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Somaliland

Public Financial Management (PFM)


Education and Training Programme

PFM for Somaliland


Workbook 5 Audit and Control
September 2017

The Somaliland PFM Education and Training Programme is supported by:


WYG International Limited (Lead firm)
CIPFA
Michael Parry Consulting LLP
PFM for Somaliland: Workbook 5 Audit & Control

Table of Contents
1 Summary of Workbook and Learning Objectives....................................................................1
2 Concepts of Accountability, Transparency and Control........................................................... 2
Linkage between accountability, transparency and control............................................................................ 2
Accountability............................................................................................................................................ 2
Transparency............................................................................................................................................ 3
Concepts of control.................................................................................................................................... 4
Concept of audit........................................................................................................................................ 4
3 Independent Audit in the Public Sector.................................................................................. 6
The Supreme Audit Institution.................................................................................................................... 6
SAIs and INTOSAI..................................................................................................................................... 8
SAI legal and regulatory framework.......................................................................................................... 11
Types of audit......................................................................................................................................... 17
4 Internal Financial Control...................................................................................................... 20
Introduction............................................................................................................................................ 20
Framework for internal control.................................................................................................................. 21
5 Internal Audit........................................................................................................................ 25
Introduction............................................................................................................................................ 25
International Standards for internal audit.................................................................................................. 27
Relationship between internal and external audit and internal control.......................................................... 27
6 Feedback from information to policy..................................................................................... 30
Introduction............................................................................................................................................ 30
Parliament and PFM................................................................................................................................. 30
PFM and Civil Society participation............................................................................................................ 31

Table of Figures
Figure 1: Linkage between accountability, transparency and control 2
Figure 2: Accountability and agency theory 3
Figure 3: IMF Four Pillars of Fiscal Transparency 4
Figure 4: Audit and accountability 5
Figure 5: SAI within the public sector 6
Figure 6: Types of government audit 8
Figure 7: INTOSAI Auditing Standards 10
Figure 8: Regulatory structure 11
Figure 9: Relationship of SAI to other organisational entities 13
Figure 10: Three dimensions of SAI independence 15

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Figure 11: Performance (value for money) audit 18


Figure 12: Risk concepts 23
Figure 13: Internal Auditing Model 26
Figure 14: Relationship between internal and external audit and internal control 28
Figure 15: Linkage between Civil Society Participation and PFM 32
Figure 16: Opportunities in the PFM cycle for CSO participation 35

List of Tables
Table 1: Coverage and learning objective 1
Table 2: Summary of desirable features of an SAI 7
Table 3: Audit comparison 17
Table 4: Audit overview 28
Table 5: Areas of information for communication 33
Table 6: Tools for communicating with CSOs 33

List of Boxes
Box 1: Definition of fiscal transparency 3
Box 2: The INTOSAI Lima Declaration founding principles 8
Box 3: INTOSAI audit standards 10
Box 4: Definition of internal control 20
Box 5: Definition of risk management 23
Box 6: Comparison internal and external audit reporting responsibility 29
Box 7: OECD recommendations for parliamentary participation in the budget 30
Box 8: Case study CSO support action plan 34

Abbreviations

AGO Accountant Generals Office


COA Chart of Accounts
COFOG Classification of the Functions of Government
COSO Committee of Sponsoring Organisations
ESA European System of National and Regional Accounting (current version is 2010)

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EU European Union
GDP Gross Domestic Product
GFS Government Finance Statistics
GFSM Government Finance Statistics Manual (published by the IMF)
GGS General Government Sector
GOSL Government of Somaliland
IAS International Accounting Standards
IFAC International Federation of Accountants
IFRS International Financial Reporting Standards
IMF International Monetary Fund
INTOSAI International Organization of Supreme Audit Institutions
IPSAS International Public Sector Accounting Standards
IPSASB International Public Sector Accounting Standards Board
ISA International Standards on Auditing
ISSAI International Standards of Supreme Audit Institutions
MDA Ministry, Department and Agency
MoF Ministry of Finance
MTBF Medium Term Budget Framework
MTEF Medium-Term Expenditure Framework
OECD Organisation for Economic Development and Cooperation
PAC Parliamentary Accounts Committee
PEFA Public Expenditure and Financial Accountability
PER Public Expenditure Review
PFM Public Financial Management
SAI Supreme Audit Institutions
TSA Treasury Single Account
VFM Value For Money
WB World Bank

Michael Parry 2017

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PFM for Somaliland: Workbook 5 Audit & Control

1 SUMMARY OF WORKBOOK AND LEARNING


OBJECTIVES

This workbook covers two areas of the financial management cycle as described below.

Table 1: Coverage and learning objective

Topic Learning objective


Audit and control
Concepts of accountability, control and Understanding of concepts and relevance to PFM
transparency
Independent audit in the public sector Understanding of principles of audit. Candidates
will not be expected to be familiar with detailed
audit procedures or audit standards
Internal financial control Understanding the concept of internal control
Internal audit Understanding of principles of internal audit.
Candidates will not be expected to be familiar
with detailed internal audit procedures or internal
audit standards
Parliamentary scrutiny Concept and approaches to parliamentary
scrutiny and examples of how it is applied in
different countries
Feedback from Information to Policy
Parliamentary and PFM The concept of and approaches to Parliamentary
involvement in the budget process
PFM and civil society participation Understanding the concepts of transparency,
accountability and civil society participation in
PFM.
Approaches to developing civil society
participation

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2 CONCEPTS OF ACCOUNTABILITY,
TRANSPARENCY AND CONTROL

Linkage between accountability, transparency and


control
Transparency enables accountability. Without transparency, there can be no effective accountability.
Control is over all aspect of PFM, including transparency and accountability. Control is ovr both
events and actions, as illustrated in Figure 1 below.

Figure 1: Linkage between accountability, transparency and control

Accountability
Accountability requires the existence of two parties:
A who gives an account - in the public sector this is the government, public sector entity or
an individual official
B who receives the account - in the public sector this is the citizen represented by
Parliament
The concept of accountability is linked to the agency theory of government, in which citizens
entrust their money and other resources to government (their agent). The government then accounts
to the citizens for its policies and management of the country.
A similar concept of accountability can be applied in the private sector. In the case of companies, the
Board of Directors accounts to the shareholders for the use of the latters funds. This model of
accountability is represented in Figure 2 below.

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Figure 2: Accountability and agency theory

To be effective accountability must imply some power of B (the citizens or shareholders) over A (the
government or Directors). Whilst this power exists in general for both governments and companies
through the democratic process, it is difficult to apply for specific policies or management actions.
Hence, this model of accountability is difficult to operationalise effectively.
Audit and mechanisms for follow up are essential to make accountability effective, as described within
this workbook.

Transparency
1
The IMF Code of Good Practice on Fiscal transparency (updated in 2014) provides a definition of
fiscal transparency as in Box 1 below.

Box 1: Definition of fiscal transparency

Fiscal transparency is a critical element of fiscal management and accountability. It ensures that
governments have an accurate picture of their fiscal position and prospects, the long-term costs and
benefits of any policy changes, and the potential risks that may blow them off course. It also provides
legislatures, markets, and citizens with the information they need to hold governments accountable.

