruments. In more liquid markets,
trading is easier and spreads are narrower while in a
transparent market, the availability of prompt and complete
information about trades and prices increases the
competitiveness of the market. Reliability ensures that
trades are completed quickly according to the terms agreed
and that sound legal and regulatory framework along
with the lower transaction costs (trading, regulatory and
tax) increase attraction to the markets.
To make the public debt management effective, efforts
need to be focused on addressing (i) the weak legislature
and regulatory framework, (ii) inadequate institutional

structures and coordination mechanism, (iii) problems

associated with maintaining the loan database in the debt
management system, (iv) inadequate capacity to produce
analytical reports useful for debt policymaking process.
The crucial elements in connection with consolidating
Nepal's institutional capacity for sustainable and effective
public debt management are: (i) strengthening the legal,
regulatory, and institutional framework for public sector
borrowing, (II) improving the capacity for debt planning
and policy formulation, and (III) enhancing debt
accountability and transparency by improving debt
recording, accounting, and dissemination.
There is a need for formulating and implementing a
comprehensive public debt management strategy. Effective
institutional arrangements for ensuring coordination among
the agencies involved in the public sector debt at all stages
of the debt cycle need to be put in place. Debt recording
and management arrangements that are sound and
sustainable need to be institutionalized to enable the GON
to maintain an up-to-date and comprehensive database
on public sector debt so that debt policy and portfolio
analysis could be undertaken as an input for the formulation
of sound policy and strategy for public debt management.
Use of the scripless system through central depository,
clearing, and settlement becomes essential for enhancing
the efficiency and effectiveness of the government debt
management. The central depository system (CDS) as a
core infrastructure plays an important role such as
centralized depository, safekeeping, clearance, and
settlement in the government securities market. The CDS
would thus be extremely useful to facilitate the recording
and processing of transactions and enhance the operational
and administrative convenience as well as the transparency
of the securities market.
The 13th Plan's (2013/14-2015/16) objective of debt
management is mobilizing appropriately and effectively
the domestic and external debt and reducing the nation's
debt burden on a long-term basis besides managing the
public debt efficiently. The working policies are (a) keeping
domestic debt within ceiling in order to maintain
macroeconomic stability, (b) overdraft to be controlled
and not to be deployed as the means for financing the
budget deficit, (c) treasury bills to be used for short-term
debt mobilization only in consonance with the
government's cash flow conditions, (d) no commercial
loan to be obtained from international financial institutions
except in large infrastructural projects with high returns

The Nepal Chartered Accountant

September 2014

25

ECONOMY

and contributing to national capital formation, (e)

government normally not to act as guarantor in debt
obtained by entities other than public enterprises and the
government, and (f) high priority to be accorded to financial
discipline in the context of debt management.

6. Debt Management Office (DMO) and

Functions
An important contributing factor to the debt crisis was
neglected by many countries the basic elements of debt
management. Active management of public debt has been
a relatively recent phenomenon in most countries. Before
the debt crisis of the 1980s, it hardly existed. So, as a lesson
of debt crisis, increasing priority started being focused on
the debt management function. This helped to pursue the
objectives of debt management and monetary management
separately. Separation of debt management from the
monetary management was expected to help preserve the
integrity and independence of the central bank, shield
debt management from political interference, ensure
transparency and accountability, and improve debt
management by entrusting it to portfolio managers with
knowledge and experience in modern debt management
techniques. Accordingly, a number of countries have
chosen to open a separate debt management office (DMO),
with front, middle, and back office functions for a focused
and effective debt management. The back office processes
(and makes) payments, settles accounts and does the
registering and accounting, as well as the debt reporting
and statistics; the middle office does risk management and
performance assessment by fixing benchmarks; and the
front office devises strategy and conducts borrowing in
capital markets, including negotiating with lenders.
DMOs have been established in countries like Australia,
Brazil, Colombia, Denmark, France, Germany, Ireland,
Italy, Mexico, New Zealand, Poland, Portugal, South Africa,
Sweden, UK, and USA. These DMOs are located under
the Treasury (Ministry of Finance) except in Denmark
which has DMO in central bank. As more coordination is
required between debt management and other policies,
DMOs inside the
MOF are more common.
The DMO organizes the functions by categorizing them
as executive functions and operational functions. The
institutional responsibilities of public debt management
are allocated to the appropriate units, giving them the
mandate and resources to accomplish their mission and
coordinate their activities. Executive debt management
might be viewed as the establishment of the "rules of the

26

The Nepal Chartered Accountant

September 2014

game" by the highest authority on debt management. This

authority gives direction and organization to the whole
system through its policy, regulatory, and resourcing
functions. The executive management functions have an
overall macroeconomic and macro-administrative
dimension.
The policy function, the first function under executive debt
management, involves the formulation of national debt
policies and strategies in coordination with the agencies
that have primary responsibility for the economic
management of a country. Broad policy considerationsfor example, deciding which sectors should have access
to external financing and on what terms, as well as fixing
borrowing ceilings by creditor category - determine a
country's sustainable level of external borrowing. External
debt policy, through foreign borrowing, affects national
planning, the balance of payments, and budget
management, and it also affects all government agencies
that determine the types of investment undertaken in a
country. The major output of this function is a well-defined
and feasible national indebtedness and external debt
strategy. The regulatory function involves the establishment
of a well-defined legal environment to provide for good
coordination of recording, analysis, operation, and
controlling supported by efficient information flows. The
major output of this function is the establishment and
continuous review of the administrative and legal
framework of organizational responsibilities, rules and
procedures among the units involved, and of the legal
reporting requirements. This function defines the degree
of control exercised and the data that need to be recorded
and monitored.
The resourcing function involves recruiting, hiring,
motivating, training, and retaining staff. At times, it might
involve the hiring and supervision of outside consultants
to provide specialized technical expertise in particular
areas of external debt management (e.g. computerization,
debt audit and preparation for rescheduling negotiations).
This function must also be interpreted very broadly to
include the provision of adequate material resources (e.g.
office space or communication equipment). The resourcing
function is of basic importance in order to have a specialized
staff with the necessary training. Attracting and retaining
qualified staff members requires that the salary scale and
career opportunities in the debt office be fully competitive
with other job opportunities in the public and private
sectors. Attention should be given to training, including
training abroad, when appropriate. High staff turnover

ECONOMY

can pose a serious threat to the prospects of success of a

debt office and has been observed as one of the most
common causes of failure of performance. It is also
necessary to evaluate the office space and equipment
requirements. Space is a prerequisite for effective
performance of daily duties. The debt office should also
have appropriate legal support and effective data collection
mechanisms. If these legal and administrative elements
are weak, debt data will be late, incomplete, and inaccurate,
and the debt office will produce poor results.
At the operational level of debt management, the
responsibilities of a debt office will include recording,
analysis, and coordinating/monitoring. The recording and
analytical functions are regarded as passive functions in
the sense that their performance does not imply a change
in the debt profile. In contrast, the operating and controlling
functions, the immediate effect of which would be a
modification of the debt profile, are thus regarded as active
functions. The recording function records information. In
spite of the apparent simplicity of this function, it is often
the source of bad debt management. Likewise, good debt
management requires accurate and up-to-date information.
Prompt updating of debt data files necessitates a wellorganized and efficient system of information flow which
is necessary at all levels, including new loans, transactions,
disbursements, and arrears created. This function is part
of what is referred to as "back office" activities, and the
efficiency with which it is performed depends on good
implementation and enforcement of the overall legal
framework and regulations. This function also needs good
(computerized) information management support.
The operating function is divided into three different
phases: negotiating, utilization of loan proceeds, and
servicing. The activities or actions involved in each phase
will differ depending on the type of borrowing involved
(for example, bilateral and multilateral concessional loans).
Utilization of loan proceeds and servicing are closer to the
monitoring of projects and budget execution. They also
comprise the "back-office" activities. Negotiating, in broad
terms, is negotiation over external financing, including
new borrowing and eventual rescheduling of operations.
The negotiating activity decides on micro-financial strategic
issues and fixes benchmarks based on the output of the
analytical function. These activities are called "front-office"
activities.
At the transaction (i.e. disaggregated) level, the
controlling/monitoring function is more concerned with

specific operations, utilization, and service. At the

aggregated level, the controlling/coordinating function is
essential to ensure that operational debt management
conforms to executive debt management. A strategy may,
for instance, impose statutory limits or overall guidelines
on how much borrowing can be taken by the public sector
and/or by the country as a whole. In this case,
controlling/coordinating must ensure that borrowing is
kept within the prescribed limits. Another important
activity of this function is to serve as the information
interface between the operational debt management
functions and the executive ones. This makes the whole
system dynamic, in that the feedback of the operational
debt function to the executive level will allow it to modify
the strategy in line with what is happening at the
operational level and to reflect this back to the units
performing the operational functions. These activities
would also be included as the "front office'.

7. Conclusion
The debt indicators show that the GON's outstanding
liability and its repayment obligations have been increasing
over the years. No specific objectives have been specified
for debt management. The debt management responsibility
has scattered across various institutions and legislation.
External debt comprises long-term concessional loan mainly
from ADB and IDA and domestic loan mostly comprises
treasury bills with maturity up to one year, which is rarely
redeemed and goes on accumulating with each renewed
issue. External loan is vulnerable to risk on account of
currency depreciation. Large portion of domestic debt
suffers from fluctuation in discount on each renewed issue,
making the cost of debt vulnerable to short-term
fluctuations as per money market conditions. These are
the critical issues which need to be addressed as a part of
debt restructuring and reform. Likewise, there is a need
for separation of the monetary operations and public debt
management to give credibility for both the debt
management and monetary policy. Efforts must be
expedited in the area of strengthening the infrastructure
needed for issuing and trading of securities in an efficient
and effective manner. Well-functioning markets for
securities contribute to the effectiveness of monetary
operations and help reinforce the transmission of monetary
impulses throughout the economy. The market for the
securities needs to be broadened and deepened to avoid
unanticipated implications on the future debt servicing on

The Nepal Chartered Accountant

September 2014

27

ECONOMY

account of heavy exposure to a single category of investors

that would be facing similar financial and investment
conditions in the economy. The maturities need to be
evened out by diversifying within the year the bunched
maturities of the securities. In addition, there is the need
to introduce two-year to five-year treasury notes and
introduce higher maturity development bonds. The
bunching of principal repayments in a year or two deserves
better distribution and balance. The institutional, legal,
operational, and technological improvements are needed
for public debt soundness. Establishing a separate DMO
as a specialized and autonomous body under the MOF
would be of considerable assistance in undertaking the
specific functions included in the front, middle, and back
office functions and in attaining the debt management
goal through improving the overall debt operations and
strategy in a coordinated, transparent, and professional
manner.

Reference
1.
2.
3.
4.
5.
6.
7.

Economic Survey, 2013/14, MOF

Quarterly Economic Bulletin, Mid-July 2013, NRB
Recent Budget Statements, MOF
Recent Monetary Policy Statements, NRB
Guidelines for Public Debt Management, IMF/World
Bank, Washington, DC, 2001
Developing Government Bond Markets, World
Bank/IMF, Washington, DC, 2001
Borrenson, Pal and Enrique Casio-Pascal, 2002, Role
and Organization of a Debt Office, United Nations,
New York and Geneva.

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The Institute of Chartered Accountants of Nepal
(Established Under the Nepal Chartered Accountants Act,

Babarmahal, Kathmandu, Nepal

P.O. Box: 5289, Tel: 4258569, 4269130, 4255668, Fax: 4258568
E-mail: ican@ntc.net.np, Website: www.ican.org.np

28

The Nepal Chartered Accountant

September 2014

ECONOMY

Remittance and its use in Nepal a Critical Assessment

The flow of remittance in Nepal

began to increase remarkably when
the youth force were forced to leave
the country for foreign
employment with a view to
escaping the decade-long conflict.
As much as 30 per cent of the
households in the country receive
remittance, which is one of the
major factors in the reduction of
poverty

Remittances are an important source

of foreign income for developing
countries, increasing dramatically in
size over recent decades. Developing
country remittance receipts were $US
0.3 billion in 1971. These receipts are
expected to reach $US 350 billion in
2011, from $US320 in the previous
year. Remittances now account for
more than two and a half times the
global level of Official Development
Assistance (ODA) having accounted
for less than five percent of the level
of ODA in 1971 (World Bank, 2011).
They flow directly to households
rather than governments, which can
be advantageous, can serve as a de
facto social safety net in difficult times
and can offset macroeconomic
volatility.

