World Bank Project Financial Management Guidelines

WORLD BANK PROJECT FINANCIAL MANAGEMENT GUIDELINES
ART. III, SEC. 5 (B), OF THE WORLD BANKS ARTICLES OF AGREEMENT: The Bank should make arrangements to ensure that borrowers use loan proceeds:
Only for the purposes intended With due attention to economy and efficiency
MODULE 1 Unit 1 - Tr. no. 1
WORLD BANK PFM GUIDELINES (contd)

SOME POLICIES AND GUIDELINES TO FACILITATE COMPLIANCE WITH ART. III, SEC. 5 (B):
OP/BP 10.02 Guidelines that have issued to borrowers
FARAH LACI Implementation Handbook The Project Financial Management Manual Others

OP 10.02
The definitive bank guideline on project financial management Describes the minimum fm requirements for every bank financed project Requires projects to: maintain adequate financial management systems provide annual audited financial statements have the financial statements audited Describes the remedies available to the Bank in the event of non-compliance
Bank Procedures (BP 10.02)

Describes application of OP 10.02 in the project cycle Recognizes the CFAA as a starting point
PHASES OF A TYPICAL PROJECT CYCLE

Identification Preparation Appraisal Negotiations Board Presentation Effectiveness Implementation Completion
N.B. The focus of this session is on the Financial Management activities that are performed during all eight stages
PHASES OF A TYPICAL PROJECT CYCLE (Contd)

FM activities before and during implementation are strongly influenced by: whether the organization (e.g. PIU) that will Implement the project already exists, or still has to be created whether or not FM staff have a track record of managing and accounting for an externally-funded project
PHASES OF A TYPICAL PROJECT CYCLE (contd)

There is usually a difference between borrower and lender FM requirements An example of a borrower FM requirement is ensuring availability of enough counterpart funds before requesting foreign project financing Lender staff have to ensure that the FM arrangements for the project will facilitate compliance with their organizations fiduciary requirements.
CASE 1: NEW PROJECT WITH A PROPOSED PIU

Typical case of the very first externallyfinanced project in a sector Most pre-implementation activities are conceptual FM arrangements may not be created and FM staff may not be hired hired until just before effectiveness The FM arrangements for the project need to be conceptualized and described in detail
CASE 1: NEW PROJECT WITH A PROPOSED PIU (contd)

Conceptualization of FM arrangements would include:
The structure of the project FM organization FM activities and functions The types, numbers, and terms of reference of needed FM skills When, how, and where FM staff will be hired Remuneration of FM staff
CASE 1: NEW PROJECT WITH A PROPOSED PIU (contd)

A project organization chart incorporating an FM organization chart is a good starting point for designing the FM structure Some Important Factors to Consider are:
Size and complexity of project Number of participating/beneficiary institutions Nature and geographical spread of the project Number and frequency of project transactions Sophistication and exigencies of financial reporting
CASE 2: FOLLOW-UP PROJECT IN AN EXISTING PIU

This is the easiest FM design situation PIU is a known entity with a track record The design and description of FM structure and functioning must still be as complete and detailed as in case 1 Emphasis should be on the modifications to the existing structure and skills mix that are needed to cope with new project Such modifications must be made before the new project becomes effective
CASE 3: BRAND NEW PROJECT IN AN EXISTING PIU

A situation where the borrower decides to use an existing PIU and FM staff and structure to implement a new project in a completely different sector or field of activities from that in which the PIU was previously engaged This is very rare because of the tendency for PIUs to be staffed by sector specialists This case requires greater care than case 2, because of the likelihood that the new project would involve new types of transactions, assets and liabilities
NEGOTIATIONS STAGE
The Negotiations state is when borrower and lender Agree on, among other things: Structure, functioning, staffing of the FM systems and Reporting formats These agreements are recorded in the minutes of negotiations signed by both parties Whenever practicable, project director and financial director should be included in the borrowers negotiating team (easier in cases 2 and 3) than in case 1 MODULE 1
Unit 1 - Tr. no. 13
PROJECT LAUNCH WORKSHOP