The IMF Code of Fiscal Transparency envisages four pillars of fiscal transparency as illustrated in
Figure 3 below.

1
http://www.imf.org/external/np/fad/trans/

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Figure 3: IMF Four Pillars of Fiscal Transparency

Source: IMF Code of Fiscal Transparency 2014


2
The OECD has also published guidance on Fiscal Transparency. This publication focuses on budget
transparency.

Concepts of control
Control is defined in the Oxford English Dictionary as the power to influence or direct peoples
behaviour or the course of events. In the context of PFM control has a specific and narrower
meaning. A common definition is the policies and procedures put into place by a business or
organization to track, manage and report its financial resources and transactions . A financial control
system as comprises three elements:
1. A set of related dollar denominated variables used by management to control an
organization, the people in the organization, the resources used by the organization
2. The people involved in establishing, maintaining, monitoring and evaluating these variables,
and
3. The process, rules and procedures that govern the establishment, maintenance and
monitoring of these variables.
Financial control will be examined in Section 4 below to apply these concepts.

Concept of audit
An external audit, often referred to as a statutory audit, has been described as the independent
examination of, and expression of opinion on, the financial statements of an enterprise, by an
appointed auditor in pursuance of that appointment and in compliance with any statutory
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obligations.

2 OECD Best Practices in Fiscal transparency 2002: http://www.oecd.org/gov/budgeting/best-


practices-budget-transparency.htm

3
Auditing Standards and Guidelines, U.K. Issued by the Financial Reporting Council

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For the government of a country the appointed independent auditor is referred to as the Supreme
Audit Institution (SAI). In Somaliland the Auditor General is the SAI.
Audit derives from the concepts of accountability - giving an account to another person. Audit
addresses two of the problems of accountability:
Audit conducted by a small group of persons overcomes the practical infeasibility of giving
every citizen access to the information needed for the exercise of effective accountability.
Audit by independent experts addresses the problem of the lack of technical skills on the part
of most citizens to be able to use and interpret financial information.
Audit provides a structured process through which accountability can be rendered. Auditors have
both access to information and the technical skills to interpret such information. The auditor
becomes intermediary in the process of accountability.
However, technical audit skills do not address the other element in the problem of achieving
accountability - the requirement for citizens to be able to exercise effective control over the
government. Since, as indicated above, this cannot be achieved directly, an elected parliament is
required to receive and take action based on reports rendered by the auditor. In many countries,
such as the UK, the role is exercised through a committee of the legislature (the UK Public Accounts
Committee). The model in Figure 4 below expands the accountability model to include audit,
Parliamentary scrutiny and Civil Society Organisations (discussed later in this workbook).

Figure 4: Audit and accountability

There is similarity between the concept of audit in the public and private sectors. In both cases, audit
is based on the concepts of accountability of those controlling resources to those providing the
resources.

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3 INDEPENDENT AUDIT IN THE PUBLIC SECTOR

The Supreme Audit Institution


A Supreme Audit Institution (SAI) is the institution responsible to the legislature (i.e. Parliament) for
auditing government activities. The SAI is called Supreme because of its responsibility to the
legislature for the activities of the government itself. The SAI should be controlled by, and report to
the legislature, in order to preserve its independence.
In Somaliland, the SAI is the Auditor General.
Key features of an SAI include:
Should be an office of the legislature (not of the executive)
Independent
Power and duty to audit government activities
Publishes reports
Provides expertise.
An overview of the role of an SAI is provided in Figure 5 below.

Figure 5: SAI within the public sector

The external audit by the SAI can be described as the independent examination of, and public
reporting on, any of the financial transactions, financial statements, or physical operations of a
government organisation, by the auditor acting in accordance with the auditors legal obligations . A
number of specific features of this definition should be noted:
The independence of the SAI is fundamental. Usually this is achieved by Constitutional
requirements, and also by ensuring the security of tenure of the government auditor, e.g. by
an appointment of the Head of the SAI for a long fixed term with no extension allowed.

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The audit examination can embrace the financial statements (certification audit), financial
transactions (compliance audit) or operations (performance or value for money audit).
The SAI expresses his opinion in a report to Parliament, which is published.
The SAIs role, rights and responsibilities are defined by law.
The SAI fulfils a unique role. The SAI should examine every government activity, and to make a
published report on his findings. According to the legal requirements, the auditor may report on
some or all of:
1. The financial statements
2. The financial transactions, or
3. The operational performance of the government organisation.
A person often referred to as the Auditor-General heads the SAI. The key features of the SAI are as
set out in the matrix in Table 2 below.

Table 2: Summary of desirable features of an SAI

Feature of SAI Description


1. Office of the Chief of Audit Office appointed by Parliament and reports to
legislature Parliament
2. Independence SAI normally defined in Constitution, Chief of Office cannot easily be
removed, guaranteed funding
3. Power and duty to Rights, duties and limits of audit responsibility defined by law. Will
audit government include all Ministries/Departments, and may include other government
activities funds, companies, and lower levels of government. Right to see all
documents and to require explanations from officers.
4. Audit of financial The auditor will always be required to audit financial transactions and
transaction financial statements of the government organisations within the
auditors mandate
5. Possible audit of Should be empowered by law to audit actual operations in terms of
operations their efficiency, effectiveness and economy, and hence whether they
have provided value for money.
6. Published reports Reports are made to parliament or the legislature of the organisation
being audited. They are published documents available to members
of the public.
7. Professional staff The senior staff of the Audit Office should be professional auditors.
They may have a background in accounting, economics, law or other
disciplines. In all cases they will receive specialist training in the
conduct of government audits.

Different ways of organising an SAI


There are four basic approaches to, or models of, government SAIs as applied in different countries.
Under these different approaches the SAI may be a:
Court which has judicial functions
Collegiate body, without judicial functions
Government Department;

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Independent Audit Office.


The approach used by different countries throughout the world varies according to the history of the
country concerned. The different approaches are summarised in Figure 6 below.

Figure 6: Types of government audit

The Somaliland Auditor General is in accordance with the independent audit office model. As
indicated below this model is closest to that envisaged in the Lima Declaration.

SAIs and INTOSAI


Supreme Audit Institutions are organised internationally into the International Organisation of
Supreme Audit Institutions (INTOSAI). The role of INTOSAI has been recognised by major
multilateral organisations, including the UN, the World Bank and the IMF. INTOSAI has set out the
4
major precepts for SAIs in the Lima Declaration of 1973.