Nepalese situation

Dr. Basudev Sharma

Dr. Sharma is Under Secretary, Ministry of

Finance

Since last few years, Nepal has been

known as a remittance-based
economy. Had migrant workers
employed in Gulf countries and
Malaysia, among others, not sent
money to the country, the domestic
economy would have collapsed long
ago, so goes the saying by the
country's renowned economists. But

what is little known is that foreigners

working in Nepal are also sending
money abroad. And the size of funds
that they are remitting home is
increasing day by day. In the first five
months of the current fiscal year,
foreigners working in Nepal sent Rs
3.13 billion abroad, the latest Nepal
Rastra Bank report shows. Of course,
the amount that exited Nepal in the
five-month period to mid-December
pales in front of Rs 163.49 billion that
the country received in forms of
remittance from those working
abroad. But what is noteworthy is the
continuous rise in volume of amount
that is leaving the country. In the first
five months of 2010/11, for instance,
only Rs 1.33 billion left the country.
In the same period last fiscal year, Rs
1.72 billion exited the country. But
the figure recorded in the five-month
period of this fiscal year marks a hike
of 81.6 percent than in the same
period last year.
The amount that exited Nepal in the
review period is almost similar in size
to Rs 3.29 billion that left the country
throughout 2010/11 and almost 62
percent of Rs 5.03 billion remitted in
the whole of 2011/12. Since the figure

The Nepal Chartered Accountant

September 2014

29

ECONOMY

compiled by the central bank does not include amount

taken home by seasonal migrant workers -- like those
coming in from bordering Indian states -- it is believed a
lot more funds may have left the country during the period.
The Department of Labor estimates more than 20,000
foreigners are working in Nepal of which around 8,000
have been absorbed by the private sector. In the past two
decades, increasing number of Nepalese people has been
migrating abroad in the pursuit of better opportunities.
Definitely, a decade long Maoist's insurgency in Nepal
(1996 - 2006) compelled for the massive exodus. Rather
than living under uncertainties and life threatening risks
associated with the civil war, thousands of people opted
for imigration - whether as laborers, students or as other
status of residency.

Assessment of Existing Situation of

Remittance
Remittance is the money sent back home by the workers
who have migrated abroad. It would include cash or noncash items, and could arrive in the country through a
formal or informal channel. In case of Nepal, the reported
figures of remittance are those flown in through the formal
channel, and researches estimate that significant amount,
mainly from India, still arrive through the informal channels
- through friends.
Table 1: Remittance inflow to Nepal (FY: 2001/02 - 2013/14)

* The figure represents provisional figure

However, over the years, it has been seen that the use of
a formal channel is becoming more widespread as the
financial institutions are making it easier and accessible
e.g. increasing the number of remit counter in cities as
well as in rural areas. In the recent years, there has been
an increasing demand for the Nepalese workers in international labor markets, and hence, the amount of
remittance flow into the Nepalese economy has been on
an upward trend - in fact, it has been so for the past 10
years. Essentially, our economy has grown depended on
remittance over the past decade.
In the fiscal year 2010/11, Rs. 259.53 billion was reported
to have arrived in a 10 months period; in the year 2009/10,

30

The Nepal Chartered Accountant

September 2014

inflow of Rs. 231.73 billion was reported (Ministry of

Finance, 2011). In fact, as of 2010, remittance accounts for
23 %1 of the GDP. And Nepal is within top five countries
in the world with highest remittance-GDP ratio (World
Bank, 2008).
High volume of remittance raised the standard of living,
and has remained as an effective instrument for poverty
alleviation particularly in the rural areas. Most importantly,
it has now been the primary component in achieving a
favorable balance of payment by narrowing the current
account deficit. As shown in the Figure 1 above, remittance
seems to have a pulled up favorable balance of payment
for the most part of the decade. With its contribution, as
well as the foreign aid inflow, balance of payment surplus
of Rs. 1 billion in the year 2010/11 was reported, despite
the deficit faced in the year 2009/10 (Nepal Rastra Bank,
2012).
As shown in table, during the ten year period that
experienced mass inflow of remittance, Nepalese export
declined, whereas the import increased. It can be derived
that the remittance has not been utilized in productive
sectors to achieve better international competitiveness.
Instead, imports grew in tandem with the remittance
inflow. To a large extent the so-called phenomenon of
"Dutch Diseases" might be in play as the influx of foreign
currency in the form of remittance appreciates local
currency (or at least stop depreciation). In addition, there
is also seemingly negative impact on labor market due to
shortage of labor forces and high wage rate. As a result
Nepalese economy relies on remittance inflow for the
stabilization of the balance of payment, which has been
favorable over the years.
The trend of remittance in terms of GDP could be analyzed
through remittance as % of GDP. Following figures depicts
the real trend of remittance and their contribution to GDP.
Gradually it is increasing since 2004.
Table 2 : Remittance income as % of GDP(FY: 2004/05 - 2013/14)

Remittance from Nepalese Diaspora

Significantly, the Nepalese Diaspora has emerged quite
strong in the last couple of years both in terms of the
quantity and quality. Of Nepal's total population of nearly
30 million, more than 3 million non-resident Nepalese live
in 115 countries other than India. Most importantly, their

ECONOMY

purchasing power is 2.5 fold of the total budget of the

Nepalese government. The Nepalese diaspora is estimated
to be generating nearly US$3 billion worth of remittance
each year. Without any government support, the remittance
has been able to bring incalculable transformation in
Nepal's social and economic structure in all the three
regions of the country - the Terai, hills and the mountain.
The flow of remittance in Nepal began to increase
remarkably when the youth force were forced to leave the
country for foreign employment with a view to escaping
the decade-long conflict. As much as 30 per cent of the
households in the country receive remittance, which is
one of the major factors in the reduction of poverty from
42 per cent to 31 per cent between 1996 and 2005 and
recently to 25 per cent. In this regard, it is important that
Non Resident Nepali Association (NRNA) has offered to
make an investment in Nepal in a wide range of areas like
hydro-power projects, tourism industry, education and
different manufacturing units. Over the past years, Nepal
lost a great opportunity of utilizing the resources of its
diaspora for the lack of adequate plans and programmes,
laws and export processing zones.
Unfortunately, foreign investment is still regarded as an
extension of imperialist exploitation of the people.
Importance of overseas Nepalese for the modernization
of Nepal is yet to be understood. There is hardly any
mechanism to pursue the diaspora to make contribution
for their homeland. There is no special Cabinet Ministry
to deal with them. There is no provision to help them and
their families back home in Nepal. On the other hand, in
Nepal's neighbourhood China has successfully mobilized
the resources of its diaspora for the development of the
country. The number of the overseas Chinese is 55 million
and they account for 70 per cent of the total foreign direct
investment of the country. Unlike the overseas Chinese,
the Indian diaspora were the late comers. The number of
Indian diaspora is 20 million or so and they are smaller in
size as compared to the Chinese diaspora. Yet the Indian
diaspora have been able to contribute nearly 10 per cent
of the total foreign direct investment into their country.
What is important about the Chinese and Indian diaspora
is that they did not make investment in their countries on
their own. In fact, this was the outcome of the strong dose
of economic development strategies and incentives given
to them.
However, the role of the diaspora should not only be
assessed on the basis of resources that they are able to

bring to their homeland. It should not be forgotten that

quite often they play significant role in promoting the
interest of their homeland in foreign countries. For example,
the Indian diaspora work even as advocacy group in USA.
They have become quite influential in this country on
account of their growing clout in national economy, politics
and even cultural sphere. For some of these reasons, it was
difficult for the US government to impose or continue
imposing sanctions against India when it made a nuclear
explosion in 1998.
Hence, it was not without reason why the Indian
Government established Ministry of Overseas Indian
Affairs (MoIA) in May 2004. Learning lessons from world's
two fast growing economies, India and China, Nepal
should no more be shy in using the financial resources
and the talents of the Nepalese diaspora. For this purpose,
the Nepalese government and stakeholders in the country
should take initiative to pass preferential laws to facilitate
the flow of resources from the diaspora for which a new
Ministry of Overseas Nepalese Affairs could be set up.
The Ministry might develop plans for using the Nepalese
diaspora so as to promote the country's interest abroad in
economic, political and cultural fields.
It may also be appropriate to allow the non-resident
Nepalese to continue to hold their right to citizenship in
order to keep their links with the motherland intact.
Patriotic appeals can be made to attract the diaspora for
making investment in Nepal. Proper organizational
network could be made to help the returned overseas
Nepalese and their family members back home. Besides,
the diaspora should be allowed to enjoy national treatment
on the investment made by them in Nepal and due
compensation paid to them if their investment projects are
affected due to war, armed conflict, riots, insurrection or
the state of emergency. Nepal has signed such kind of
agreement as Bilateral Investment Promotion and
Protection Agreement (BIPPA) with India, which is
exemplary. There is no reason why BIPPA kind of coverage
could not be accorded to investment projects made by the
diaspora in Nepal. Last but not the least, Nepal needs to
improve governance structure in the country to take
advantage from the diaspora, who need to be treated as
unofficial ambassadors for their potential role in promoting
economic, political and cultural interest of the country in
the host country.

Use of Remittance
It has been argued that remittance has been one of the

The Nepal Chartered Accountant

September 2014

31

ECONOMY

biggest contributors to Nepal's poverty reduction, especially

the reduction from 41 percent of the population below
poverty line to 31 percent and from 31 percent to 25 percent.
However, the Nepal Standard Living Survey of 2010/11
by Central Bureau of Statistics showed that a large amount
received as remittance is not being utilized in the
production sector; rather it is being utilized in consumption.
Table 3: User of remittance

Source: CBS- Nepal Standard Living Survey, 2011

Out of total remittance 79 percent is being used in daily

consumption, whereas 7 percent used in payment of loans
and only 2 percent is used for capital formation.
It should be kept in mind that the remittance is personal
money and migrants have their own needs and choices.
The government cannot force them to use this money in
any sector; rather this is their personal choice and it largely
depends on their needs and interests.

Conclusion

Nepalese lower middle class people and substantial income

for the contribution of GDP. In spite of several controversies
poverty is declining in Nepal because of the substantial
support from the remittance. Remittance is a direct inflow
of resource but its use and sustainability should be analyzed
from different angle. A country cannot be self sufficient
unless and until it does not develop its internal resources.
Therefore remittance should be an instrument to mobilize
internal strength instead of dependency syndrome.
Remittance should be used for productive sector instead
of consumption and recreation. Use of remittance in
business, infrastructure, health, education, saving and
other long-term recourse generating purpose, contribute
more as compared to use on short term benefit. Remittance
could not be a long term source of benefit to the people as
well as for the country itself. It is only a short term solution
and immediate benefit to the people for their basic
requirement. For a long term point of view, it should be
a base for internal resource generation and sustaining
economy in the transitional period. Utilizing remittance
in productive sector for capital formation at home and
bringing it through a formal channel is a big issue in Nepal.
It should be addressed by appropriate policy and
implementing mechanism with efficient organization
networking.

Remittance is an important source of foreign exchange in

Nepal. It is an important resource for the livelihood of

The Institute of Chartered Accountants of Nepal is going to organize the First ICAN Summit
on

"New Dynamics of Accounting Profession"

Date : January 31st 2015, and February 1st, 2015
Venue: Soaltee Crowne Plaza, Kathmandu, Nepal

Participation Fee:
Corporate:

7000/-

CA Member:

6000/-

RA Member/ Students:

5000/-

32

The Nepal Chartered Accountant

September 2014

MANAGEMENT

Inducting Chartered Accountants (CA)

in Civil Service

With some exception, Chartered

Accountants are not serving in
Civil Service at the moment. In
this context qualified and skilled
accounting manpower is
essential however; government
may plan to inject the qualified
professional manpower to look
after all its treasury. This
challenge can be solved by
making appropriate provisions
in Civil Service Act. Similarly the
government
requires
formulating a policy for PSEs for
recruiting the CAs so as to
strengthen the financial
management and enhance the
credibility of the government
entities.

Background:
The terms "accounts" and
"accountants" are not new to the
public and private sector business
community. The Accountant may be
a professionally qualified Accountant
such as CA or non- CA that can be
engaged depending on the
requirement of the organization. In
this article we highlight about the
professional accountant. Now the
question comes where we can see the
CA? We can see CA in business, CA
in public practice and CA in public
sector. The services of CA can be used
in number of areas including budget
planning, financial forecasting,
financial management in the capacity
of head of finance in case of
employment. Most of the CAs in our
country are either in public practice
or serving in private sector but very
few are in public sector. Hence it is
needed to be assessed to find out the
underlying reasons behind this
situation even if public sector is highly
potential for CAs for career
development.