To be organized immediately after loan or credit effectiveness, but before implementation begins, it: Brings together everyone likely to be involved in project implementation Discusses lender and borrower procurement, accounting, reporting, disbursement, auditing and other FM (and non-FM) arrangements FM discussions at the workshop are facilitated by the existence of a Project Financial Management Manual (PFMM) Anticipates and resolves problems
PROJECT PREPARATION FACILITY (PPF)

Introduces pre-implementation FM problems as well as the means for providing solutions Necessitates project accounting which would have been unnecessary without it Provides the funds to recruit and pay FM staff before credit effectiveness Is very useful in case 1 projects by enabling the creation of good FM capacity well before implementation begins
BORROWER ROLE VERSUS LENDER ROLE

Pre-implementation FM activities The borrower has the primary responsibility for implementing all the FM activities The lenders primary responsibility is to ensure that the borrower carries out its responsibilities to the lenders satisfaction Borrower and lender share the responsibility for ensuring that FM arrangements are accurately and adequately reflected in the minutes of negotiations Although the lender often request the project launch workshop, it is usually organized by the borrower
FM ACTIVITIES DURING IMPLEMENTATION

Borrower is responsible for all record keeping, systems maintenance, and reporting activities Lender requires adequate borrower reporting for fiduciary purposes
FM PROJECT COMPLETION
Overall evaluation of implementation experience includes a review of FM performance throughout project life: the review will cover the following aspects of FM Planning & budgeting Internal control, including procurement & internal audit Book-keeping, accounting, IT, records management Financial reporting Independent audit opinions
PROJECT FINANCIAL MANAGEMENT (PFM) AND ITS ENVIRONMENT

The organizational structure for project implementation should reflect the complexity of the project. How a project is organized and staffed has a very important bearing on its financial management arrangements.
MAIN COMPONENTS OF A PFM ENVIRONMENT

The organizational structure of the project implementing unit Functional relationships between the various parts of the organization Clear definition of the responsibilities of each functional part and individual The quality of human resources
MAIN COMPONENTS OF A PFM ENVIRONMENT

Vertical and horizontal flows of information, recommendations and decisions Project actions based on information, recommendations and decisions The flow of funds to finance project activities The culture of the entity regarding proper financial accountability and management
PROJECT FINANCIAL MANAGEMENT (PFM) ENVIRONMENT (contd) Elements of good PFM Systems:
Planning and Budgeting Internal Controls Records Management and IT Book-keeping and accounting Financial reporting Auditing
INTERNAL CONTROL
Internal control is a process: effected by an organization, designed to provide reasonable assurance that objectives in the following areas are being achieved:
effectiveness and efficiency of operations reliability of financial and operational reporting compliance with applicable laws, and regulations
CATEGORIES OF INTERNAL CONTROL

Main categories of Internal Control Control Environment Risk Assessment Control Activity Information and Communication Monitoring
INTERNAL CONTROL (IC)

Internal control is a key component of a good financial management system. A Weak System: Endangers the security of project assets Facilitates unauthorized transactions Facilitates fraud and mistakes Leads to inaccurate and/or unreliable information Endangers the integrity of project or Business records
INTERNAL CONTROL (IC) (contd)

The Control System Environment is very important and includes:
Ethical values Competent staff Good organization methods A clear definition of responsibilities and reporting relationships A clear separation of functions

Good internal control requires an excellent IC culture.
IC culture requires: Understanding Acceptance Involvement of all project staff

Other important aspects of internal control that are sometimes overlooked : Procurement procedures Internal audit department Documentation: creation, storage, retrieval and security (i.e., Records Management)

Designing of IC system can be approached from viewpoint of: Organization of function Transactions Records/documentation Combination of all above (probably best)

Whichever approach is used, designing an IC system is essentially a matter of identifying risks in all these areas and introducing systemic measures to eliminate or, at least, minimize them. Assessment of probability of occurrence Cost effectiveness: IC system should not cost more than risk
IC SYSTEM FOR A MULTIDONOR-FINANCED PROJECT

By way of example only, a project should include: A. Project receipts
Special bank account for each donor source Prompt notification of receipt to PIU by the bank Regular and prompt monthly bank statements Monthly and prompt bank reconciliation statements, prepared by cashier, reviewed by the finance director, signed by both
IC SYSTEM FOR A MULTIDONOR-FINANCED PROJECT (contd)