Box 2: The INTOSAI Lima Declaration founding principles

Principle Explanation
1. Purpose and types of Purpose: Audit is not an end in itself but an indispensable part of a
audit control system whose aim it is to reveal deviations from accepted
standards and violations of the principles of legality, efficiency,
effectiveness and economy of resource management early enough so
as to make it possible to take corrective measures
Types:
Pre-audit and post audit - only post audit is essential
Internal and external audit - SAI carries out external audit and
examines internal audit
Formal and performance audit

4
This and other INTOSAI references can be found on the INTOSAI website: www.intosai.org

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Principle Explanation
2. Independence of SAIs Functional independence fundamental to an SAI. This includes:
and its members Independence of members and officials of SAI
Financial independence
3. Relationship to Should be specified in constitution
Parliament, government
and the administration
4. Powers of SAIs Powers of investigation including access to records, documents and
officials
5. Audit methods, audit Audit in accordance with self-determined programme
staff, international Audit staff should have qualifications and moral integrity
exchange of experiences
6. Reporting Empowered to report annually to Parliament
7. Audit powers of SAIs Specified in constitution. Audit should include:
Public bodies including institutions abroad
Tax audits
Public contracts and public works
Electronic data processing
Industrial and commercial enterprises with public participation
Subsidised institutions

INTOSAI audit standards


International standards for government audit have been set by INTOSAI. The INTOSAI standards
form an appropriate base for the development of government audit standards. Figure 7 below
summarises the structure of INTOSAI audit standards.

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Figure 7: INTOSAI Auditing Standards

These standards are further explained below.

Box 3: INTOSAI audit standards

Basic Postulates Follow all INTOSAI standards


Greater need for accountability
Governments must have adequate information, control, evaluation and
reporting systems
There should be accounting standards
There should be sound internal control
Organisations to be audited must be legally bound to provide all data
required for the audit process
The SAI should audit performance measures
General standards Independence - already discussed above
Competence - to properly perform the audit (see below)
Due care - the standard or professional work to be carried out
Other general standards - these include recruitment and personnel
management policies, internal quality control systems

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Field standards Adequate audit planning


Adequate audit supervision and review
Internal control - identifying and assessing internal control procedures of
the auditee
Compliance with laws and regulations - by the auditee
Evidence - the concept of audit evidence
Analysis of statements - the desk analysis of financial statements to
identify areas for further investigations
Reporting Standards SAI should produce a written report or opinion in agreed form; contains
clear recommendations; is easy to understand and free from vagueness
or ambiguity

SAI legal and regulatory framework


The operations of an SAI are contained in four layers of regulation:
The Constitution
Financial Management Legislation
Auditing Standards
Financial Regulations and procedure manuals, forms and other documentation.
In addition, the audit is by legislation and regulation, for example financial management,
procurement, tax legislation. This is summarised in Figure 8 below.

Figure 8: Regulatory structure

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Constitution
In order for the Auditor-General to have the independence required for there to be confidence that
his reports are free from government interference, it is important that the position and rights are
contained in, and guaranteed by, the constitution.
The constitutional provisions should include:
Existence: the post of Auditor-General and an SAI should be a requirement of the
Constitution.
Status: the Auditor-General should have similar status to a Constitutional Court judge.
Appointment: the Auditor-General should be appointed by the Head of State (e.g.
President) on the recommendation of Parliament.
Tenure: the Auditor-General should be appointed for a fixed term
Removal: the Auditor-General should only be able to be removed for incapacity by a
substantial majority of Parliament (any protection given to judges should also be extended to
the Auditor-General).
Standards and subsidiary legislation: the Constitution should specify that there should
be established audit standards and subsidiary legislation to regulate the operations of the
SAI.
In respect of independence, there are other aspects that should also be included in the
constitution:
Legal protection from political interference;
Financial Independence; and
Powers of Investigation and Reporting.
The guarantee of independence from political interference with adequate legal protection by
the Constitutional Court is an essential element in ensuring the independence of the Auditor-General.
It is also essential for the effective operation of the SAI, that it has financial independence and be
provided with the financial means to fulfil its mandate. Although, the salary of the Auditor-General is
normally guaranteed under the constitution, this is impracticable for all aspects of his staffing or
operational budget. This does not mean that the SAI has a blank cheque, but rather that the
government cannot restrict its operations by limiting its budget.
The most effective way to do this is for the constitution to guarantee adequate financial means; the
SAI should prepare its own budget and to submit this to Parliament (or the Public Accounts
Committee) for approval. Any unreasonable reduction of the SAIs budget proposals would, thus, be
available in the public domain. Within the agreed budget total, the SAI should be free to allocate the
funds how it sees fit.
The SAI also requires independence of access and reporting. The constitution should also ensure
that the SAI has access to all records and documents relating to financial management and that it
should be empowered to request orally, or in writing, any information that it requires.
The constitution should also empower and require the SAI to report annually and independently to
parliament, or other competent public body, on its findings, which should be published. The SAI
should also be empowered to report between annual reports on matters of national importance.
Finally, the Constitution should require that there should be subsidiary audit legislation, and also audit
standards, setting out the manner in which the Constitutional requirements will be implemented.

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Subsidiary audit Legislation


As noted above, the Constitution will require subsidiary legislation. In most cases there is a specific
Act, e.g. Public Audit Act.

Audit Standards
Auditing standards should be based on INTOSAI audit standards (see below).

Regulations
Public finance legislation usually gives the Minister of Finance the power to make Financial
Regulations and Instructions. These contain the details of how the various government systems
work, regulations being much easier to change than acts of parliament.
The absence of sound Financial Regulations and Instructions would also result in the SAI being able
to issue an unqualified certificate on the governments accounts.

Relationship between SAI and other organs of government


The diagram in Figure 9 below summarises the relationship between the Auditor General and other
institutions.

Figure 9: Relationship of SAI to other organisational entities

Parliament
The Lima Declaration describes the relationship with Parliament as follows:

The independence of Supreme Audit Institutions guaranteed by the


Constitution and by law entails their having a very high degree of initiative and
autonomy, even when they act as an agent of Parliament and undertake
audits on its instructions. The relationship between the Supreme Audit
Institution and Parliament should be laid down by the respective national
Constitution in accordance with the conditions and requirements of the
country concerned.
The Lima Declaration continues by describing the reporting process to Parliament:

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The Supreme Audit Institution (SAI) shall be empowered and required by the
Constitution to report annually and independently to Parliament or other
competent public body on its findings; this report shall be published. This will
ensure extensive information and discussion, and create a more favourable
climate for enforcing the findings of the SAI.

The SAI shall also be empowered to report between annual reports on


particularly important and significant findings.

The annual report shall cover all activities of the SAI; only in the case of
interests worthy of protection or protected by law shall the SAI carefully weigh
such interests against the benefits of disclosure.

The reports shall present the facts and their assessment in an objective, clear
manner and be limited to essentials. The wording of the reports shall be
precise and generally understandable. The point of view of the audited entity
and institutions concerning the findings of the SAI shall be given due
consideration.
A committee of Parliament (e.g. the UK Public Accounts Committee) typically considers reports of the
SAI. Such committees usually have the power to call witnesses, ministers and ministry staff, to
questions them on the SAIs findings and recommendations. The development of such a process has
greatly added to the standing and credibility of SAIs. In practice, the SAIs effectiveness may be
seriously hampered unless it has the backing of a committee representing different groups committed
to upholding public accountability. Such a committee can be expanded to include people of standing
in the community but who are not elected representatives in order to give added stature to the
committee.
All SAIs should produce audit reports on the accounts of government. Many SAIs also publish
separate performance audit reports on specific topics. The reports of the SAI are important to
Parliament in terms of both assurance that voted funds have been spent legally for the approved
purposes and that they have spent effectively and not wasted.