Need for Professional

Accountants in Public Sector:
Mr. Dev Bahadur Bohara
Mr. Bohara is Member of ICAN

Financial Comptroller General

Office (FCGO) is responsible for
maintenance and controller of the
accounts of the Government of Nepal
(GON) and about 4500 civil servants

are engaged in accounts keeping

across the country. Every year volume
of government budget is increasing
and statistics shows that it increase
manifold over the years. With the
increased amount of budget various
accounting and legal complexities are
also growing as indicated by the
Auditor General in his Annual Report
The existing budget and public
expenditure format is not compatible
with international practice for
intensive financial analysis. The
accounting system is also unable of
capturing all fiscal operations such
as off- budget items and contingent
liabilities of the government and its
entities. Under the public financial
management reform agenda, the
GON has decided to adopt Nepal
Public Sector Accounting Standards
(equivalent to Cash Based
International Public Sector
Accounting Standards) on 2066/05/
30 and planning to roll out from
Ministries to subordinate offices. The
Government of Nepal has taken
initiation to implement NPSAS in two
line ministry namely Ministry of
Woman, Children and Social Welfare
and Ministry of Physical
Infrastructure and Transport with
technical support of The World Bank.
These pilot projects were started in
September 2013. This adoption shall
pave the way to the government for

The Nepal Chartered Accountant

September 2014

33

MANAGEMENT

migrating to accrual based financial reporting gradually

in future. In the light of government accounting reform
agenda it is need of the hour to engage the qualified
accountant staff in the government treasury since there is
not a single qualified accountant, at the moment, working
in the government.
In the public or private sector CA can play an important
role in maintaining sound financial management system
in the organization. The areas may include the issue of
governance ranging from presentation of financial
statement to quality and disclosure, internal audit, risk
assessment, system designing, policy development,
expenditure management, revenue collection, project
financial management and so on. These are the major
components of public finance where expertise and
knowledge of the professional accountant can be utilized.
Similarly they can participate in regulatory process by
developing, prescribing, auditing, investigating, monitoring
and other functions within the legal framework. Despite
the vast potentiality, the public finance is an area where
the expertise of professional accountant is not being utilized
and tapped yet in Nepalese context.
In some ministries and departments technical knowhow
of CAs are highly desirable for preparing budget; fund
management; debt management; review of tax returns;
preparing compiled financial statements at ministry level
along with consolidate account of the government as a
whole and internal audit of the public sector entities.
In the above background the public sector financial
management has enormous potential for engaging the
CAs and recruiting them under civil service. Such
recruitment shall provide the opportunity to utilize their
professional skill in ensuring efficacy and efficiency in the
financial management of the government.

Demand Forecast for Chartered Accountants:

Since last few years onwards we have been able to produce
qualified accountants in Nepal that can be taken, as one
of the remarkable achievement of the Institute of Chartered
Accountants of Nepal (ICAN) and appreciate the efforts
of the pioneers of the institute including government who
contributed to bring the institute at this stage. Among
other things if we see the present scenario, ICAN to a large
extent, focused its endeavors on producing CAs i.e. supply
side only and demand side is not being considered to the
desired level.
Despite increased economic activities both in public and

34

The Nepal Chartered Accountant

September 2014

private sector, no research or demand analysis of CAs has

been conducted since the inception of the institute so as
to run the institute as per its main objectives. If we see the
other South Asian countries few of them have made such
forecast. In our context also it seems desirable to know the
actual requirement of CAs within our country and sketch
the map for way forward and maintain balance of demand
and supply as well as increase the demand of CAs. Such
analysis also can be useful enhancing the country's
corporate regime more transparent and accountable,
gaining the confidence of investors and for the sustainability
of the business. It would be appropriate to ICAN to conduct
a need assessment to find out the requirement of qualified
accountants in terms of size of the national economy.
Pursuant to the implementation of International Financial
Reporting Standards (IFRS) road map of ICAN, we plan
to implement IAS/IFRS from the financial year 2014-15
onwards in a phased manner and some preparatory
activities are being initiated by the Institute for transition
to new set of reporting standards. But we have also to note
that dealing with the challenges associated with the
convergence process, sufficient resources and accounting
professional shall be required for which assessment of
demand of CAs also be useful for smooth transition.

Chartered Accountants in Civil Service:

With some exceptions no Chattered Accountants are
serving in civil service. Even the Government of Nepal
(GON) has no specific policy in place to engage CAs for
public sectors.The Civil Service Act also does speak specifically
about recriutment and any privileges to CA qualification holders.
Unless and until the CA profession is not recognized as
reputable profession and some special favor is not accorded
to this profession, the attraction of CAs to join civil service
will remain unchanged. One of the main reasons for low
preference in public sector by the CAs may be low pay
packages being offered at entry level compared to emerging
private sector. With this in view, the ICAN need to initiate
the dialogue with Office of the Auditor General, Ministry
of General Administration, Ministry of Finance, Public
Service Commission and persuade the authorities that
CAs can play the significant role in maintaining desired
level of fiscal governance or system and preparation of
financial statement of government in accountable and
transparent manner. In this connection, simple dialogue
with concerned authorities will not be sufficient to convince
the authorities. Comprehensive study is required to
convince the government authorities.

MANAGEMENT

Turning to the need of chartered accountants particularly

in government regulating authorities, office of the Auditor
General, Ministry of Finance and Department under the
Ministry, Financial Comptroller General Office, Ministry
of Commerce and departments under these ministries
where the services of CAs are highly desired. Similarly
the services of Chartered Accountants are also useful in
the Department of Money Laundering and Central
Investigation Bureau. However, including the above
mentioned entities most of the regulating bodies are not
staffed with professionally qualified accountants even to
review the financial statements. This situation may seriously
limit the authorities' capacity to undertake the verification
or investigative activities and credibility of report generated
by them and may be questioned.
Considering the roles and responsibilities of these
ministries, the officers with CA qualification is highly
desirable to meet the requirement of these authorities and
provides quality services to the wide range of stakeholders.
We have to keep in mind that without competent people
in any organization it is difficult to provide better and
quality services to the stakeholders. But the question comes
to remuneration which the CAs presently drawing in the
private sector compared to public sector is better and in
some cases it is significantly higher. Similarly, the CAs
perceive the civil service as non-dynamic nature of job
and wait for long time for getting promotions are some
major reasons for low preference to join in the civil service.
These are few of the keys barriers to attract the CAs in
civil service which need to be resolved with reform in
legislative and administrative system. The professional
like doctors, engineers are serving in the public sector
without any privileges except the doctors are given some
incentives such as non-practicing allowances and in other
forms but unwillingness of CAs joining the civil services
is an issue for discussion. In this situation, ICAN needs to
come forward and initiate dialogue with the competent
government authorities along with various options and
convince the authorities the benefits for induction of CAs
in Civil Service although it is the responsibility of the
government to decide whether it actually requires the CAs
in Civil Service or not. If the answer is yes, the government
has to find out the ways to recruit either paying CAs higher
pay package or higher level of post or time bound
promotions to lure the CAs in Civil Service by making
appropriate legal or administrative arrangement. The CAs
has also to establish their worth through demonstrating
their performance after joining the civil service.

In this connection, it seems appropriate to the GON to

conduct a study to recruit CAs by forming a working
group comprising representatives of major ministries or
directly instruct the Ministry of General Administration
(MOGA) to find out the avenues for induction of CAs in
Civil Service. Such study can facilitate the government to
take appropriate decisions to induct the qualified chartered
accountants in civil service either by creating special posts
or the ways suggested by working group or MOGA for
recruitment of CAs in public sector.
As mentioned above, that the ICAN has announced the
IFRS implementation in the Public Sector Enterprises (PSEs)
too and government is also the important machinery to
implement the IFRS in PSEs however, question arises that
without the trained manpower to provide such services it
seems challenging to implement successfully. The available
options of seeking the services of professional accountants
is either to hire the CA firms or recruit the CAs in those
PSEs. The latter option seems more appropriate.

Chartered Accountants in Office of the

Auditor General (OAGN):
The OAGN is the only public sector (except public sector
enterprises) entity where a very few Chartered Accountants
are serving as civil servants and these are groomed by
OAGN from its initiative. Based on the erstwhile Regulation
of OAGN which empowered AG to grant study leave to
its staff to pursue CA courses for a period of three years
as it is the fundamental requirement of accounting
professional education across the globe. This legal provision
was first implemented in 1986 by sending OAGN officers
in India and fortunately the writer of this article was first
officer selected for studying CA courses in India. Presently,
there are six officers serving in OAGN having CA
qualification and five have already resigned after
completing the contractual period of three years. The main
reason behind resignation of CAs seem to the nonavailability of additional promotional or any facilities
available to them based on the Regulation. Adequate efforts
were also not initiated to amend the Regulation to make
special arrangement for officers with CA qualification. The
officers who resigned from OAGN, either they are serving
in foreign countries or are practicing within the country.
Informally the officers plead that there is no extra benefit
to them because of having professional qualification rather
they faced problem in getting promotion as they were
given only half of the score allotted for serving geographical
location as per Civil Service Law resulting in break in
career development.
The Nepal Chartered Accountant

September 2014

35

MANAGEMENT

Based on the then Regulation related to OAGN Staff

(repealed after integration of audit service in Civil Service
Act), the fresh CA were recruited as second class gazetted
officers by Public Service Commission and paid additional
allowances equivalent to the prevailing salary, which was
not available to internally groomed CAs even they have
more experience in public sector. This situation has become
a serious challenge to OAGN to retain the existing officers
with CA qualification. OAGN neither can recruit fresh
CAs nor send officers to pursue for CA study by allowing
study leave. In these circumstances the officers have not
shown their willingness for CA courses despite the
provision of study leave in the Civil Service Act. This
situation needs to be seriously studied for retaining the
serving CAs and inducting fresher.

The above mentioned provisions are some of the instances

and such provisions appears to be useful in determining
the tax liability which eventually can protect the interest
of the shareholders and facilitates the regulators in
supervising and monitoring the companies. Similarly these
types of arrangement shall also enhance the truthfulness
as well as reporting requirements of the companies. In this
situation companies shall require the services of CAs to
fulfill the requirement and open the job opportunities to
the qualified CAs. Ultimately such arrangements will not
only open the avenues for CAs but also contribute to
enhance the corporate culture and image of corporate
sector.

Chartered Accountants in Private Sector:

Conclusion

After restoration of democracy in 1990 the economic

activities were significantly increased particularly growth
of banking, insurance, industry and other services sector.
In public sector also the quantum of budget has also
increased substantially afetr restoration of democracy
compared to earlier period in the social and infrastructure
sector. Presently, we can see the volume of transactions
in billions of amount even in the private limited companies;
however with some exceptions they have not employed
CAs as CFO or in any other capacity. The prevailing
Companies Act also does not specify the transactions limit
for a private company. In this context, the demand of
number of qualified accountants has not increased
compared to the size of the economy of the country. This
indicates the lack of corporate culture in the private sector
to some extent. To accommodate the CAs in private sector,
few provisions seem to be made in the concerned legislation
particularly in the Companies Act, Banking and Financial
Institution Act by making the following arrangements:
Arrangement of compulsory internal audit in the case
of private or public limited companies which exceed
particular amount of annual transactions either by
appointing CAs as internal auditor or hiring the CA
firm in practice.
In case of manufacturing companies there should be
provision of cost audit and get the cost records audited
by the CAs.
In the case of banking and finance companies that
requires to fulfill the regulatory requirement needed
to be certified by the CAs.

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The Nepal Chartered Accountant

September 2014

Reporting on internal control mechanism within the

entity.

Government is the largest employer in the country. Despite

the increased quantum of budget along with the variety
of programs being implemented, the financial management
is becoming more complex and existing government
reporting and accounting system is not capable of providing
adequate information for decision making purposes. Even
in some of the government run projects, the project
authorities are getting service of outside experts mere to
prepare the Project Accounts of externally financed projects
of government due to lack of knowledge to prepare such
statement. Similarly the government revenue account is
not reconciled with Nepal Rastra Bank since many years.
Apart from this, government's investment in various public
enterprises has not been confirmed. With some exception,
Chartered Accountants are not serving in Civil Service at
the moment. In this context qualified and skilled accounting
manpower is essential however; government may plan to
inject the qualified professional manpower to look after
all its treasury. This challenge can be solved by making
appropriate provisions in Civil Service Act. Similarly the
government requires formulating a policy for PSEs for
recruiting the CAs so as to strengthen the financial
management and enhance the credibility of the government
entities.
As discussed in the article it seems appropriate to undertake
an assessment either by the government or ICAN to identify
the possibilities of need of CAs in Civil Service. Conducting
such assessment by ICAN will not only assume as support
to the government but also it is in the interest of its
members. This will help making the financial management
of the public sector more professional meeting the
requirement of the stakeholders.

TAXATION

Emergence of Changes and Coverage of

VAT Mechanism

Most of the corporate and business

houses show it's financial in loss
and resultantly never pays income
tax rather shows their performance
is paying VAT which is nothing
but collected from final consumer
of Goods and Services.
There is still larger part of business
houses or enterprises, services
providers are far away of VAT net
and consequences are there that
the government is away from
greater prospects of revenue
collection through VAT.

CA. Kaushlendra Jha

CA. Jha is a Business Consultant in India &

Nepal.