B. Procurements by purchase order to be signed by everyone responsible for following:
Initiation of order Authorization Placing of order Receipt and confirmation quantity/quality Payment

C. Salaries To be carefully compiled, independently checked, and paid to authentic recipients Special procedures for authenticating payment to any sick or absent staff A monthly salary charge to the project form should be used for salary IC and accounting

D. Petty cash
To be maintained by a responsible project staff member not involved in bank cash accounting Surprise cash counts by the project director and the auditor All payments to be supported with a petty cash voucher

E. Cheque payments : Authorized signatories (of whom two must sign every cheque) Safe custody of cheque books Direct payments to suppliers by the world bank should be supported by a purchase orderlike any other procurement

F. Journal Record every transaction, including adjustments, before any entry is made in the ledger Access should be restricted to staff in charge Entries should be regularly checked by finance director

G. Ledger accounts To be maintained by qualified staff and secured from everyone else Posted daily H. Trial balance To be prepared by responsible staff and checked by the finance director monthly J. Internal auditor To perform independent reviews and checks

Documentation should be:
Accurate Complete Secure from unauthorized persons Neatly filed Easily retrievable by authorized staff Serially listed with a number appearing in both the journal and the ledger, thereby creating a good audit trail
For computerized accounting systems, all access restrictions should be imposed by means of passwords and different levels of user rights.
PLANNING AND BUDGETING (P&B)

P&B Start immediately after Project Identification, and continue until Ex-post Evaluation P&B are essential elements of financial management Project owner or borrower is responsible for P&B Lenders duty is to confirm that borrower has properly carried out this responsibility
PRE-IMPLEMENTATION P&B
PRE-IMPLEMENTATION P&B INCLUDE:
Pre-feasibility and/or feasibility study that contains details of

Project justification Market analysis Technical analysis Planning of project activities and timing Critical path analysis Project cost estimates
PRE-IMPLEMENTATION P&B (contd)

Financial analysis Economic analysis (including shadow pricing, where necessary) Cash flow planning and analysis Sensitivity analysis A financing package
A loan or grant request is based on the feasibility study
P&B DURING PROJECT IMPLEMENTATION

At this stage, P&B activities involve preparation, implementation and monitoring of: Annual and quarterly physical activities Annual and quarterly plans, including:
Procurement Receipts Expenditures Cash flow
P&B DURING PROJECT IMPLEMENTATION (contd)

One simple way to set up first annual and quarterly budget is to adopt the first years figures from the year-by-year table in the project appraisal document (PAD), or from the feasibility study. SOME TIPS:
Set up physical and financial budgets in the same format (or chart of accounts) as will be used for quarterly reporting, and Design the quarterly report in the same format as will be used for the annual financial statement

LINKING REPORTING/ ACCOUNTING/BUDGETING FORMAT
Stakeholder Information Needs Reporting Content & Frequency Accounting Systems Budget Format & Content PAD Cost Tables
The first quarter in a project life usually involve minimal activities One-quarter of annual project activities and cost may not occur in the first (or indeed any) quarter of the year
THE IMPACT OF UNCERTAINTY

No guarantee that any project plan or budget will be implemented as anticipated Primary reasons: Imperfect knowledge of future events Time: over time, even things we know, change The longer the project period, the more likely are project circumstances to change, necessitating adjustments of plans and budgets
P&B FOR UNCERTAINTY AND TIME

Techniques employed to minimize impact of uncertainty include: Contingency provisions (physical and price) Pilot projects Flexible design of project and loan, matching commitments and disbursements to varying project circumstances during implementation
P&B FOR OF UNCERTAINTY AND TIME (contd)

Post-implementation events/activities that need to be planned and/or budgeted: Arrangements for after-life of project Disposal of project computers, vehicles, other assets Future repairs, maintenance, sustainability (e.g. Roads, railways, industrial forests)
P&B FOR UNCERTAINTY AND TIME (contd)