Government - the Executive


The Lima Declaration also makes reference to the relationship between the SAI and the government
as the Executive:

The SAI audits the activities of the government, its administrative authorities
and any other subordinate institutions. This does not mean, however, that the
government is subordinate to the SAI. In particular, the government bears full
and sole responsibility for its acts and omissions and cannot absolve itself by
referring to audit operations and to expert opinions of the SAI unless such
opinions have been delivered as legally valid and enforceable judgements.
The independence of the SAI means that the government should not be able to direct it to undertake
specific tasks. Where such power exists, it is frequently abused to the detriment of the operational
efficiency of the SAI.
However, the government should be able to request the SAI to undertake specific audit studies. As
these are likely to be areas of important national interest, the SAI should try to accede to government
requests, especially if the government provides additional resources, as long as they do not
compromise the SAIs independence or efficiency.
Good working relationships between the SAI and government ministries are essential for the smooth
running of the audit process, if only because of the help that the auditor needs in such daily matters

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as locating papers and examining files in regular use. In practice, both parties may expect more
extensive benefits where there is a spirit of positive co-operation.
All SAIs liaise with the organisation audited when compiling their reports, but there are different
procedures for obtaining formal agreement. The normal practice is for the SAI to send a draft copy
of its report to the management of the organisation audited for them to review. They will then hold
meetings to agree the facts contained in the report. Frequently, the interpretation of facts will
vary between the audited body and the SAI.

Civil society
As government is financed by taxation paid by its citizens, referred to as Civil Society The
Government should report to Civil Society on how public money has been spent. The SAIs reports is
part of the reporting process.
INTOSAI recommends that all audit reports should be published unless legislation or confidentiality
precludes publication. Any power to prevent publication should be carefully controlled and very
limited in use.

Relationship with Internal Audit


This is described in Section 5 below.

Independence
Independence of the SAI is fundamental to proper performance of its functions. Audit independence
5
can be viewed as having three dimensions , as illustrated in Figure 10 below.

Figure 10: Three dimensions of SAI independence

Organisational independence
There are a number of aspects to organisational independence.

5
Audit, accountability and government Fidelma White and Kathryn Hollingsworth, Clarendon Press,
Oxford, 1999

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The SAI should be an office of the legislature, not the executive, but is should be subject to
directions by either arm of government
The appointment and removal of the head of the SAI, the Auditor General, should be
designed to minimise political or bureaucratic involvement, and to ensure a suitably qualified
person of integrity and standing is appointed. The appointment should be for a significant
period of time. Removal should be made difficult and subject to various procedures.
The head of the SAI should have control over the appointment, removal and salary of staff
within the SAI, subject to reasonable constraints.
The budget of the SAI should not be under the control of the Executive. Achieving this is
difficult, but solutions have been found, e.g. by an Audit Commission.
The SAI should be independent of other institutions of government.

Personal independence
This requires that the Auditor General and his staff should be free from any external influence or
pressures. Equally they should avoid situations that create a conflict of interest.

Operational independence
The SAI should be able to conduct its day-to-day operations without interference from any other
government institution. It should not require permission from any organisation to carry out its work.
As part of this operational independence, the SAI should have a right to obtain any information it
requires, to receive any documentation it requires, and to interview any individual it deems
necessary. This wide power may be constrained by individual rights, but otherwise it should be
unfettered.

Independence in practice
6
INTOSAI has carried out a study surveying the situation in some 113 SAIs. This study applied
number of measures of independence, as indicated above. Its conclusions are The interpretation
and effective application of this concept and of related constitutional/statutory guarantees are very
much affected in practice by the particular political and civil society structures and systems of
countries within which SAIs operate. For example, SAI independence has little meaning in an
environment where proper checks and balances do not exist or are severely limited. It is also
dependent, to a considerable extent, on the degree of democratisation of the environment in which
SAIs evolve.

Summary on auditor independence


An effective, independent external audit service (SAI) is an essential part of the accountability cycle
to assure parliament and the public that the government has spent the funds voted to it in
accordance with the law and that it has obtained good value-for-money from such expenditure.
An effective internal audit service greatly reduces the workload of the SAI. However, it must always
be remembered that internal audit will be subject to the direction by the head of the organisation and
can never be truly independent. Accordingly, no matter how good the level of internal audit
coverage, the key role in accountability will always be the responsibility of the SAI.

6
Independence of supreme Audit Institutions (SAIs) Project - Final Task Force Report, INTOSAI,
March 31, 2001

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Types of audit
Table 3 below summarises different types of audit.

Table 3: Audit comparison

Audit area Government audit Commercial audit


Certification audit Certification of financial Certification of annual
statements produced by the financial statements.
government.
Compliance audit Compliance with government Not normally part of the
rules and regulations. audit function to ensure
compliance with any rules
other than in respect of
financial statements.
Performance audit To ensure efficiency, Not part of the audit
effectiveness and economy in function.
government activities.

The certification audit


The concept of SAIs certifying government financial statements is relatively new and follows from the
development of financial statements prepared in accordance with IPSAS (see Workbook 4).

The compliance audit


The more traditional approach to public sector auditing is the compliance audit. This leads to a
report on the extent to which the government and other public sector organisations have complied
with rules and regulations as to the processing of public money and other public goods.

The performance audit


The theme of value for money is central to the performance audit which seeks to reduce
extravagance and waste in government departments by improving their efficiency and economy in
the acquisition and use of resources. Performance audits may be required under statute (external
audit) or organizations may voluntarily institute the process (internal audit) to improve efficiency.
The object of the performance audit is to report on the extent to which the organization maximizes
the service potential (outputs) from its resources (inputs). In practice it involves an analysis of the "3
Es" (efficiency, effectiveness and economy) which are defined as follows:
Efficiency: The ratio of resources consumed to output;
Effectiveness: An assessment as to how well the output is achieving the desired results;
Economy: Appropriate resources at the minimum cost.
The performance audit is a valuable tool for control and performance evaluation within government.
There are, however, difficulties in its implementation because of the intangible nature of many
government outputs. For example, it is not easy to give precise meanings to qualities such as health,
welfare, education, particularly when the benefits may be spread over time and may also arise in a
number of different areas (externalities). Figure 11 below illustrates the relationships of performance
audit.

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Figure 11: Performance (value for money) audit

Ex ante, current or ex post audit?


The financial management cycle begins with the planning/budget process, extends through the
budget execution to accounting for transactions that have taken place. Whilst commercial audit has
focused on ex-post audit of the financial transactions, public sector audit has always been involved in
transactions at an earlier stage. For example, in many countries there is a system of pre-audit,
where transactions receive audit approval before they are accepted for processing. In Russia, audit
involvement has been described as being at three stages of the financial cycle:
An audit of the budgets
Audit of ongoing transactions
Audit of financial statements.