With the past annual report of IRD

for the FY 2069-70 (2012-13), we have
seen that the share of VAT in total
revenue collection is 32 percent taken
the first position. The authority has
shown very much satisfaction for
touching the target of collection Rs.
83.50 hundred crores out of targeted
of Rs. 88.95 hundred crores i.e. 93.87
percent.
Like the position of income tax,
custom, excise, education, registration,
Non-Tax revenue has taken the place
in gradual descending order. What I
believe is that the number one position
of revenue collection is not the good
sign of economic growth under the
prevailing tax rate if VAT in all
products from shoes to cap shall be
13% in country. Even a daily wages
earner pays the 13% tax for a cup of
tea or one day meal i.e. Ek Chhak
Khana ko lagi.
The non-producing of VAT invoice
from the restaurant or hotel to the
customer begin from here and the
customer who find the opportunity
of getting the meal of Rs.200 costing
of Rs.200 is not much concerned to
pay Rs.226 i.e. Rs.26 extra as VAT.
How we expect from wage earner to
get the revenue collection of Rs.52 per
person if they would like to have two

time meal. Surprisingly this happens

and the innocent wage earner even
not aware of how they are
contributing to revenue collection
target of the nation and development
of the nation. The origin of so called
false invoice or estimate bills happens
from here because neither the
restaurant nor customer would like
to get VAT bills but producing of
VAT bills to the customer is losing
the customer who even don't know
the meaning of VAT bills rather
would be interested to know the total
cost of food or their meal which he
normally gets in just side hotel where
he/she can get meals in just of Rs.200
or less.
Other cases of seen example of
estimate invoice/bills can be
understood with disguised case
studies of an experienced event:
Mr A is Class one officer in
Government and had to give a
reception party for the marriage of
his son, He is in dilemma to approach
a five star hotel to host the reception
where has to pay a high bills
including VAT and service charges,
hence decided to approach a catering
centre where the catering centre is
organising a reception and event with

The Nepal Chartered Accountant

September 2014

37

TAXATION

and without VAT bills and not having the accounting

system and well equipped office so that can be caught by
revenue governance authority; and also tried to get the
quotation from some of restaurant from where he got
mixed of quotation including VAT and service charges
and excluding VAT and service charges. Here game of
competition begin among the restaurant and catering
company and the customer who is not wishing to show
their bills/spending in regulatory network shall never
would like to get the VAT bills against which they use to
pay in cash. The catering company or restaurant that gets
the payment in cash also has to pay many purchases in
cash in the market from where the raw
materials/consumable can be bought in cash only.
The deal gets final without VAT bills where both the party
is in win win position and the loser is the company who
runs in system and only would like to be done their
transaction including VAT which ultimately gets out of
market with huge loss and not remain competitive in the
market.
The above cases are not only escaping the revenue collection
of the country rather it has adversely impact the economic
growth by promoting the revenue leakage, discouraging
the commercial ventures who make an efforts to comply
with the tax laws and grow their business rightly, closing
down of good restaurant and party venue adversely impact
the promotion of tourism sector and promoting the
black/cash money circulation out of banking channel
resulting into money out of circulation, etc.
There are end number of mechanism to control all these
unscrupulous practice through review and critical analysis
of financial statement, audit report submitted by the
ventures/business houses, review and analysis of personal
bank accounts of directors and proprietor of business
houses, discouragement of purchase only on the basis of
PAN bills, physical monitoring and review of events in
metro city, using input output analysis of VAT returns,
allow to open up restaurant and party palace only in
commercial places, promotion of sector wise accounting
systems etc.
Most of the corporate and business houses show it's
financial in loss and resultantly never pays income tax
rather shows their performance is paying VAT which is
nothing but collected from final consumer of Goods and
Services.
The structures of VAT or sales tax in other countries like

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September 2014

neighbours country India have become much sophisticated

and structured rages from 1% to 12.5% depending of the
basic necessary Goods and daily life of luxurious Goods.
The structured VAT/Sales tax position levy less harsh to
the general consumers of basic goods and services.
More interestingly, the restructuring of VAT tariffs rates
and its coverage does not require big reforms in taxes and
cabinet approvals rather a small effort is needed from
governing department or authority. There is need of strong
desires to see and coverage of VAT and its rates differential
based on products and services. Many consultant and
advisor from non-commerce background are still not aware
of VAT compliance and its importance hence have not
been registered with VAT resultantly effects of it at
multifaceted level of economy.
The provision to deduct tax at source at fifteen percent in
case where the consultant does not produce invoice with
VAT registration and conversely when the consultant
purchases goods and services against their office and
profession running, they always tends to purchase without
VAT bills and never think of having registered with VAT
to take credit of input VAT with the department.
There is strong need of advocacy among non-commerce
professional about the VAT mechanism and the importance
of their potential contribution to the development of
economy through revenue collection and its good
governance.
There is still larger part of business houses or enterprises,
services providers are far away of VAT net and
consequences are there that the government is away from
greater prospects of revenue collection through VAT.
The role of professional like chartered accountant and
registered auditors are seems to be much important or
instrumental in development of awareness and advocacy
among business enterprise. The importance of VAT credits
and long terms business growth effects are not being
conveyed among the stakeholders via government. Further
the connection of turnover/sales, cross examination of
ratios of sales to purchase in case of trading, ratios of
purchase to manufactures and sales in case of
manufacturing industries are not there well implemented
while doing the scrutiny and VAT full audit by the
authority.
If we see the neighbouring country India, they are on the
verge of reform of VAT, custom and Excise resulting into
one single governance Act called GST (Goods and Services

TAXATION

Tax Act) in pace with other developed and developing

country. But the revenue mechanism and reform pace in
Nepal seems not much optimistic.
Turning to the performance and target of VAT, the
collection is approximately 100% and more where
incentives are given to the concerned department. We
believe that budgeted and targets is something which is
little difficult to achieve but here, yearly target always
have been achieved which shows IRD is more focused on
soft target rather than self compliance of the country's tax
regime.
The well proven mechanism is needed to know how much
opportunity in tax and non tax revenues is due to be
collected per year rather than holding the soft target and

reaching to it. There are various contractors who collects

VAT amount from various department against raising of
invoice and does not deposit back of outstanding debit
amount of the VAT to the department. The focus is never
been to the lost amount of revenue through debit amount
and non-collected other potential revenue to go to the
government which was supposed to be collected in time.
There is big potential collection of revenue lies with nonfiler of VAT returns which stood almost 22 % of total fling
of VAT returns. The department does not take any action
unless they face any difficulties in meeting their target
rather they may be focused on reducing to very low
percentage of non-filer of VAT returners.

The Nepal Chartered Accountant

September 2014

39

TAXATION

Tax Issues on Defined Benefit Liability Provisions and

Payments: An Employer's Perspective

Background
Whatever may be clarified by the
Revenue Authority in due course
of time, at this moment we can
conclude that in case an employer
deposits the liability so calculated
in an approved retirement fund
(either in lumpsum or in
individual account) without the
right to recourse to the employerthe provision for such liability is
deductible for tax purpose. The
employer should always be ready
to bear the risk due to the
interpretation of the said
explanation.

1. Taxpayers particularly business

communities are debating
regarding withholding tax rate
while making payment of gratuity
and other retirement benefits that
is of non contributory in nature.
The Income Tax Act 2058 has
clearly prescribed the tax rate of
15% for all retirement payments
from non-contributory funds.In
this article, we will be highlighting
several provisions of Income Tax
Act for the appropriate rate of
taxes in case of Defined Benefit
Plan payment. The article also
discuss on the tax treatment of
provision for Defined Benefit Plan
Liability and the loss sustained by
the shareholders of the company
and the government due to the
practice adopted by entities as "Tax
Planning Tools" in absence of
clarity in legal provisions of the
revenue authority.
Contributory and Non-Contributory
Fund:

CA. Umesh Raj Pandeya

CA. Pandeya is Member of ICAN

40

The Nepal Chartered Accountant

2. Contributory funds are those

funds where a beneficiary makes
contribution out of his/her income
which has already been taxed. The
contributor and the beneficiary are
same in case of Contributory
Funds.

September 2014

3. Non contributory Funds mobilize

such resources that are maintained
for the payment to a separate
individual than the person
making the contribution in the
Fund, i.e. the beneficiary and the
contributor of the funds are
different.
4. The only difference exists in these
two types of fund is that the
contributory fund mobilizes such
resources that have been made
taxable at any point of time in the
hands of the beneficiary. On the
other hand, non-contributory fund
mobilizes such resources that are
not made taxable in the hands of
the beneficiaryuntil the actual
payment is made from the fund.
5. The matter of deduction/
reduction in case of contribution
to approved retirement fund is a
separate matter of facility to
taxpayer as per the other
provisions of the Act so as to
encourage the social security
contribution from taxpayer's point
of view.

Gratuity: A Defined Benefit

Plan
6. The Labour Act, 2048 requires
every enterprisehaving 10 or more

TAXATION

determine how much benefit is attributable to the

current and prior periods and to make estimates
(actuarial assumptions) about demographic
variables (such as employee turnover and
mortality) and financial variables (such as future
increases in salaries and medical costs) that will
influence the cost of the benefit;

employees to provide certain amount as gratuity at the

time of retirement from the enterprise after completing
certain years of service (See box for the amount of
benefit).
Rule 23 of labor Rules:

The enterprises shall provide a lump sum amount as

follows as gratuity to every employee who is retired
from the office due to any reason (except for disciplinary
actions that makes ineligible to make such payments)
if the employee has served more than three years
continuously for such enterprise:
a. For employee completing three years of service and
retiring before seven years of service- Amount
equivalent to half months' salary drawn at the end
of service for each year of service
b. For employee completing seven years of service
and retiring before 15 years of service- Amount
equivalent to two-third of a month's salary drawn
at the end of service for each year of service
c. For employee completing 15 years of service and
retiring after 15 years- Amount equivalent to a
month's salary drawn at the end of service for each
year of service
7. The Rules has precisely mentioned that the amount is
contingent upon the salary drawn by the employee at
the end of his service. Thus, the amount of benefit can
be determined only at the retirement of the employee,
construing that the gratuity is a defined benefit
employee liability.
Charge to Income Statement
Requirement of Accounting Standard

8. According to IAS 19 "Employee Benefits"- Accounting

for defined benefit plans is complex because actuarial
assumptions are required to measure the obligation and the
expense and there is a possibility of actuarial gains and
losses. Moreover, the obligations are measured on a discounted
basis because they may be settled many years after the
employees render the related service (Para 48). The
accounting by an entity for defined benefit plans
involves the following steps:
(a) Using actuarial techniques to make a reliable
estimate of the amount of benefit that employees
have earned in return for their service in the current
and prior periods. This requires an entity to

(b) discounting that benefit using the Projected Unit

Credit Method in order to determine the present
value of the defined benefit obligation and the
current service cost;
(c) determining the fair value of any plan assets;
(d) determining the total amount of actuarial gains
and losses and the amount of those actuarial gains
and losses to be recognised;
(e) where a plan has been introduced or changed,
determining the resulting past service cost; and
(f)

Where a plan has been curtailed or settled,

determining the resulting gain or loss.

9. After applying the steps mentioned above, an entity

shall recognize the net total of the following amounts
in profit or loss, except to the extent that another
Standard requires or permits their inclusion in the cost
of an asset for any accounting year:
(a) current service cost;
(b) interest cost;
(c) the expected return on any plan assets and on any
reimbursement rights;
(d) actuarial gains and losses, as required in accordance
with the entity's accounting policy;
(e) past service cost;
(f)

the effect of any curtailments or settlements; and

(g) the effect of the limit in paragraph 58(b), unless it

is recognised outside profit or loss in accordance
with paragraph 93C (See IAS 19 for further
explanations)
10. The standard requires recognizing expenses for
Defined Benefit Plans after considering the effect of
expected return on any plan assets and on any
reimbursement rights, i.e. the employers are required
to account for the returns on plan assets and any other
reimbursement rights.
Practice in Nepal

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September 2014

41

TAXATION

11. As Nepal is yet to implement the IFRS on adoption

modality- the applicability of new accounting
standards drafted in conformity with IFRSs and IASs
is still not known and the prevailing Nepal Accounting
Standard on Employee Benefits is under voluntary
compliance, the employers are calculating the gratuity
liability such that the amount covers such outflow of
resources as if all the employees of the entity opt for
retirement.
12. The amount, so calculated, is compared with the
previous year liability balance and the additional
amount is recognized as expenses for the year along
with any additional payments made during the year
for any retired employee.
Defined Benefit Plan Asset- Deposit of Gratuity Liability in an
Approved Retirement Fund

13. The employers have started to deposit the liability

provision for Defined Benefit Plan (say, gratuity and
accrued compensated absences) in an Approved
Retirement Fund. Large employers, such as Banks
and Financial Institutions, have Retirement Funds
controlled by Management Committee (the members
of the management committee are the employees of the
organization that manages fund) after registering a bylaw in Inland Revenue Department (IRD). The legality
of operation of retirement fund and approval of such
retirement fund by IRD is a separate legal question
when Sec. 12 of Companies Act does not allow any
entity except for a public company to operate a
retirement Fund and is not discussed in this article.
The liability of such retirement fund is not limited
and the legal status of such retirement fund is still not
clear.
14. Interestingly, the practice of the employers depositing
such plan liability in approved retirement fund is that
they do not expect the return on the plan asset and
account for such return. The additional liability is
computed without considering such return (either it
may be a malicious negligence or lack of knowledge) and
indirectly passing on the accrued benefit on such
investment to the beneficiaries of the retirement fund
through a unique mechanism in most of the cases.
15. One such mechanism that might have been used by
employers (the modality is finalized by the
management and the Board of the entities are less

42

The Nepal Chartered Accountant

September 2014

concerned about such modality and in most of the

cases this has been happening without the knowledge
of Board, or even if the Board has information- they
are unknown about the financial impact of the modality
developed by the management) is deposit the Defined
Benefit Liability (say, gratuity) in approved retirement
fund (ARF). As stated earlier, the management
committee of the fund is composed of the employees
of the organization. The same retirement fund also
manages other defined contribution plan investment
from part of each employee maintaining the individual
account of the employees (termed as beneficiary in
other part of this article). The ARF invests both the
funds (i.e. Defined benefit Plan Liability Fund and
Fund accumulated through individual contribution
from beneficiaries) at its own discretion. The employers
never charge interest on Defined Benefit Plan assets.
As such, total return from the investment explained
above is passed on to the beneficiaries either as interest
at higher rate than return in proportion to the fund
accumulated through their contribution or in the form
of bonus.
Loss to Shareholders & Revenue Loss