Evaluation of project achievements The future of project personnel Continuation of activities not completed during project period (e.g. 7-year scholarship for 5-year project life) Credit closing by lender; Borrower refund of any balance remaining in special account Arrangements for final audit Ensuring availability of funds to pay for final audit Dispatch of final audit report to lender and government
ACCOUNTING SYSTEM (AS)

Decisions regarding the accounting system of a project depend on the answers to some questions: First question: why do we need an accounting system? To provide information, usually in form of reports Second question: who needs the information or reports? Several stakeholders do:
ACCOUNTING SYSTEM (AS) (contd)

Project management (PIU) Government (typical project owner) Beneficiaries Bilateral donors (e.g. USAID, SIDA, CIDA, etc.) Lenders (e.g. World Bank)
A good project accounting system should produce information that meet the needs of all stakeholders Harmonizing users information needs would help avoid setting up parallel systems to meet the need of different stakeholders

Having ascertained stakeholder requirements, the third question is: What do we need to account for? These are typically project activities and transactions, including: Receipts Commitments Expenditures Inputs Outputs Results

Project transactions are either generic or specific. Generic activities and transactions include: Receipts of government, lender, or donor disbursement Payment of salaries Procurement of vehicles and computers Payment of consultants Payment for local training workshops

Examples of transactions specific to a particular sector include:

In a health project, purchase of medicines In a rural development project, credit to farmers In an education project, purchase of textbooks In a railway rehabilitation project, purchase of new wagons
After listing what needs to be accounted for, the fourth question is:

What kinds of records are needed to account for them?


By way of illustration only, a traditional project accounting system should include: Purchase orders, receipts, check books and other similar evidence of receipt, commitment or expenditure of funds A journal for primary entry of all items (including adjustments) destined for ledger posting A petty cash book (PCB) for very small payments, with credit side analysed by project component MODULE 1
Unit 1 - Tr. no. 57

A bank cash book for each source of financing, with the credit side analysis columns by component (like the PCB) A ledger with a separate account for each component, and the debit side analysed with a column for each procurement and disbursement category (e.g. Civil works, vehicles, etc.) A fixed assets register, recording location price and date of acquisition of each project fixed asset, and divided into sections for buildings, vehicles, computers, etc.

The accounting system should help to generate at the end of each month, at least, the following: Total project expenditures Total contribution from each financier Total expenditure on each project component Analysis of all project expenditures into civil works and all other procurement and disbursement categories

Having decided on books and records to keep, the fifth question is: What entries should be made in these books on the occurrence of each transaction? It is useful to record these in the form of accounting instructions which should be part of the project financial management manual (PFMM) for all project staff.


The sixth question is: What systemic choices should we make regarding the project account? Accounting entries (single or double) Accounting basis: accrual, cash or modified version of one or the other, cash basis is:

Measurement or valuation basis: normally historical cost, unless some other basis is justified Accounting standards: the world bank prefers international accounting standards (IAS)
COMPUTERIZATION
Computerization of accounting systems does not tell us what information we need, or what to do It merely helps us to obtain faster or more easily the information we have already decided should be prepared
SPECIAL ACCOUNTING ISSUES
Certain types of project raise special issues requiring attention during the design of an accounting system: Multiple institutional participants or implementing agencies One agency implementing a project in several locations
COMPUTERIZATION OF ACCOUNTING SYSTEMS

Most world bank-financed projects are implemented in a partiallycomputerized environment For all projects, the urge to computerize is almost irresistible, and Computerization is generally encouraged by foreign financiers
REASONS FOR COMPUTERIZATION

Modernization: no one wishes to appear out-of-date Facilitates electronic data exchange with foreign financiers, all of whom are computerised Speeds up processing of accounting information Can reduce human intervention and incidence of human error
RISKS AND DISADVANTAGES OF COMPUTERIZATION

Provides training in new skills Requires special training beyond accounting Limited computer skills in developing countries Leads some project staff to believe they do not have to understand accounting Requires special care and measures to:
Reproduce the internal checks and balances of a manual system
RISKS AND DISADVANTAGES (contd)

Create a satisfactory audit trail to replace lost paper trail Requires backing up of data in event of computer crash or freeze Decision regarding computerization is best made during project preparation, so cost can be built into project Computerization strategy is highly dependent on whether and to what extent the accounts of the implementing agency are already computerized
COMPUTERIZATION STRATEGY (contd)