Ex-ant audit of planning and budget


As already noted, in some countries the auditors examine the setting of performance measures - part
of the planning process - and the assumptions underlying the budget. This is also envisaged within
the INTOSAI auditing standards. Therefore, the concepts are not new. The INTOSAI Standards refer
to the examination of draft budgets as one of a number of non-audit activities and states that such
activities provide valuable information to decision makers and should be of consistently high
quality. The Standards also state as a basic postulate that SAIs should works towards improving
techniques for auditing the validity of performance measures

Current audit of systems and procedures


There is also a precedent for auditing current systems and transaction procedures. On the one hand,
pre-audit or some comparable form of transaction approval is part of the management control
process. Although pre-audit is recognised by the INTOSAI Lima Declaration as being required in
some countries, it does not lie within a proper definition of audit, and is better regarded as part of
internal control.

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On the other hand, reviews of operational systems and procedures are clearly part of the audit, and
are included within the INTOSAI auditing Standards. This audit of operational systems and
procedures can be at either of two levels:
A review of internal control procedures to establish their adequacy and the extent to which
they can be relied upon by the auditor, and
A review of management operations and procedures to evaluate them in terms of economy,
efficiency and effectiveness.
Under the latter approach, the auditor would review the procedures for budget execution, cash and
debt management, accounting, reporting and monitoring in value for money terms.

Ex-post audit of financial and performance measures


The INTOSAI standards state that the full scope of government auditing includes regularity and
7
performance audit should include:
Financial accountability of accountable entities and government administration.
Audit of financial systems and transactions, including compliance with law and regulations.
Audit of the probity of administrative decisions.
Audit of probity and propriety of administrative decisions of the audit entity.
Performance audit of economy, efficiency and effectiveness.
This is a wide definition of the ex-post audit to include both financial and performance audit. This
accords with the approach adopted in many industrialised countries, e.g. the USA, UK, Sweden.

Audit and anti-corruption


The analysis above includes under regularity audit the audit of probity and propriety. This should
include the identification of misuse of resources, but the issue of corruption within governments is
now such a matter of concern that it needs to be addressed specifically as part of the audit.
There is widespread recognition that corruption is a significant problem in many countries, and that it
has substantial costs. Corruption increases managerial costs, leads to misallocation of resources,
slows investment, and has a negative impact on development objectives. The problem of corruption
has been recognised by multilateral agencies and governments, e.g. The World Bank, OECD, the
Group of Seven, as well as declared policies by major industrialised countries.
Auditing has a key role in the fight against corruption. Within governments, audit is the only
independent systematic, recurrent, independent examination of financial transactions for their
probity. Normally, the SAI is enshrined within the constitutional structure and has extensive powers
of enquiry and access to information. As such the SAI is uniquely placed to identify and initiate
action against corruption.

7
Auditing Standards, op cit, paras 38 through 40. Definitions are paraphrased for brevity.

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4 INTERNAL FINANCIAL CONTROL

Introduction
The definition of internal control is in Box 4 below.

Box 4: Definition of internal control

Internal control is broadly defined as a process, affected by an entitys legislative body, management,
and other personnel, designed to provide reasonable assurance regarding the achievement of
objectives in the following categories:
1. Effectiveness and efficiency of operations
2. Reliability of financial reporting
3. Compliance with applicable laws and regulations

The numbered points are further explained below.


1. Addresses an entitys basic objectives, including performance goals and safeguarding of
resources.
2. Relates to the preparation of reliable published financial statements, including interim and
condensed financial statements and selected financial data derived from such statements,
such as budgetary control releases, reported publicly.
3. Deals with complying with those laws and regulations to which the entity is subject. These
distinct but overlapping categories address different needs and allow a directed focus to meet
the separate needs.
Internal control systems operate at different levels of effectiveness. Internal control can be judged
effective in each of the three categories above, respectively, if the management have reasonable
assurance that:
They understand the extent to which the entitys operational objectives are being achieved.
Published financial statements are being prepared reliably.
Applicable laws and regulations are being followed.
Internal control can help an entity achieve its performance goals and prevent loss of resources. It
can help ensure reliable financial reporting. And it can help ensure that the entity complies with laws
and regulations, avoiding damage to its reputation and other consequences. In summary, internal
audit can help an entity better achieve its goals.
However, an internal control system, no matter how well conceived and operated, can provide only
reasonable - not absolute - assurance to management and the legislative body regarding
achievement of an entitys objectives. The likelihood of achievement is affected by limitations
inherent in all internal control systems. These include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the collusion of two or more people, and management has the
ability to override the system. Another limiting factor is that the design of an internal control system
must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs.

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Framework for internal control


Over a decade ago, the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
8
issued Internal Control Integrated Framework that has helped businesses and other entities assess
and enhance their internal control systems. That framework has since been incorporated into policy,
rule, and regulation, and used by thousands of enterprises in the public and private sectors to better
control their activities and achieve their objectives.

Components of Internal Control


Internal control consists of five interrelated components. These are derived from the way
management runs its activities, and are integrated with the management process. Although the
components apply to all entities, small and mid-size entities may implement them differently than
large ones. Its controls may be less formal and less structured, yet a small company can still have
effective internal control. The components are:
1. Control Environment The control environment sets the tone of an organization, influencing
the control consciousness of its people. It is the foundation for all other components of
internal control, providing discipline and structure. Control environment factors include the
integrity, ethical values and competence of the entitys people, managements philosophy and
operating style, the way management assigns authority and responsibility, and organizes and
develops its people; and the attention and direction provided by the legislative body.
2. Risk Assessment Every entity faces a variety of risks from external and internal sources
that must be assessed. A precondition to risk assessment is establishment of objectives,
linked at different levels and internally consistent. Risk assessment is the identification and
analysis of relevant risks to achievement of the objectives, forming a basis for determining
how the risks should be managed. Because economic, industry, regulatory and operating
conditions will continue to change, mechanisms are needed to identify and deal with the
special risks associated with the change.
3. Control Activities Control activities are the policies and procedures that help ensure
management directives are carried out. They help ensure that necessary actions are taken to
address risks to achievement of the entitys objectives. Control activities occur throughout
the organization, at all levels and in all functions. They include a range of activities as
diverse as approvals, authorizations, verifications, reconciliations, reviews of operating
performance, security of assets and segregation of duties.
4. Information and Communication Pertinent information must be identified, captured and
communicated in a form and timeframe that enable people to carry out their responsibilities.
Information systems produce reports, containing operational, financial and compliance-
related information, that make it possible to run and control the business. They deal not only
with internally generated data, but also information about external events, activities and
conditions necessary to informed decision-making and external reporting. Effective
communication also must occur in a broader sense, flowing down, across and up the
organization. All personnel must receive a clear message from top management that control
responsibilities must be taken seriously. They must understand their own role in the internal
control system, as well as how individual activities relate to the work of others. They must
have a means of communicating significant information upstream. There also needs to be
effective communication with external parties, such as suppliers and shareholders.
5. Monitoring Internal control systems need to be monitoreda process that assesses the
quality of the systems performance over time. This is accomplished through ongoing

8
Executive Summary of Enterprise Risk Management Integrated Framework (September 2004)
published by the Committee of Sponsoring Organizations of the Treadway Commission