16. As explained in paragraph 10 above, the Defined

Benefit Plan asset is asset of the entity and as such,
the entity shall expect return on such plan asset. It is
also a matter of prudence to expect return on any
investment. Every rational investor expects the return
on any investment made by it so that the goal of
maximization of shareholder's wealth is achieved.
Such return on Plan Asset decreases the employer's
expenses with regard to the Benefit Plan.
17. So far as the practice is concerned, the employers have
failed to reap the investment return. Due to this, the
amount accrued to the revenue authority, i.e. tax and
shareholders is lost. If the entity seeks return on Plan
Asset, the return results in increased profit either by
way of increased revenue (disclosed as return on plan
asset) or by way of reduced expenses (i.e. the
expenditure during a year for Defined Benefit Plan is
reduced by the return on plan asset). The increased
revenue is attributable to the shareholder and
government. The government can obtain increased
revenue as the net investment in Approved Retirement
Fund is decreased by the return amount or in case it
is not changed, the return is included in income (The

TAXATION

tax impact of Provision for Defined Benefit Plan is

explained in Paragraph 19 and onwards). In this
regard, the revenue authority has failed to identify
the tax avoidance practices and has failed to increase
the tax base. We can roughly estimate the loss of
taxation is in Millions or nearly billions of rupees.
18. We can explain the quantum of tax loss through a
hypothetical example. There are three banks- A, B &
C managing their own retirement fund, each having
more than 2000 employees and gratuity and accrued
leave liability fund of at least Rs. 5 Billion. Assume
the minimum investment return of 6% p.a. in long
term investment (return that could be maintained by
Employee Provident Fund and Citizens Investment
Trust). The annual return on plan asset is Rs. 900
Million (Rs. 5 billion multiplied by 3 multiplied by
6% p.a.). The tax effect on the return is Rs. 300 Million
(Rs. 900 Million at 30%- tax rate applicable for banks)however the approved retirement fund are charging tax at
5% on half of the return on plan asset in the hands of
beneficiaries: that means the tax collected by Revenue
Authority through that way is Rs. 22.5 Million- the resulting
tax loss p.a. if the fund size is Rs. 15 Billion (actually the
fund size is not less than Rs. 20 Billion p.a.) is Rs. 277.5
Million. The investors are losing Rs. 600 Million and
the return is reaped by the employees instead of
rightful beneficiaries.
Tax Treatment of Defined Benefit Liability

19. The Income Tax Act does not allow the provision for
Defined Benefit Liability as expenditure unless the
same is actually paid to the recipient and made taxable
in his/her hand since the provision is merely an
accounting estimate and cannot be actually determined
till when the actual payment is made.
20. The Income Tax Manual 2066 issued by IRD and
updated on 2068 B.S. has ruled as follows with regard
to the eligibility of provisions for Defined Benefit Plan
Liability.

Example 8.4.3

g]kfn n]vfdfg cg'?k ljQLo ljj/0f tof/ kfbf{ sDkgLn] pkbfg

Joj:yfafkt vr{ n]vL bfloTj lx;fjdf n]vfg ug{'kg]{ x'G5 .
;f] sDkgLsf] sd{rf/Lx? To; cj:yfdf ;]jf lga[t eOg;s]sf]
Pj+ eljiodf ;]jf lgj[t x'g] ;do;Dd pQm bfloTj /sd km/s
kg{ ;Sg] ePsf] x'+bf pQm pkbfg jfktsf] bfloTj cfos/
k|of]hgsf] nflu oyf{y ?kdf olsg x'g ;Sg] bfloTj dflgb}g
/ ljlQo n]vf (Financial Accounts) df vr{ bfaL u/]tf klg
cfos/ k|of]hgsf] nflu ;f] /sd sL bfjL of]Uo dflgb}g .
olb ;f] sDkgLn] pk/f]Qm adf]lhdsf] bfloTj sDkgLn] pkef]u
ug{ g;Sg] u/L tyf sd{rf/Lx?sf] gfdsf] olsg cfwf/df cyf{t
bfloTjsf] d"No oyfy{k/s 9+un] cg'dfg ug{ ;lsg] u/L :jLs[t
cjsfz sf]ifdf e'Qmfg u/]sf] eP e'QmfgLsf] cj:yfd} cfos/
k|of]hgsf] nflu sL bfjL ug{ ;Sg] x'G5 .

As per the above explanation, the provision for Defined

Benefit Plan Liability is allowable if it satisfies all the
following conditions:.
a. The liability is earmarked and deposited in an
Approved Retirement Fund,
b. The liability is computed on the basis of amounts
attributable to each employee (i.e. estimated on a
factual basis), and
c. The amount so deposited cannot be used by the
management (i.e. investment without recourse)
21. The Directive is silent about the return on plan asset
and the intention of Revenue Authority is still not
clear through the above explanations. The following
questions arise (that is to be addressed by Revenue
Authority for clarity) due to the above explanations for
eligibility of Defined Benefit Liability (say, gratuity
provision), the answer of which cannot be sought from
the Directive itself:.
a.

Can an entity deposit gratuity liability in lumpsum

in approved retirement fund, all liability being
deposited in a single account and maintain a list
of individual staffs and the amounts attributable
to them for the eligibility?

b.

Or, the entity is required to open an individual

account of each employee in the Approved
Retirement Fund and deposit the amount in such
account for eligibility? If this is the intent of Revenue
Authority, another question that is integral part of

The Nepal Chartered Accountant

September 2014

43

TAXATION

this arrangement arise- i.e. can an entity deposit

any amount in individual account of its employee
without including the amount in the employee's
income? If it is to be included in income, then what
is the difference between provident fund and
gratuity?
22. Whatever may be clarified by the Revenue Authority
in due course of time, at this moment we can conclude
that in case an employer deposits the liability so
calculated in an approved retirement fund (either in
lumpsum or in individual account) without the right
to recourse to the employer- the provision for such
liability is deductible for tax purpose. The employer
should always be ready to bear the risk due to the
interpretation of the said explanation. The verdict of
Supreme Court in Mahendra Raj Pandey Vs. NRB et.
Al. that the debatable tax provisions to be interpreted
in favor of taxpayer is also considered while forming
this conclusion.
Mahendra Raj Pandeyet. al. Vs. NRB (Supreme Courtcollection of Precedents 2066, Part 10- Industry,
Commerce & Tax- pg. 135):
Fact of the Case:
484 employees of NRB took voluntary retirement from
the Job of NRB from 2059 B.S. They were entitled to a
sum equivalent to 10 years' pension income in advance
at the time of retirement and obtained the same. NRB
withheld tax @15% assuming that the amount is gratuity,
maintained a separate account in this regard for deposit
purpose and deposited the same in Revenue Account
on 27 Ashad 2062. The applicant filed a writ petition
on 23 Shrawan 2062 at Supreme Court alleging that the
amount so obtained at the time of retirement was
advance pension- on which annual tax shall be calculated
and paid as per Sec. 87- and Sec. 88 is not applicable
and the amount so withheld by NRB is refundable to
them after due calculation of tax. The payment of amount
in Revenue Account is against their property right. The
court accepted the writ petition on 22 Bhadra 2062.
Decision on the Case:
In this case, the Supreme Court decided in favour of
the petitioner- the decision accepted that the amount is
advance pension, and tax shall be levied on annual basis
as per Sec. 8 & Sec. 87, not as per Sec. 88. The decision
also included the following note:

44

The Nepal Chartered Accountant

September 2014

k|To]s sovereign nation sf taxation power cGtlg{lxtclwsf/

ePklg s/ ;DaGwdf sfo{kflnsfnfO{ s'g} :jljj]sLoclwsf/
k|bfg x'Fb}g . s/ nufpg] ;DaGwdfsfg'g g} ag]sf] 5}g jf
sfg'g t 5 t/ sfg'g lljwfhgs 5 eg] To:tf] s/ ;DaGwL
sfg'gsf] k|of]hg / JofVofhlxn] klg s/bftfsf] favor df ug'{
kb{5 gls /fHosf] kIfdf, of] s/ ;DaGwL sfg'gsf] JofVof /
Joj:yfsf] dfGo l;4fGt xf] ."
Withholding Taxation on Retirement Payments

Relevant Provisions of the Act:

**-!_ sf] Joj:yfM

afl;Gbf JolQmn] g]kfndf ;|ft] ePsf] Jofh, k|fs[lts ;|ft] , ef8f,
/f]oN6L, ;]jf z'Ns, sldzg jf ljqmL jf]g; / cjsfz e'QmfgL
sf] /sd e'QmfgL ubf{ s"n e'QmfgL] /sdsf] kGw| k|ltztsf b/n]
s/ sL ug'{ kg]{5 .
**-!_ sf] k|ltaGwfTds jfSofz+ sf] v08 -!_M
g]kfn ;/sf/ jf :jLs[t cjsfz sf]ifaf6 ePsf] cjsfz e'QmfgLsf]
xsdf bkmf ^% sf] pkbkmf -!_ sf] v08 -v_ adf]lhd u0fgf
ul/Psf] nfedf kfFr k|ltztsf b/n]
**-@_-u_ sf] Joj:yfM
:jLs[lt glnPsf] cjsfz sf]ifaf6 nfe e'QmfgL ubf{ nfe /sdsf]
kfFr k|ltzt .
23. Income Tax Manual has clarified that the withholding
tax rate from payment of contributory fund is 5% and
that from non-contributory fund is 15%. There exists
anomaly in practice which is discussed in this article.
Withholding Tax Issues in Defined Benefit Plan (say,
Gratuity) Payments
24. There is no debate on how tax should be withheld in
the payments from Contributory Funds. 5% of the
amounts derived from actual payment from approved
retirement funds deducting higher of 50% of payments
or Rs. 500,000 is withheld at the time of payment. The
debate or lack of clarity is basically on the payments
from Non-contributory Funds.
25. To enter into the matter of withholding tax issues in
Defined Benefit Plan Payment to employees at the
time of retirement, we shall first look into mechanism
of payments of Defined Benefit Plans that are basically

TAXATION

of non-contributory in nature.
26. The mechanism of payments route through the
arrangement of tax planning to both the employer
(entity) and the employee. The entity can claim the
provision made for the Defined benefit Liability if the
amount is deposited in ARF as explained in paragraph
22. The mechanism allows the employer to pass on
the benefit of return on plan asset to the employees of
organization. We shall discuss on different modality
of deposit of plan asset and payment to employees
under such modalities and conclude on the withholding
tax rate applicable on that. The two modalities of
Defined Benefit Plan Liability payment to a retired
employee are as follows, the details of which is
discussed on each of the heading later in this article:
a.

Payment through a Fund maintained at Approved

Retirement Fund

b.

Payment through other than Approved Retirement

Fund

Payment through a Fund maintained at Approved

Retirement Fund
27. As explained in Paragraph 12, the employers deposit
the amount in approved retirement fund. There are
two mechanisms as explained in Paragraph 28 & 29
of depositing the amount in the Fund. One such
mechanism is deposit of liability amount in the
individual account of beneficiaries (i.e. individual
employee) by making the Defined Benefit Plan Liability
accrued to him/her treating the amount as if it is
contribution to approved retirement fund by the
employer. Other mechanism is maintenance of a
employer level single account in RF for total Defined
Benefit Plan Liability.
Payment of Liability in ARF in individual account of employee
28. Some of the employers (organization) calculate Defined
Benefit Plan (say, gratuity) Liability accrued to each
of the employees each year and the additional amount
accrued for the year is treated as if the amount is the
contribution of Employer in a Retirement Fund. The
amount is included in income of the employee and
treated like that for Provident Fund. In this case, the
payment at the time of retirement is from the
contributory fund and withholding of tax at 5% on the
payment less higher of 50% of payment or Rs. 500,000.
The practice of withholding tax complies the provision
of the Income Tax Act.