Possible scenarios: Case 1: the accounting system of the implementing entity has already been computerized but some modifications required for the project Case 2: the accounting system of the implementing entity has not been computerized but implementing agency has decided to take advantage of project to computerize Case 3: the the implementing entity will continue operating manually alongside a computerized project accounting system

CASE 1 PIU already has knowledge and experience of computerized system Staff may be able to modify the existing software with or without outside help New software is desirable This would involve many of the considerations applicable to a case 2 or 3 scenario

Cases 2 and 3 require implementation of a strategy designed to avoid some common pitfalls First step: understand and clearly define information required from the computerised system Distinguish between essential and nonessential attributes Appoint an adviser with experience of computerizing accounting systems of multifinancial projects in developing country
COMPUTERIZATION COMMITTEE
Set up a computerization committee to meet regularly to review the advisers progress reports and provide advice and input The committee should:
Define the precise computerization needs of the project Invite proposals from a few preselected suppliers
COMPUTERIZATION COMMITTEE (contd)

Manage the rest of process:
Decide appropriate time scales and phasing Decide the impact on the project staff Brief project staff regularly during the process Decide the staff needs and training requirements Decide technological needs and how they will be met Decide the required documentation and support organization and how they will be provided
OTHER DESIRABLE MEASURES

Put project needs in writing and require vendors to state in writing how they would respond to all needs Review all responses in detail and match them up Seek independent views, particularly from persons who have used the same package in implementing multi-donor financed projects
OTHER DESIRABLE MEASURES (contd)

Require each vendor to give a demonstration, showing how his/her package responds to all project needs Before inviting vendor proposals it is important to distinguish between mandatory and optional requirements. The mandatory requirements should be clearly communicated to vendors MODULE 1
Unit 1 - Tr. no. 75
MANDATORY REQUIREMENTS
The system must be: Capable of handling provincial district as well as headquarters transactions Multi-currency User friendly (e.g. Windows driven) Not prohibitively expensive Able to account under different bases (e.g. Cash, accrual, modified cash, modified accrual) Able to produce the PMR for the financial management initiative (formerly LACI)
MANDATORY REQUIREMENTS(contd)
Capable of providing clear audit trails Able to track actual, budget, forecast and project life per the pad Able to link financial figures to physical performance indicators as required by project Equipped with user manual or documentation Able to track and search by specific references (e.g. The journal number allocated to each transaction or by cheque number) MODULE 1
Unit 1 - Tr. no. 77
MANDATORY REQUIREMENTS (contd)

Able to drill down vertically as well as horizontally Equipped with a fixed asset/inventory management registry Capable of operating in the borrowers official language, as well as in English

Able to track and report by: Flexible reporting cycles, e.g. Month, quarter, calendar year, fiscal year, etc.
Source of program funds Loan agreement category Project components
Able to generate reports for previous periods (e.g. Lost reports) Able to customize reports within reasonable limits

Equipped with: Adequate security features (e.g. Cannot delete posted transactions, controlled access, password protection) Back-up and system maintenance procedures Self diagnostic tests to ensure integrity Adequate training facilities Adequate after sale support for resolving technical issues
POSSIBLE OPTIONAL ATTRIBUTES

The ability to:
File reports electronically to IDA Export data (e.g. To excel) Track and report on multiple projects or programs Interface with government financial management system Track and report on procurement information system, such as procurement procedure used (ICB, LCB, etc.), by contract, by source of supply, or by status
SOFTWARE SELECTION PROCESS SOME TIPS

The committee should assess: Technical and functional quality of solution Overall quality of proposed relationship Reliability of company Quality of support staff Training facilities Help desk service Documentation available Future development plans Policy for upgrades of previous version
COMPUTERIZATION
It may be prudent to run a manual and computerized system in parallel for some time, before finally abandoning manual system Even after that, there should be back up of all information and systems in electronic form
PERIODIC PROGRESS REPORTS

Projects typically produce 3 types of reports:

(i) ad hoc (ii) regular periodical progress reports (iii) annual reports
Bank-financed projects are required to submit to the bank at regular intervals, not more than 6 months, periodic progress reports, FMR FMR stands for Financial Monitoring Reports
CHARACTERISTICS OF FMR
FMR replaces the Project Management Reports (PMR), introduced by the World Bank on July 1, 1998, under the loan administration change initiative (LACI) The distinguishing characteristics of FMR are:
Distinction between project management (by Borrower) and project monitoring (by lender) New emphasis on maximum reliance on borrowers Accounting/reporting systems/format Format, content, and frequency more flexible Reflecting project size, sector, and complexity
GUIDING PRINCIPLES OF FMR

The overall objective is to provide regular information that gives necessary fiduciary assurance to the Bank FMR will be less detailed than the report prepared for project management Borrowers own system should be used as far as possible in producing FMRs
GUIDING PRINCIPLES OF FMR (Contd)

The same structure of financial information should normally be used for project planning, monitoring reports and annual audited financial statements, and implementation completion reports (ICRs) As far as possible, borrowers should not be required to provide the Bank with information already available to the Bank The requirements for financial and procurement monitoring should, as far as possible, be aligned with other bank requirements for project progress reporting and monitoring MODULE 1
Unit 1 - Tr. no. 87
GUIDING PRINCIPLES OF FMR (contd)

While the reports to be submitted to the Banks should meet certain minimum requirements, they should be flexible and customized to each project or where possible, to each country and/or sector Monitoring expenditures in relation to physical progress is a key aspect of ensuring that the project is under proper financial control Wherever possible, common reporting and monitoring arrangements should be agreed with other donors involved in the project
STRUCTURE OF THE FMR
The FMR should normally include: Financial reports Physical progress reports, and Procurement reports
FMR FINANCIAL REPORTS

Financial reports should show:

Cash inflows and outflows for the period (e.g., quarter), and cumulatively for the project life Expenditures should be reported according to project activities, not according to procurement/disbursement categories (although this may be reported as an addition) MODULE 1
Unit 1 - Tr. no. 90
PHYSICAL PROGRESS REPORT

Physical progress reports should link physical outputs or implementation progress to costs of achieving them Indicators of physical progress and outputs should be selected during project preparation, stated in the Project Implementation Plan (PIP)
PROCUREMENT REPORT
The procurement report:

shows the status of procurement of goods, works, services, and consultants compares the actual procurement performance with the plan agreed with Bank at negotiations or in a subsequent review highlights specific problems (e.g., staffing or training needs)
MATTERS TO BE AGREED AT NEGOTIATIONS

Explains deviations from plan, and proposes solutions to problems identified Format, content, frequency, and currency of reports Project outputs and other indicators for monitoring physical or other progress toward achieving project results How to deal with multiple implementation agencies, scattered project locations, and community-based project activities
ANNUAL FINANCIAL REPORTING

OP 10.02 on accounting and reporting standards for: Revenue-earning entities Non-revenue-earning entities There is no established standard or format for financial reporting by nonrevenue-earning entities
ANNUAL FINANCIAL REPORTING (contd)

Article IV of practically every development credit agreement (DCA) or loan agreement contains financial covenants, including the OP 10.02 requirement for every project to send the Bank audited financial statements within 6 months following the end of the fiscal year.
ANNUAL FINANCIAL REPORTING (contd)

FARAH discusses extensively in chapter iv how to meet the need for annual financial reporting. FARAH also presents two basic models of financial reporting: One for revenue-earning One for non-revenue-earning
PROJECTS IMPLEMENTED BY REVENUE-EARNING ENTITIES

Projects implemented by revenueearning entities typically involve onlending Bank/IDA funds from government to the implementing agency through a subsidiary loan agreement between government and agency.
PROJECTS IMPLEMENTED BY REVENUE-EARNING ENTITIES (contd)

They also usually involve the Bank requiring, not only annual financial statements of the project, but also those of the implementing agency, because: The success and viability of the project depend on the financial health of the agency Capacity building within the agency is one of the project objectives

Entity financial statements required from such projects generally include: A balance sheet - financial snapshot taken at the year end - showing assets, liabilities and equity An income statement showing income, expenses, and results of operations for the covered period