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monitoring activities, separate evaluations or a combination of the two. Ongoing monitoring


occurs in the course of operations. It includes regular management and supervisory
activities, and other actions personnel take in performing their duties. The scope and
frequency of separate evaluations will depend primarily on an assessment of risks and the
effectiveness of ongoing monitoring procedures. Internal control deficiencies should be
reported upstream, with serious matters reported to top management and the legislative
body. An internal auditing function is often established within an entity to assist in
monitoring the effectiveness and efficiency of internal control systems.
There is synergy and linkage among these components, forming an integrated system that reacts
dynamically to changing conditions. The internal control system is part of the entitys operating
activities and exists for fundamental business reasons. Internal control is most effective when
controls are built into the entitys infrastructure and are a part of the essence of the enterprise. Built
in controls support quality and empowerment initiatives, avoid unnecessary costs and enable quick
response to changing conditions.
There is a direct relationship between the three categories of objectives, which are what an entity
strives to achieve, and components, which represent what is needed to achieve the objectives. All
components are relevant to each objectives category. When looking at any one categorythe
effectiveness and efficiency of operations, for instanceall five components must be present and
functioning effectively to conclude that internal control over operations is effective. The internal
control definitionwith its underlying fundamental concepts of a process, effected by people,
providing reasonable assurancetogether with the categorization of objectives and the components
and criteria for effectiveness, and the associated discussions, constitute this internal control
framework.

Roles and Responsibilities for internal control


Everyone in an organization has responsibility for internal control.
Management The chief executive officer is ultimately responsible and should assume
ownership of the system. More than any other individual, the chief executive sets the tone
at the top that affects integrity and ethics and other factors of a positive control
environment. In a large entity, the chief executive fulfils this duty by providing leadership
and direction to senior managers and reviewing the way they are controlling the operation.
Senior managers, in turn, assign responsibility for establishment of more specific internal
control policies and procedures to personnel responsible for the units functions. In a small
entity, the influence of the chief executive is usually more direct. In any event, in a
cascading responsibility, a manager is effectively a chief executive of his or her sphere of
responsibility. Of particular significance are finance officers and their staffs, whose control
activities cut across, as well as up and down, the operating and other units of an entity.
Legislative Body Management is accountable to the legislative body, which provides
governance, guidance and oversight. Effective members of the legislative body are objective,
capable and inquisitive. They also have knowledge of the entitys activities and environment,
and commit the time necessary to fulfil their responsibilities. Management may be in a
position to override controls and ignore or stifle communications from subordinates, enabling
a dishonest management which intentionally misrepresents results to cover its tracks. A
strong, active legislative body, particularly when coupled with effective upward
communications channels and capable financial, legal, and internal audit functions, is often
best able to identify and correct such a problem.
Internal Auditors Internal auditors play an important role in evaluating the effectiveness
of control systems, and contribute to ongoing effectiveness. Because of organizational
position and authority in an entity, an internal audit function often plays a significant
monitoring role.

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Other Personnel Internal control is, to some degree, the responsibility of everyone in an
organization and therefore should be an explicit or implicit part of everyones job description.
Virtually all employees produce information used in the internal control system or take other
actions needed to effect control. Also, all personnel should be responsible for communicating
upward problems in operations, non-compliance with the code of conduct, or other policy
violations or illegal actions.
External Parties A number of external parties often contribute to achievement of an
entitys objectives. External auditors, bringing an independent and objective view, contribute
directly through the financial statement audit and indirectly by providing information useful to
management and the legislative body in carrying out their responsibilities. Others providing
information to the entity useful in effecting internal control are those transacting business
with the entity, financial analysts, bond raters, and the news media. External parties,
however, are not responsible for, nor are they a part of, the entitys internal control system.

Risk management
Fundamental to the COSO approach is the concept of internal control as managing risk within an
organisation. Risk in this context means the risk that the entity may not perform as intended.

Box 5: Definition of risk management

Risk management is a process, effected by an entitys legislative body, management and other
personnel, applied in strategy setting and across the entity, designed to identify potential events that
may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance
regarding the achievement of entity objectives
Risks are usually categorised as the likelihood of the risk occurring and effect (impact) if the event
does in fact occur. This may be represented as quadrants on a graph as illustrated in Figure 12
below.

Figure 12: Risk concepts

Examples of high impact risks:


Very large loss due to theft
Failure of a critical IT system
Examples of low impact risk:
Theft of small amount of cash

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Failure to comply with specified procedure but without any loss resulting
Risk management must be structured to take account of both the impact and likelihood of risk. Risk
avoidance has a cost and this cost must be balanced against the likelihood and potential impact of
the risk event.
As a result of many high-profile business scandals and increased awareness of the level of corruption
in many countries as noted by the Corruption Perception Index published by Transparency
International, calls have been made for enhanced corporate governance and risk management, with
new law, regulation, and listing standards. The need for an overall risk management framework for
the entity as a whole, providing key principles and concepts, a common language, and clear direction
and guidance, became even more compelling. Thus, COSO published Enterprise Risk Management
Integrated Framework in 2001 that fills this need. This framework expands on internal control,
providing a more robust and extensive focus on the broader subject of enterprise risk management.

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5 INTERNAL AUDIT

Introduction
Internal auditing is an independent, objective assurance and consulting activity designed to add value
9
and improve an organizations operations . Internal audit helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of
risk management, control and governance processes.
Internal audit is part of the management process, and therefore it should be controlled by the
managers. In government these are generally the heads of departments or ministries. Any central
direction to internal audit should be in setting standards, providing training and creating operational
documentation.
Internal auditors are employees of a particular public sector organisation. Internal auditors are
responsible to management and their duties may be determined by management. The internal
auditing function is no longer restricted to one of merely checking the arithmetic accuracy of the
records or the efficiency of the system of internal control. Internal auditing is now regarded as
including a service element whereby the auditor can assist the organization through an examination
and evaluation of its activities. The rationale underlying this thought is that the internal auditors
access to all parts of the organization enables them to perform a wider role. This is not limited to
the narrow field of compliance but is concerned with promoting efficiency in policy implementation.
It is therefore important for the internal auditor to be given the necessary status and authority to
carry out these functions and for reports to be made directly to senior government officials who can
act on the recommendations. It is not, however, the auditors responsibility to make and implement
decisions which change the current operations; their task is one of reporting and recommending.
The additional responsibilities placed on internal auditors require the acquisition of new skills. No
longer is internal auditing merely a matter of checking whether transactions have been processed in
the prescribed manner. Internal auditing is a positive process which requires an investigative and
innovative approach to the problems of government. The opportunity now exists for auditors to play
a positive role in improving the performance of government departments. The performance audit is
one way in which the problem can be tackled.

Framework for internal audit


To assist the internal auditor in maintaining a high level of professionalism, practice advisories are
issued and development and practice aids are provided by the Institute of Internal Auditors. The
framework for the professional practice of internal auditing at each level of government is
represented in the model in Figure 13 below.

9
Adapted from a Professional Practices Framework for Internal Auditing, Institute of Internal Auditors
from their www.theiia.org website

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Figure 13: Internal Auditing Model

The model is further explained below.