Maintenance of Employer Level Single Account & Payment

from that Fund
29. The other modality is maintenance of single employer
level account for the Plan Asset in an Approved
Retirement Fund. The Fund balance represents the
total Defined Benefit Liability accrued to the employer.
As explained in Paragraph 11 and 12, every year the
employer deposits the additional liability accrued to
the organization for the employees on roll at such
fund. The final payment at the time of retirement is
done from the balance at that fund. The Approved
Retirement Fund makes the final payment deducting
tax at 5% on the payment less higher of 50% of payment
or Rs. 500,000.
30. The auditors of approved retirement funds, such as of
Citizens Investment Trust & other Retirement Funds,
opines that the retirement fund shall withhold tax at
15% on the actual payment amount since the payment
is made from a Non-contributory Fund. However, the
practice is withholding of tax at 5%.
Proposition in favour of 5% WHT rate
31. The proposition in favor of 5% withholding tax rate
advocates that payment is made from Approved
Retirement Fund (ARF) and the ARF cannot withhold
tax at 15%. The party to this proposition explains the
requirement of Section 65 of the Act and argues that
the tax is withheld as per the provisions of that Section.
Section 65:

cjsfz e'QmfgLx? M
-!_ s'g} k|fs[lts JolQmsf] s'g} :jLs[t cjsfz sf]ifdf
/x]sf] lxtaf6 ePsf jf g]kfn ;/sf/af6 ePsf]
cjsfz e'QmfgL cfo u0fgf ug]{ k|of]hgsf] nflu b]xfo
adf]lhd x'g]5 M
-s_ ;f] sf]ifdf /x]sf] lxt afkt ;f] sf]ifn] u/]sf cjsfz
e' Q mfgLx?nfO{ cfodf ;dfj] ; ug' { kg] { 5 , /
-v_ v08 -s_ df h'g;'s} s'/f n]lvPsf] eP tfklg olb
To:tf] e'QmfgL Psd'i7 ?kdf ul/Psf] 5 eg] o;/L
ul/Psf] e'QmfgL /sdaf6 ;f] e'QmfgL /sdsf] krf;
k|ltzt jf kfFr nfv ?k}ofFdWo] h'g a9L x'G5 ;f]
/sd 36fO{ x'g] e"QmfgLnfO{ ;f] k|fs[lts JolQmsf]
u}/ Jofj;flos s/of]Uo ;DklQsf] lg;u{af6
k|fKt nfe dflgg]5 .
The Nepal Chartered Accountant

September 2014

45

TAXATION

-@_ s'g} k|fs[lts JolQmsf] s'g} :jLs[lt glnPsf] cjsfz

sf]ifdf /x]sf] lxtaf6 ePsf] nfe u0fgf ug]{ k|of]hgsf
nflu b]xfo adf]lhd x'g]5 M
-s_ afl;Gbf JolQmaf6 /sd e'QmfgL ul/Psf]df
clGtd ?kdf x'g] s/ sLsf]] ?kdf ;f]
lxtflwsf/L pk/ ;f] /sddf s/ nfUg]5, /
-v_ u}/ afl;Gbf JolQmn] /sd e'QmfgL u/]sf]df ;f]
lxtflwsf/Lsf] cfo u0fgf ubf{ ;f] /sd ;dfj]z
ug'{ kg]{5 .
:ki6Ls/0f M o; bkmfsf] k|of]hgsf] nflu :jLs[lt
glnPsf] cjsfz sf]ifdf /x]sf] lxt afkt ePsf]
nfe eGgfn] :jLs[lt glnPsf] cjsfz sf]ifnfO{ ;f]
sf]ifdf /x]sf] lxt afkt lxtflwsf/L k|fs[lts JolQmaf6
a'fOPsf] cjsfz of]ubfgx?sf] /sdeGbf ;f] sf]ifaf6
;f] JolQmsf] lxt afkt ;f] JolQmnfO{ ul/Psf] cjsfz
e'QmfgL a9L eP o:tf] a9L eP hltsf] /sd ;Dg'
k5{ .
t/ lxtflwsf/Lsf] of]ubfg gx'g] s'g} sf]if -gg\
sG6La'6/L km08_ af6 ePsf] e'QmfgLnfO{ :jLs[lt glnPsf]
cjsfz sf]ifdf /x]sf] lxt afkt ePsf] nfe dflgg]
5}g .
32. The party to this proposition also argues the
responsibility of identification of the nature of the
fund, whether contributory or non-contributory lies
upon the employer and the approved retirement
funds do not have any right to withhold tax at 15%.
This argument is valid and is in line with the essence
of the Act.
Crux of the Issue & Proposition in favour of 15% WHT Rate
33. In this context, the tax practitioner and the employers
including ARF and employees have failed to catch
the crux in the modality. The matter of 5% rate of
Withholding Tax when making the payment from
Approved Retirement Fund is correct. But the question
is: Is it really the Approved Retirement Fund that is making
the payment or is it the employer making the payment of
Defined Benefit Plan Liability from some earmarked
investment? The actual question is the identification
of person making the payment.

46

The Nepal Chartered Accountant

September 2014

34. Just a glimpse of what we explained in preceding

paragraphs:
In case of Defined Benefit Plan Liability, the plan asset
(i.e. balance maintained at employer level single account)
is an investment made by employees as "Sinking Fund"
to address the possible significant cash outflow at the time
of retirement of employees. The plan asset may be invested
anywhere, be it an approved retirement fund or government
bond or fixed deposits of Banks & Financial Institutions
or any other instruments. The purpose is to manage fund.
In the context of Nepal, investing the plan asset in Approved
Retirement Fund is for tax benefit (arrangement prescribed
by Income Tax Manual for deductibility of liability provision
for tax purpose) by the employer. The Tax Authority does
not permit the provisions as expenses if the amounts are
invested in any other form of instruments.
35. Let's move towards the question of the identification
of person making the payment. The writer of this
article opines that the payment is made by the
employer (the employee of which is going to be
retired) not by the Approved Retirement Fund. There
is valid ground and justifications to favor the
proposition made by the writer. In this payment
modality, the employer calculates the actual Defined
Benefit Plan (say, gratuity) liability accrued to the
employee at the time of retirement as per the
prevailing law and internal regulation, or to fulfill
legal or constructive obligation. The employer, then,
makes a request to the approved retirement fund to
release such fund as mentioned in the letter to the
employee mentioned in that letter. Just a reminder of
mechanism to make payment to creditors through bank
transfer- A person cuts a cheque, orders bank to make
payment to someone- holder or any other- and the bank
makes the payment as per the order. In this case, is it the
bank who makes payment to the holder or is it the person
cutting cheque who makes payment? The fact is the person
cutting the cheque is making the payment and the bank
acts as agent. The bank is actually making the payment to
the person cutting the cheque by debiting his account. The
same is the case while making payment of Defined
Benefit Plan Liability to an employee by an employer.
The employer makes the payment and the Approved
Retirement Fund acts as an agent.
36. Let us explain other matters to support this
proposition: The Liability approach. The liability of
the employer does not extinguish just because it

TAXATION

deposits the amounts calculated for Defined Benefit

Plan Liability in Employer Level Single Account
maintained at Approved Retirement Fund. But in
case the payment is of Defined Contribution Plan
Liability- the amount is deposited in individual
account and the employer does not bear any liability
for loss of the fund balance due to the insolvency or
otherwise of the Retirement Fund once the amount
is deposited in the account. In case of Defined Benefit
Plan Liability, the employee's right to receive the
payment establishes when the employee resigns from
the employment. That means, the employer cannot
transfer the risk of loss to employee merely
transferring the amount in an account maintained at
Approved Retirement Fund. If the mechanism is as
explained in Paragraph 28, the matter is different and
the employer is relieved from liability of compensation
once it is deposited though the legal basis of that
arrangement is also questionable and it is up to the
employers to justify if the employees challenge the
arrangement in competent court seeking their right.
37. In case of Employer Level Single Account for
investment of Defined Benefit Plan Liability, the
employee does not bother to ask how the fund is
managed to make his retirement payment. It is of no
concern of employee to know the management of
funds for his receipts- either that is made through normal
operational cash flow of the employer or through funds
managed for that purpose. The payment through
Approved Retirement Fund or otherwise is just a
mechanism to discharge the liability by employer and
the payer at the time of retirement is employer, not
ARF.

Fund.
What if the Plan Asset is deposited into individual account of
each of the employees maintained at Retirement Fund without
making it Contributory? Does that relieve the responsibility of
employer to withhold tax and the responsibility passes on to
Retirement Fund?
40. After going through all the matters discussed in this
article, it is an obvious question that the employer
may make an arrangement to deposit an amount in
individual account of employee maintained at
Retirement Fund without making it contributory. The
answer is: the arrangement cannot be made without
making it contributory. This is principally wrong and
violates the provision of Sec. 8 (2) (Cha) of the Income
Tax Act that requires an employer to include the
amount contributed by the employer in a Retirement
Fund account of an employee. This arrangement is
in substance the contribution of employer in
Retirement Fund Account of an employee. The matters
of Withholding Taxes in case of this arrangement are
already discussed in Paragraph 28 of this article.
41. Even when the employer deposits the amount in
individual account of employee maintained at
Retirement Fund and does not make it contributory,
the arrangement is treated as "Tax Avoidance
Arrangement" and the tax authority has every right
to exercise the power given by Section 35 of the Act,
i.e. application of General Anti Avoidance Rule. The
employers are themselves responsible for the
outcomes of the application of said rule by Revenue
Authority.

38. The explanation in Paragraph 34 to 36 justifies that

the payment is made by the Employer and the
Approved Retirement Fund acts as agent of the
employer.
39. This concludes that the Withholding Tax Rate for
non-contributory Defined Benefit Plan Liability at the
time of payment to a retiring employee is 15% as the
actual payer- true payer- is the employer, not the
approved Retirement Fund. It is the responsibility of
the employer to withhold tax at 15% at the time of
retirement of its employee on all such Defined Benefit
Plan Liability. The responsibility to withhold tax is
not passed on to the Retirement Fund merely because
the employer invests its Plan asset in the Retirement

The Nepal Chartered Accountant

September 2014

47

TAXATION

Conclusion

42. It is concluded that the existing practice of withholding

of tax at 5% on Non-contributory Defined Benefit
Liability Payment is not in line with the requirement
of Income Tax Act. The person responsible to withhold
tax (i.e. employer) has not fulfilled its obligation and
the person who has acted merely as agent (i.e.
Retirement Fund) is currently withholding the tax.
The employers are required to address the issues so
as to avoid the action of Revenue Authority when the
avoidance scheme is established.

48

The Nepal Chartered Accountant

September 2014

OTHER

A Member in Practice and Service Opportunities and Challenges

Background
Irrespective of his selection
whether to go for practice or
profession, ultimately he is
Chartered Accountant, a
dignified professional and a
highly recognized profession in
the country and across the globe.
It is his responsibility to live with
and maintain the dignity of
glorious profession.

CA. Bishnu Prasad Bhandari

CA. Bhandari is Member of ICAN

Once a person is qualified as

Chartered Accountant (CA) many
hopes and expectations trigger in his
mind. A lot of things crop up whether
to go to service or in practice. Few
hopes,some expectations, dilemmas,
confusion and so on. A person should
do the things wherein he enjoys the
most. Before making the decision, he
has to take into consideration his own
priority. Priority here means he has
to objectively define his own goal as
to whether to be the practitioner or
the service holder. It's the long term
objective in which he has to be very
clear in his mind. He has to be very
clear in all aspects like his personal
targets, professional targets, financial
targets, growth targets and so on. The
foremost challenge faced by a fresh
Chartered Accountant is to choose
between practice and job. A lot of
opportunities come his way and at
this point of time, he has to make a
very careful well thought decision as
to what opportunity he would be able
to capitalize the best. Some may call
it the Problem of Plenty, while others
may refer to it as a Plethora of
Plausibility. Whatever opportunities
present themselves, one has to look
for several factors like his satisfaction,
professional growth, and
remuneration. This profession is based
on faith and competence. Both of these

skills, more or less, have a time value

attached to them which is why a
newly qualified CA takes some time
to settle. What a newly qualified CA
must have is the patience to endure
those initial days, and in the process
he must acquire skills that would help
throughout his professional life. This
write up is trying to summarize
opportunities and challenges of both
member in service and practice.

Opportunities
The number of Chartered
Accountants in the country is very
few (747 as on date). No doubt, there
is high demand. With the
liberalization of economy and
promotion of foreign investment,
opportunity for the Chartered
Accountants is ramping up. Foreign
companies setting up their business
in Nepal, require compliance with
the laws and regulations wherein
Chartered Accountants can meet the
expectations of such corporates.
Besides traditional services of book
keeping and auditing, they can add
value to the business with innovative
and creative works. The qualification,
education and experience provides a
foundation of knowledge, skills and
professional values that enables them
to continue to learn and adapt to
changes throughout their professional
lives.

The Nepal Chartered Accountant

September 2014

49

OTHER

Followings are some of the avenues of work for

Chartered Accountants;
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

Accounting
- Cost Accounting
- Convergence with IFRS
Assistance to Government
Audit, Assurance and related services
Corporate Laws
Corporate Governance
Direct and Indirect Taxation
Financial Market and Investor's Protection
Government Accounting and Consultancy
Information Technology and Computer Software
Related Services
Insurance and Pension
Internal Audit
Management Audit
Management Services
Enterprise Resource Planning
Transfer Pricing
Job Avenues
- Private Sector
- Public Sector
- Government Departments
- Non-profit organizations (NPOs)
- Co-operative Sector
- Research Bodies
- Global Organizations
- Accounting Firms and Consultancy Services

(The list extracted from the publication "Professional

Opportunities for Members - An Appraisal, 2009" www.icai.org)

Challenges
Over the past few years, it has witnessed unprecedented
economic advancement and growth, which has resulted
in the globalization of the world's economies and has
opened up the world's economies. This wave of
globalization and economic progress has resulted in huge
opportunities and potential for businesses to expand their
footprint all over the world. All of this has resulted in a
huge demand for professional services. The changing
economy has resulted in a complete change in the operating
dynamics of professionals. With the increasing demand
of professional services, professionals like Chartered
Accountants, are facing new challenges and new burdens
every day.
Few challenges faced by Chartered Accountants in today's
scenario are stated below;

1. Keep Up-to-Date Information of the

Laws and Amendments
50

The Nepal Chartered Accountant

September 2014

Laws and regulations of the country keep on changing

with the necessity of business. A professional
Chartered Accountant has to be well aware on the
recent amendments so that he can meet the
expectation of his client.