Level of government
Internal audit should operate at all levels of government and in all public sector entities. Within each
it is a service to the management of that organisation, but there should be some central direction of
internal audit standards and training.

Internal audit roles


Potential internal audit roles are as follows:
1. Assurance Services These services involve the internal auditors objective assessment of
evidence to provide an independent opinion or conclusions regarding a process, system or
other subject matter. The nature and scope of the assurance engagement are determined by
the internal auditor. There are generally three parties involved in assurance services: (1) the
person or group directly involved with the process, system or other subject matter - the
process owner, (2) the person or group making the assessmentthe internal auditor, and (3)
the person or group using the assessment - the user.
2. Consulting Services These services are advisory in nature, and are generally performed
at the specific request of an engagement client. The nature and scope of the consulting
engagement are subject to agreement with the engagement client. Consulting services
generally involve two parties: (1) the person or group offering the advice - the internal
auditor, and (2) the person or group seeking and receiving the advicethe engagement
client. When performing consulting services the internal auditor should maintain objectivity
and not assume management responsibility.

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Support
The central support provided to internal auditors should include:
Code of Ethics - a standard code of ethics to be observed by all internal auditors
Standards - there should be national standards for internal auditors. These can be based by
international standards developed by the IIA.
Practice and advisory - support and advice on audit operations
Development and practice aids - training and audit tools

International Standards for internal audit


10
International Standards for internal audit have been issued by the Institute of Internal Auditors . The
Standards consist of Attribute Standards, Performance Standards, and Implementation Standards.
The Attribute Standards address the characteristics of organizations and parties performing internal
audit activities. The Performance Standards describe the nature of internal audit activities and
provide quality criteria against which the performance of these services can be evaluated. While the
Attribute and Performance Standards apply to all internal audit services, the Implementation
Standards apply to specific types of engagements. There is one set of Attribute and Performance
Standards, however, there are multiple sets of Implementation Standards: a set for each of the major
types (assurance and consulting) of internal audit activity. The purpose of the Standards is to:
1. Delineate basic principles that represent the practice of internal auditing as it should be.
2. Provide a framework for performing and promoting a broad range of value-added internal
audit activities.
3. Establish the basis for the evaluation of internal audit performance.
4. Foster improved organizational process and operations.
The set standards are available from the Institute of Internal Auditors website (www.theiia.org):

Relationship between internal and external audit and


internal control
The relationship between internal and external audit and internal control is summarised in Figure 14
below.

10
International Standards for the Professional Practice of Internal Auditing, Institute of Internal
Auditors, www.theiia.org (2004).

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Figure 14: Relationship between internal and external audit and internal control

In summary:
External audit is an independent audit by the Supreme Audit Institution of the country (e.g.
Auditor General) and reports to Parliament.
Internal audit is within an entity and reports to the entity management to improve the
operation and controls of the entity.
Internal control refers to all of the procedures put in place by management to ensure the
entity performs in accordance with objectives.
Although there are major differences between internal and external audit, the types of audit
performed can and do overlap. The areas of difference and overlap are summarised in Table 4
below.

Table 4: Audit overview

Type of audit Performed by internal audit Performed by external audit


Certification of financial
X
statements
Compliance

Performance

Operational X

From the above table it is apparent that:


1. Only the certification audit is unique to the external auditor and
2. Only the operational audit is unique to the internal auditor.
3. Both internal and external auditors may perform compliance and performance audits.
However, the reporting responsibility is quite different as between internal and external audit
according as summarised in Box 6 below.

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Box 6: Comparison internal and external audit reporting responsibility

Type of audit Reporting responsibility Independence


External Reports to the ultimate owner, i.e. the Must be independent -
audit legislature independence often guaranteed
by the constitution.
Internal audit Is part of management process, and reports Cannot be independent since
to senior management. part of management.

Because of the importance of the concept of independence, external audit must remain separate from
other financial management processes. External audit may impact on the financial management
process, but cannot be a part of it. Internal audit, on the other hand, is part of the management
process.
This leads to the extent to which internal and external audit may or should coordinate their activities.
In summary:
The external auditor has an independent responsibility to Parliament. This responsibility
cannot allow reliance on the work of the internal auditor.
However, in deciding the scope and nature of audit work the external auditor may and should
take account of the extent and effectiveness of internal audit.
Internal Audit is an independent appraisal activity established within an organisation to examine,
evaluate and report on its accounting, financial and other operations with the objective of assisting
members of the organisation to discharge their responsibilities effectively. The head of a government
department is responsible for establishing systems of control to ensure the propriety, security,
completeness and accuracy of departmental transactions and accounts. Thus, internal audit is a
managerial control which functions by assessing the effectiveness of other controls.
The value of internal audit is enhanced where a central body (e.g. the Ministry of Finance) is
responsible for laying down standards and for monitoring the overall efficiency of internal audit units.

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6 FEEDBACK FROM INFORMATION TO POLICY

Introduction
The final stage of the PFM cycle is the feedback from financial and audit reports and information to
policy. Workbook 1 has shown how historic information is utilised as part of the fiscal and strategic
planning process. This Workbook is particularly concerned with issues of Parliamentary scrutiny and
civil society participation.

Parliament and PFM

Parliamentary Scrutiny
The model of accountability in Figure 4 at the start of this workbook indicated the four elements
necessary to achieve effective accountability in the public sector. One of these was Parliamentary
scrutiny. The auditor may report, but there must be a mechanism to ensure that audit
recommendations are turned into actions so as to achieve change. This is the responsibility of
Parliament to scrutinise the actions of the executive, i.e. government.
In most parliamentary democracies there will be a mechanism whereby a Committee of Parliament
regularly reviews actual expenditures against the amounts in the budget estimates. This process may
be linked to review of reports from the supreme audit institution within the country. Government
officers will be called before the committee to explain their actions and any apparent failures. Such
failures would include unauthorised budget overruns.
Therefore, the reporting system must be designed to make relevant information available. Original
budgets, supplementary budgets, and approved virements must be combined to show the final
authorized expenditures, and compared to actual expenditures. Expenditures must be presented
compared to such authority. In some countries legislation may require this comparison to be on a
cash, not accrual, basis.
In the UK the Committee of Public Accounts examines reports from the Comptroller and Auditor
General on value for money studies on the efficiency and effectiveness with which government
departments and other bodies have used their resources to meet their objectives. The Public
Accounts Committee also examines some accounts where the Comptroller and Auditor General has
qualified his audit certificate or made a specific report to Parliament. The Parliamentary Accounts
Committee usually takes oral evidence from departmental officials rather than Ministers, because the
Committee does not generally question policy. Instead, it examines the way in which policy is
implemented.
The UK approach is very good at ensuring the issues are identified and discussed. However, the
Parliamentary Accounts Committee in the UK has no power to enforce its conclusions. The
Committee must rely on the government to implement its recommendations.

Parliamentary involvement in the budget process


The OECD Guide to Budget Transparency includes a number of recommendations for parliamentary
involvement. These are summarised in Box 7 below.

Box 7: OECD recommendations for parliamentary participation in the budget

A pre-budget report serves to encourage debate on the budget aggregates and how they interact
with the economy. As such, it also serves to create appropriate expectations for the budget itself.
It should be released no later than one month prior to the introduction of the budget proposal

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The governments draft budget should be submitted to Parliament far enough in advance to allow
Parliament to review it properly. In no case should this be less than three months prior to the
start of the fiscal year. The budget should be approved by Parliament prior to the start of the
fiscal year.
Parliament should have the opportunity and the resources to effectively examine any fiscal report
that it deems necessary.
All fiscal reports referred to in these Best Practices should be made publicly available. This
includes the availability of all reports free of charge on the Internet.
The Finance Ministry should actively promote an understanding of the budget process by
individual citizens and non-governmental organisations.

PFM and Civil Society participation

Concept of civil society participation in PFM


The concept of civil society participation in PFM is relatively recent and unfamiliar to many
government professionals involved in PFM. Therefore, some definitions and explanations are
provided.
The World Bank has adopted a definition of civil society developed by a number of leading research
centres: the term civil society to refer to the wide array of non-governmental and not-for-profit
organizations that have a presence in public life, expressing the interests and values of their
members or others, based on ethical, cultural, political, scientific, religious or philanthropic
considerations. Civil Society Organizations (CSOs) therefore refer to a wide of array of organizations:
community groups, non-governmental organizations (NGOs), labour unions, indigenous groups,
charitable organizations, faith-based organizations, professional associations, and foundations .
Civil society participation refers to the participation of civil society, as defined above, in the
governance of a country or region. Citizen participation and a commitment to accountability and
transparency have become common in the international concepts of good governance. A key
element to civil society participation is participation in PFM. This is because PFM links to many
aspects of governance:
Fiscal strategy - taxation and borrowing - through the budget process
Resource allocation through the budget process
Provision of financial resources for the implementation of government strategies through the
budget execution process
Management of resources and expenditures through the accounting processes
Reporting on outcomes through financial statements and other financial reports
Reporting on financial and performance and financial issues through the audit.
These areas of linkage are illustrated in Figure 15 below.

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Figure 15: Linkage between Civil Society Participation and PFM

A number of organisations have been established to track and measure civil society participation
including:
Transparency International: https://www.transparency.org
The Open Budget Index: http://internationalbudget.org/who-we-are/
International Budget Partnership: http://internationalbudget.org/who-we-are/
Transparency International publishes a Corruption Perception Index for countries around the world.
In 2012 Somaliland was placed joint bottom out of 175 countries as the most corrupt country.
The Open Budget Initiative is a global research and advocacy program to promote public access to
budget information and the adoption of accountable budget systems. To measure the overall
commitment of the countries surveyed to transparency and to allow for comparisons among
countries, IBP created the Open Budget Index (OBI) from the Survey. The OBI assigns a score to
each country based on the information it makes available to the public throughout the budget
process. There is no score for Somaliland.
The International Budget Partnership partners with civil society organizations around the world,
leveraging their knowledge of their countrys political context, their experience navigating policy
processes for social change, and their relationships with the public in order to transform their
countrys budget system. The Open Budget Index is another attempt to score countries according to
the openness of their budget. Again Somaliland is not included in the index.

Developing civil society participation


In countries such as Somaliland the concept of civil society participation may seem academic.
However, participation can be a route to peacefully resolving conflicts. This is an important subject
with considerable research and literature. The section of the Workbook provides some indication of
the type of strategies available to develop civil society participation.

Developing parliamentary capacity for financial scrutiny


This has already been considered above.

Improving the communication of financial information by government


All levels of government should seek to improve the communication of financial information. This
may be considered at two levels:
1. What information should be communicated?

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2. How the information should be communicated?


Communication can take place at various stages in the budget cycle. Some possible areas are
indicated in Table 5 below.

Table 5: Areas of information for communication

Area of information Type of information Frequency


communicated
1. Budget fiscal and policy Information levels of taxation Annually before budget
strategies and borrowings preparation to allow time for
Sector strategies discussion

2. Medium term and annual Budget documents Annually as part of budget


budgets process
3. Audit Financial Statements Annually in accordance with Annually
IPSAS
4. Financial reports Budget execution reports Regular or continuous to
Fiscal reports provide information on progress
against budget targets
5. Audit reports Annual audit report Annually plus performance and
Certification report on financial other reports as available
statements
Performance and special reports

The second consideration is the mechanism for communicating the information in reports. A number
of communication approaches varying from very simple to sophisticated are available as illustrated in
Table 6 below.

Table 6: Tools for communicating with CSOs

Communication Communication Item Target Group


Medium
Simple technology Posters and notice boards Especially useful for remote groups
without access to electronic media
Printed materials Production and distribution of General public at all levels of society.
printed materials such as citizens
guide to the budget, bulletins,
newsletters, brochures and
leaflets.
Mass media: Articles in printed press. Will differ according to which press outlet
printed press is utilised; target groups will be private
sector; urban and rural populations;
young and older generation.
Mass media: radio Participation in nationwide Will differ according to which media
and TV broadcasting of specialised radio outlet is utilised; channels focussing on
and TV talk-shows and news and politics will have target groups
programmes on budget issues. such as academics, intellectuals, business
people. Channels focussing on music will
have young people as main target group.

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PFM for Somaliland: Workbook 5 Audit & Control

Communication Communication Item Target Group


Medium
Web Elaborating websites to include This medium will be appropriate for
links to on-line forums; and placing general public in cities where there is
web banners on other popular access to internet. Target groups will
websites. Moving towards an include the younger generation,
interactive web approach. educational institutions such as
universities and schools

Developing Civil Society Organisations


In many countries it is necessary to provide support to CSOs to develop the capability to effectively
interact with both citizens and the government. Support to CSOs may include:
Funding - to support the establishment or development of the CSO
Training - of CSO staff and members to use and analyse information and to be able to
advocate particular policies.
An action plan for a CSO is illustrated below.

Box 8: Case study CSO support action plan

Assisting the CSO to carry out a situation analysis, identifying the major target groups
needing budget policy information, and their differing needs for raised awareness.
Meetings with key representatives of the media to understand their expectations, interests,
concerns and plans concerning budget policy topics;
Analysis of the way budget topics have been covered by the media in the past, and
recommendations on improved coverage to support a more intensified and productive
interaction between government and citizens.
Arranging press conferences and other media events encouraging CSO to develop productive
working arrangements with the media;
Encouraging the CSO to develop its information materials in collaboration with
representatives of the general public and other CSOs as part of an information and
awareness team.
Assisting the CSO to implement sustainable communication plans.

In each country and for each CSO a different action plan will be required.

Increasing opportunities for CSO participation in PFM


The concept of CSO participation requires creating opportunities for participation through the budget
cycle. Some examples are provided in Figure 16 below.

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PFM for Somaliland: Workbook 5 Audit & Control

Figure 16: Opportunities in the PFM cycle for CSO participation

In each of these areas it is the responsibility of the government agencies to support and encourage
CSO participation. Very often this may be perceived as a burden involving additional work and delay.
Many officials dislike revealing information to external organisations. Nevertheless, this approach is
fundamental to the development of civil society participation.

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