2. Increasing Demand of IFRS

International Financial Reporting Standards (IFRS)
are designed as a common global language for
business affairs so that company accounts are
understandable and comparable across international
boundaries. They are a consequence of growing
international shareholding and trade and are
particularly important for companies that have
dealings in several countries. They are progressively
replacing the many different national accounting
standards. It deals with the rules to be followed by
accountants to maintain books of accounts which are
comparable, understandable, reliable and relevant as
per the users internal or external. There is a challenge
to Chartered Accountant to keep him aware and well
equipped with emerging needs of clients.

3. Maintaining Professional Ethics

Professional ethics are codes of practice that have
been laid down by bodies governing the profession
to ensure that the highest standards of integrity and
professionalism are maintained in the profession.
Each professional must ensure that the ethics and
codes laid down in that profession are followed. A
professional is a person who is specially trained and
possesses specialized skills and knowledge. He must,
in providing his services, adhere to the highest
standards of ethics to ensure that not only the interests
of his client are safeguarded but also that standard
of his profession are maintained.Though it is
important in today's time to retain clients and expand,
a professional must never forget his duties and must
always carry out the same within the prescribed
boundaries.

4. Compliance with Laws and Regulations

Every business is abided by the laws and regulations

of the country in which it operates. With his
specialized knowledge and skills, a Chartered
Accountant has to advise to his clients in such a
manner that the applicable laws and regulations are
complied with. In this context, he has to be cautious
on the compliance.

OTHER

5. e-Knowledge and Updates

Advancement of Information Technology (IT) has
given rise to big challenge everywhere and a
professional CA is not an exception. Understanding
complex IT environment in which clients are
functioning (SAP, Oracle etc) and management of
database for ready availability of information is a
real challenge. Further, understanding how the
network environment affects the internal control
systems which generate accounting and financial
data is another challenge.

6. Individual Development and Human

Resource Management
Continuous training and development is prerequisite
for a Chartered Accountant. Retaining talent and
management staff turnover is another challenge.

case of practice
2.

Since the number of clients grow slowly and gradually,

there may be irregular income in initial years

3.

As he has to set up his office and manage expenses

there is high level of initial capital outflow

4.

Relative to service, future growth in practice is not

that much certain and dependent on potential,
opportunity and knowledge

Member in Service - Pros & Cons

Once a person is qualified as Chartered Accountant and
become the member of the professional body like The
Institute of Chartered Accountants of Nepal (ICAN), he
may seek for the job and join the industry. Before joining
the industry, he has to take into consideration his own
priority.
Following points may help to decide him to go for
the service.

Member in Practice - Pros & Cons

A member equipped with his vast knowledge and
experience can serve to the profession in various forms.
Below are some points which will be deciding guideline
to select practice.
Following points may help to decide him to go for the
practice.
1.
2.
3.

4.

5.
6.
7.

A member in practice is independent and can be

leader in the profession
He will be having multidimensional knowledge
Personality development and wider network go side
by side as he meets and interacts with wide range of
people
As he has to serve his clients, abreast of information
and knowledge may be prerequisite which will be
continuous learning
Compared to service a member in practice has more
flexibility
Individual recognition to the society as a professional
increases
Could be regarded as the contributor to the society
and nation at large

Followings are the points wherein he may

have to think over while going for the
practice
1.

Trust and competence are of utmost importance to a

professional. It takes longer period to gain them. The
transitional period and gestation period is long in

1.
2.
3.
4.

Future growth is relatively certain

Regular income
No capital investment
Promotions are based on yearly reviews

Followings are the points wherein he may

have to think over while going for the services
1. Knowledge is limited to the areas in which one is
responsible for
2. There is lesser flexibility
3. Interaction is with the same set of people in office
4. Departmentalization limits one's exposure to various
areas
5. Independence is subject to one's position in the
industry

To Sum Up

Every human being has his own willingness and

expectations in his life. What is important for one individual
may not be important for another. One thing to be noted
is that if an individual person objectively defines his
objectives and goals in life, he has to act upon them, which
ultimately increases the probability of success in his life.
Irrespective of his selection whether to go for practice or
profession, ultimately he is Chartered Accountant, a
dignified professional and a highly recognized profession
in the country and across the globe. It is his responsibility
to live with and maintain the dignity of glorious profession.

The Nepal Chartered Accountant

September 2014

51

NEWS

News
Oath Taking Ceremony

He thanked all the stakeholders such as individuals, entities

and the institutions for their support for making his tenure
successful.

Hon'ble Finance Minister Dr. Ram Sharan Mahat Lighting the Lamp
in the Ceremoney

The newly elected president CA. Narendra Bhattarai and

Vice President CA. Prakash Lamsal took oath of office for
third tenure of sixth council on 18 July 2014 for fiscal year
2071/72 in the function. The President of ICAN CA.
Mahesh Kumar Guragain welcomed the Chief Guest Dr.
Ram Saran Mahat, Finance Minister of Nepal in the
program with badge and bouquet. Dr. Mahat formally
inaugurated the program by lightning the lamp in the
program. President CA. Guragain welcomed Chief Guest,
Guests of Honor and other participants in his welcome
speech.

Newly Elected Presidnet CA. Narendra Bhattarai Taking Oath of Office from
Auditor General Mr. Bhanu Prasad Acharya

CA. Narendra Bhattarai, the newly elected President of

ICAN took oath of office and secrecy from Auditor General
Mr. Bhanu Prasad Acharya. Before being elected as a
President CA. Bhattarai performed his responsibilities as
a Vice President of 2nd tenure of 6th Council. To
administrate as a President, CA. Mahesh Kumar Guragain
handed over his responsibilities to CA. Narendra Bhattarai
by garlanding President Medallion.

Newly Elected Vice Presidnet CA. Prakash Lamsal Taking Oath of Office from
President CA. Narendra Bhattarai
ICAN President CA. Mahesh Kumar Guragain Speaking on the occasion

He highlighted the key achievement made in his

presidential tenure and various aspects of the program.

52

The Nepal Chartered Accountant

September 2014

CA. Prakash Lamsal, newly elected Vice President of ICAN

took oath from President CA. Narendra Bhattarai. Before
being elected as a Vice President CA. Lamsal performed
his responsibilities as a council member of 2nd tenure of
6th Council.

NEWS

Hon'ble Finance Minister Dr. Ram Sharan Mahat Releasing the

Strategic Plan for 2014/15-2016/17

Finance Minister of Nepal Dr. Ram Sharan Mahat released

the strategic Plan for 2014/15 to 2016/17 of Nepal Chartered
Accountants. On the occasion he said that the Institute
and its members can contribute for the economic
development of the country.
In the program President CA. Narendra Bhattarai thanked
all the council members for electing him unanimously as
a President of the Institute. He hoped and seek for the
cooperation from Council Members, Past President, staff
of the Institute and stakeholders in making his tenure
successful. He presented Annual Work Plan, Policy and
Program for the development of accounting Profession
and expressed his commitment to give continuity to the
unfinished activities of the previous year.
South Asian Federation of Accountants (SAFA) President
CA. Subodh Kumar Agrawal praised the ICAN for
achieving fast development and expressed the hope that
the Institute can contribute a lot for for the development
of accounting Profession. He mentioned that SAFA is
always ready to support its member's countries.
In the speech the Auditor General Mr. Bhanu Prasad
Acharya appreciated the contribution of ICAN towards
the development of the accounting profession and
expressed commitment on behalf of Office of the Auditor
General to support for the cause of the profession. He
suggested the institute to focus monitoring activities,
implementation of Code of Ethics, and full initiation in
implementing accounting and auditing standards. Similarly
he also suggested maintaining strengthen the relation with
stakeholders and providing suggestions to the Government
in the area of accounting, auditing so as to improve the
public sector financial management. Further he appreciated
the efforts of the Institute for conducting international
conference, seminar, and workshop.

Hon'ble Finance Minister Dr. Ram Sharan Mahat Delevering Speech

on the Occasion

In the occasion Chief Guest, Finance Minister Dr. Ram

Sharan Mahat, in his speech congratulated to newly elected
President and Vice- President and expressed best wishes
for the success of their tenure. He underscored the role of
accounts and accounting professional in the economic
development. He emphasized that fair and unbiased audit
not only helps to enhance trust of the society towards the
accounting profession but also contribute in creating
investment friendly atmosphere for the investors. In the
program, he further added that the writing the new
constitution and increase the economic growth are two
key challenges that the country is facing today. Speaking
on that the per capita income of the East Asian countries
is high compared to South Asian Countries because they
focused on per capita income and national income but in
South Asia gave importance to the politics. He assured
that Ministry of Finance is always positive for the
development of accountancy profession in the country.
Before closing the program President CA. Narendra
Bhattarai distributed token of love to the Chief Guest and
Guest of Honors.
Declaring the Program closed the newly elected VicePresident CA. Prakash Lamsal made his commitment to
support the President and expressed his thanks to outgoing
President for his successful tenure. He concluded the
program with vote of thanks to Chief Guest, Guest of
Honors and others for their participation in the program.

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NEWS

National BPA Award-2013

SAFA International Conference

Hon'ble Finance Minister Dr. Ram Sharan Mahat Presenting Winning

Certificate to the Winner

Conceding the occasion of oath taking ceremony held on

July 18, 2014, the national Best Presented Accountants
(BPA) Award 2013 was given to different entities.
On the occasion, the Chief Guest, Finance Minister DR.
Ram Sharan Mahat distributed the awards to those entities
who prepared best presented for annual statements. BPA
award, 2013 was given in three different categories. This
time only four entities were given awards who has been
able to score minimum marks required for the competition.
The following were declared winner and runner up in the
category of banking, manufacturing and public sector
entities.
S.
No.

Sector

1 Banking Sector
Nabil Bank Ltd. Standard Chartered
(Private and Public)
Bank ( Nepal) Ltd.

Conference was participated by the individuals and

representatives of different entities from Nepal and abroad.

Public Sector Entities Employment

Provident Fund

In the Program, Winner representative expressed the view

regarding BPA awards. It is expected that such practice
of awarding the BPA shall enhance the quality of financial
statements prepared by different corporate entities. The
evaluation of financial statements is carried out pursuant
to the criteria laid down by SAFA. The winner of the
National BPA award is nominated for the SAFA BPA
Award. ICAN has initiated the practice of awarding BPA
awards since 2003 to the best presented financial statements
prepared by companies and others those who publish their
accounts for the public consumption.

54

The Institute of Chartered Accountants of Nepal Organized

an SAFA international conference on the topic "Governance
for Creating Enabling Environment for Economic
Development" on July 19, 2014. Conference was conducted
in three technical sessions. The details of sessions,
moderators and panels is given below.

Runner Up

Winner

2 Manaufacturing and Butwal Power

Company Ltd.
General Sector

A Glimpse of SAFA International Conference on "Governance for Creating

Enabling Environment for Economic Development"

The Nepal Chartered Accountant

September 2014

Participants at 34th SAFA Board Meeting in Kathmandu

34th SAFA Board meeting was also held in Kathmandu.

Representatives of SAFA member Bodies attended the
Board meeting. In the meeting various issues were
discussed.

NEWS

Interaction Program with the President,

Biratnagar
The Institute of Chartered Accountants of Nepal, Branch
Office Biratnagar organized an interaction program with
the newly elected president CA. Narendra Bhattarai on
August 1, 2014 in Biratnagar, Morang. The chairperson of
Biratnagar Branch coordination Committee CA. Aswini
Bansal chaired the program. CA. Bansal welcomed the
Chief Guest, other guests and invitees in the program.
While speaking in the program he highlighted the current

In the workshop President CA. Narendra Bhattarai

emphasized on the role of such regional program and the
benefit to the accountants and stakeholders of the eastern
region.
In the closing session CA. Aswini Bansal stressed the need
of such regional program that helps to update knowledge
of the members and stakeholders about latest changes in
tax legislation. Workshop was concluded with vote of
thanks by RA. Prakash Narayan Chaudhary. Altogether
90 individuals of different sectors participated in the
workshop.

Inauguration of New Office Building

A Glimpse of the Interaction Program

activities, plans and programs of Biratnagar Branch. Vice

Chancellor, Purbanchal University, ICAN President,
Constitutional Assembly member, DIG of Eastern region,
Council member, Assistant CDO, Past Biratnagar Branch
Coordinator, AuDAN Regional Chairman and Biratnagar
Branch Coordinator Committee Members were present in
the program. In the program President CA. Narendra
Bhattarai spoke on the expectation gap that the stakeholders
expect from the Institute. Altogether 60 individuals
participated in the program.

Rt. Honorable President of Nepal Dr. Ram Baran Yadav Lightning the Lamp
in inaugurating the New Office Building

Chief Guest Rt. Honorable President of Nepal Dr. Ram

Baran Yadav in a special function inaugurated the new
office building at Satdobato, Lalitpur on 13 July 2014.

Workshop on Taxation, Biratnagar

The Institute of Chartered Accountants of Nepal, Branch
Office Biratnagar organized a workshop on taxation on
the topic "Amendments in Income Tax, VAT and Excise
by Finance Bill 2071" on August 1, 2014 in Biratnagar.
Workshop was conducted in three technical sessions given
below.

ICAN President CA. Mahesh Kumar Guragain Speaking in Building

Inauguration Ceremony

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NEWS

President of ICAN CA. Mahesh Kumar Guragain

welcomed Chief Guest Rt. Honorable President of Nepal
Dr. Ram Baran Yadav with batch and bouquet in an
inauguration program. CA. Guragain briefed to the chief
guest that the building has been constructed by the financial
contribution of student and member of the Institute,
assistance from the Government of Nepal. There after
Chief Guest formally inaugurated the newly constructed
building by lightening the lamp.
After the formal inauguration, CA. Suvod Kumar Karn,
Past President and the Chairman of Building Committee
appraised all the invitees about the constructions of building
and about arrangement financial resources needed for
construction.
He expressed his happiness on the completion of building
construction and thanked all the stakeholders for the
financial as well as other contribution for building
construction.
SAFA President CA. Subodh Kumar Agrawal speaking
on the occasion believed that the Institute could able to
better serve due to the building which is a milestone for
the development of the Institute and the accounting
profession.. He further said this building would be
beneficial for the capacity building of the member.

Rt. Honorable President of Nepal Dr. Ram Baran Yadav Felicitating CA.
Komal Bahaudr Chatracar

The Chairman of Building Committee CA. Suvod Kumar

Karn presented the token of love to President of Nepal,
Auditor General and SAFA President.Chief Guest Rt.
Honorable President of Nepal Dr. Ram Baran Yadav
reminded the Institute the importance of accounting and
auditing profession as well as the other role and
responsibilities of the institute for economic and social
development. Further he suggested the Institute to perform
these responsibilities in a professional and accountable
manner.
Program was concluded with the vote of thanks by VicePresident CA. Narendra Bhattarai to all invitees.

Workshop at Birgunj
The Institute of Chartered Accountants of Nepal Organized
a workshop on "Amendments in Income Tax, VAT and
Excise by Finance Bill 2071, Introduction of IFRS & Anti
Money Laundering" at Birgunj on 19 September 2014. The
workshop was formally inaugurated by the ICAN President
CA. Narendra Bhattarai. The workshop was conducted as
given below.
Rt. Honorable President of Nepal Dr. Ram Baran Yadav Speaking in the
Ceremony

In the program, Chief Guest, Rt. Honorable President of

Nepal Dr. Ram Baran Yadav distributed appreciation
certificate to the members of Building Committee, Council
Members, Past Presidents, and staff members of the
Institute who were directly or indirectly involved in
building construction. In the same program first President
and Past President of SAFA CA. Komal Bahadur Chitracar
was also felicitated.

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ICAN President CA. Narendra Bhattarai Delivering Speech in the Workshop

NEWS

Spokesman Designated
The decision of 190th Council Meeting designated CA.
Binay Prakash Shrestha, Executive Director as a
spokesperson of the Institute.

Delegation meets with Auditor General

Program was concluded in the presence of Chief District
Officer, Parsa, Mr. Him Nath Dawadi. Office head of
various entities of Parsa district and President of ICAN
were present in the closing of the program. In the program
Mr. Dawadi reminded the importance of audit and "green
ink" which is used by the auditors and suggested to carry
out the audit by maintaining the value of the green ink. In
the program, ICAN President CA. Narendra Bhattarai
highlighted the activities of the Institute and the importance
of accounting and auditing profession. Past Council
Member, RA. Krishna Poudel was also spoke in the
program.

Appointment of Board Chairperson

As per the Nepal Chartered
Accountants Act, 2053, Nepal
Government, Minister Level
decision of on 2071.03.10 has
appointed CA. Sunir Kumar Dungel
as a Chairman of Auditing Standard
Board. CA. Dhungel performed his
responsibility as President in the Institute of Chartered
Accountants of Nepal in the past.

A delegation of the Institute led by the ICAN President

CA. Narendra Bhattarai met Auditor General Mr. Bhanu
Prasad Acharya and discussed of contemporary issues like
NFRS implementation in state owned enterprises, audit
of VDCs and some other relevant issues on 29 August
2014. The other members were ICAN Vice President, CA.
Prakash Lamsal, Executive Committee members and
Executive Director CA. Binay Prakash Shrestha.

Exchange of Greetings
On the auspicious occasion of the Dashain festival a brief
program was held to exchange good wishes between staff
member of ICAN and ICAN's President and Vice-President
on September 26, 2014. The objective of the program was
to share greetings and introducing to each other. In the
program, the staff members briefed the president about
various areas of improvement and problem faced by the
Institute. The President also mentioned about the activities
performed in the past and proposed activities to be initiated.
In this occasion Vice-President CA. Prakash lamsal also
expressed his view on Institutional development.

Status of Membership and COP in Fiscal Year 2070/71

In fiscal year 2070/71 (up to reporting period) altogether
8028 members were registered in the Institute out of it 209
female and 7819 Male. In total the registered member the
number of CA member was 752 while RA was 7276. In
fiscal year 2070/71, 552 CA and 4461 RA member renewed
their membership. Out of total renewed member 277 CA
members and 3566 RA members have renewed their COP
in the same period. In the reporting period, 7950 members
were within the country 78 were in foreign countries.

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NEWS

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NEWS

Membership Renewal Status

The total number of Registered Member, Certificate of Practice holder and Auditing Firms and the status of renewal till
30 September 2014 (Aswin 14, 2071) are stated below.

Chartered Accountancy June 2014 Result

Published

Accounting Technician (AT) Examination

Conducted

The result of Chartered Accountancy Examination of

different level held in June 2014 was published on 15
August 2014. The examination was held during 1-9 June,
2014 and the level wise results is given below.

Accounting Technician examination was held in 17-21

September 2014. The total number of AT students who
filled examination forms were 16. Out of which 13 students
appeared in the exam. Accounting Technician examination
is being held in March and September every year.

Information System Audit (ISA) Result

Published
The result of Information System Audit Examination held
on 10 June 2014 was published on 26 August 2014.
According to the published result none of the examinee
were declared pass. Two examinees were appeared in the
examination.

Student Enrollment
As per the result published 272 (61.31%) out of 451, of
CAP I Level and, 132 (14.88%) out of 887 and 50 (17.01%)
out of 295 are declared pass at least a group of CAP II and
Cap III level respectively.

Membership Examination Result Published

The Institute of Chartered Accountants of Nepal enrolled

different level students in different fiscal year has
strengthened the quality of products. Growth in number
of students in different years indicates the attraction toward
chartered accountancy education. As per the record
following is the status of enrollment.

As per the provision of ICAN Rules, the Foreign Chartered

Accountancy degree holder are required to pass chartered
accountancy membership examination on Advance
Taxation and Law conducted by ICAN to obtain
membership of the Institute. According to the result
published 181 foreign CA degree holders were appeared
in the examination and out of which 28 were eligible to
get membership of ICAN. The examination was conducted
in June 2014.

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NEWS

International Participation
Bangladesh Visit
A four member delegation led by President CA. Narendra
Bhattarai visited Bangladesh from 8-10 September to attend
workshop, Conference and various Committee meetings
and Board meeting organized by the Institute of Chartered
Accountants of Bangladesh (ICAB). The other delegates
were Vice President CA. Prakash Lamsal, Council Mamber
CA. Achyut Raj Joshi and Past President CA. Suvod Kumar
Karn.

Meeting with ICAB President, Vice President

and Past Presidents
President CA. Narendra Bhattarai and Vice President CA.
Prakash Lamsal called on President, Vice President and
Past Presidents of ICAB on September 8, 2014. During the
courtesy call they obtained information on examination
and education system of ICAB.

Participation on SAFA Workshop on Impact

of BASEL-II organized by ICMAB
SAFA Workshop on impact of BASEL-II was organized
by ICAB on 8 September 2014. On the workshop Nepal,
Bangladesh, Pakistan and Sri Lanka presented their papers.
President CA. Narendra Bhattarai presented the paper
from Nepal.

SAFA International Conference: Accountants

for Growth - Perspective South Asia
SAFA International Conference on Accountants for Growth
- Perspective South Asia was organized by ICAB on 9
September 2014. The program was organized in three
technical sessions. The Topics, Paper Presenter and the
Session Chairman were as follows:

60

The Nepal Chartered Accountant

September 2014

SAFA Committee/Task Force Meeting

Various SAFA Committees/Task Force meetings were
held on 10 September 2014, which were organized by
ICAB. On behalf of ICAN, President CA. Narendra
Bhattarai attended 3 SAFA Committees/Task Force
Meetings which included SAFA Committee on Professional
Ethics and Independence, SAFA Task Force to Implement
BASEL II Report in SAARC Countries, and SAFA
Committee for Improvement in Transparency
Accountability and Governance (ITAG).

SAFA Board Meeting

SAFA Board Meeting was held on September 10, 2014. In
the meeting various reports were submitted by the
committees and Task Force. The report submitted were
discussed and approved. In the meeting various activities
were discussed for the development of SAFA and existing
provisions of SAFA and the Board discussed the main
agenda decided the followings.
i)
ii)
iii)
iv)
v)

To take note/consider Correspondence Distribution

List of SAFA Board
Confirmation of draft minutes of 34th SAFA Board
meeting held on January 21, 2014 in Colombo.
Review of the status of actions in respect of the
decisions taken earlier.
To take note of/consider Member Body Report on
the items that have arisen since the last meeting
Reports from Chairmen of the Committees

Different Committees given below presented their report

before the Board and the Board appraised the status of
projects in hand
(i)
Committee for Improvement in Transparency,
Accountability and Governance (ITAG)
(ii)
International Relations Committee
(iii) Committee on Professional Ethics and Independence
(iv) Committee on Harmonization of Fiscal and Tariff
Regimes
(v)
Task Force to Develop Strategy to Combat
Corruption in SAARC Region
(vi) SAFA Task Force to Implement BASEL II Report in
SAARC Countries

NOTICE

Member Achievements
Nepal Government, Minister Level
Decision (19 Bhadra 2071) has
appointed CA. Buddhi Prasad
Acharya as a Managing Director of
Nepal Telecom.

The Board of Director Meeting (10

Aswin 2071) of Tourism Development
Bank has appointed CA. Mahesh
Sharma Dhakal as a Chief Executive
Officer of the Bank.

Nepal Government (12 Bhadra,

2071) has appointed Mr. Tul
Bahadur Shrestha as a Registrar of
B.P. Koirala Institute of Health
Sciences

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NOTICE

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NOTICE

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NOTICE

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NOTICE

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The Nepal Chartered Accountant

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INFORMATION

The Key Observations of Auditor General's Annual Report, 2014

The Auditor General submitted his 51st Annual Report to
the President on 11 April, 2014. The Office of the Auditor
General conducted audit of 4740 entities for the financial
year 2069/70 (2012-13).These entities comprises of
government offices, constitutional bodies, security agencies,
public sector enterprises, universities and other bodies.
A comparative statement of audited amount and
irregularities of the government offices of the last three
years is as follows:
(Rs. in million)

in account
All transaction are not covered by Treasury Single
Account

Contract Management
Contract not awarded in time
Procurement not made in a transparent manner through
competitive process
Non-completion of contract in time
Actions not taken against the contractors who fail to
complete works within stipulated time
Works executed against rule through user's committee

The key observations reported in the Annual Report are

given below.

Revenue Leakage
Failure to bring potential tax payers in the tax net
Collection of revenue not made as per law
Revenue exemption given in illegitimate manner
Increased revenue arrears
Under collection of tax due to unfair presentation of
Financial Statement
Low number of tax audit
Increase in volume exemptions

Status of Public Corporations

Most of the corporate bodies facing financial loss
Risk of going concern due to negative net worth
Loan taken by corporation not in operation for
administrative expenditure

Budget Discipline
All foreign aid, including technical or commodity aid
not included in budget
Expenditure incurred from contingency budget without
allocating to specific head
Authorization not issued in time

Project Management
Noncompliance with the basis of project selection
Priority projects not implemented in a planned
manner
Non availability of sufficient budget
Foreign assistance not utilized in line with objective
Non- achievement of target
Lack of effective internal control system
Monitoring and supervision not undertaken by
responsible person
Internal auditing system not reliable
Accounts not maintained as per the accounting
standards
Non presentation of income and expenditure of
government fairly by the Consolidated Financial
Statement because all transaction are not incorporated

Non -compliance of law in virement

Expenditure incurred exceeding budget

Ownership of Responsibility
Financial transactions are not submitted for within the
period specified by law
Responsible official not initiated action in a timely
manner to settle irregularities
A number of foreign aid are not in the purview of
public auditing
Lack of implementation and monitoring of the decisions
of Public Accounts Committee
Total accumulated irregularities amount to be recovered
and reconciled is Rs. 243 billion 98 million

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A Prestigious & Reward

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Profe
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'Punantu Manasa Dhiya' means

'Purity of Mind and Clarity of Wisdom'

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