A cash flow statement showing the cash provided by and used in operations and activities during the covered period Notes on the financial statements explaining the main accounting disclosures, including risks and uncertainties affecting the organization, and any resources or obligations not recognized in the financial statement MODULE 1
Unit 1 - Tr. no. 100

Sometimes the project financial statements are integrated in the entity financial statements. In other cases they are shown as a separate attachment to the entity financial statements. Whichever solution is adopted, the Bank always requires, through the DCA, that project expenditures be accounted separately from other entity expenditures.
PROJECTS IMPLEMENTED BY NON-REVENUE-EARNING ENTITIES

It is likely that the majority Bank financed projects are implemented by government ministries (or PIUs), or other entities. Regardless of the type of implementing agency, the Bank requires financial statements to monitor project performance and utilization of the loan.
PROJECTS IMPLEMENTED BY NON-REVENUE-EARNING ENTITIES (contd)

For non-revenue-earning agencies, the main feature of the annual financial statements is the statement of sources and application of funds for the current year and cumulatively since the start of the project. Actual project expenditures should be compared with the original (PAD) or amended projections. MODULE 1
PROJECTS IMPLEMENTED BY NON-REVENUE-EARNING ENTITIES (contd)

The reporting should include the total project, regardless of funding sources for particular activities. The Bank still receives financial project statements showing only world Bank-financed activities and excluding others. This is unacceptable and contrary to OP/BP 10.02.
SOME ISSUES IN PROJECT ANNUAL FINANCING REPORTING

Application of IAS to projects in agencies that do not apply IAS This requests project reporting standards that differ from those applying to: The ministrys other business Projects reports to, say, ministry of finance Since all governments report differently, applying IAS to all projects ensures their financial statements information would be more directly comparable than if government reporting standards were applied
SOME ISSUES IN PROJECT ANNUAL FINANCING REPORTING (contd)

Even within the private sector, reporting practices vary across countries. One of the most striking international differences is between: Anglo-Saxon practice, allowing freedom in reporting format, and Napoleonic law (practised in most western Europe, French, Portuguese and Spanish speaking countries) where financial statement format must conform to a standard.

Even within the Anglo-Saxon countries, the typical UK format is different from the typical U.S.A. Format. So, in the private as well as the public sector, application of IAS facilitates matters by introducing a degree of uniformity and comparability of project financial reporting which would not exist otherwise. How to report on a project with multiple implementing agencies

Example: a capacity building project benefiting 10 different institutions, each implementing its own project component/s independently of all other. Usually, the best solution to this case is to create one small umbrella PIU, consolidate the project financial statements of all the 10 agencies in that umbrella and send only one consolidated annual financial statement to the Bank.

In practice, apart from entity financial statements, a typical world Bank-financed project produces the following annual financial statements: A statement of sources and application of funds, or A receipts and payments account, showing cash received and paid by the project

A balance sheet, always required when accounts are prepared on an accrual basis A summary of special account transactions and balance for the year, sometimes combined with, or in the form of: A special account reconciliation statement

A summary of statements of expenditure (SOEs) issued during the year, where the project is using SOEs A summary of the financial monitoring reports (FMR) issued during the year, where the project is disbursing through FMR A list of project fixed assets and, where applicable

A list of important financial commitments which, although they are not yet payable, will definitely become payable in the future, showing when payments will become due (e.g. Scholarship payments during the next 7 years). Specific financial reporting requirements vary from project to project, even though general requirements in article iv of the DCA are standard. The specific requirements are also included in financial covenants in the DCA.

For most projects, relevant grouping for annual financial reporting are determined by: Project components as presented in the PAD Procurement/disbursement categories in the DCA Under a good PFM system, projects components in the pad and disbursement categories determine:

The ledger and other accounts to maintained by the project The FMR reporting format The annual project financial statement format It is important to this bear in mind when preparing the PAD and the DCA

Note also that having the same format for both the FMR and the annual financial statements, particularly the statement of sources and application of funds, means that last annual FMR is effectively the annual financial statement.
AUDITING ARRANGEMENTS
The Bank requires borrower and implementing entity to have annual financial statements audited in accordance with standards on auditing acceptable to the Bank (OP 10.02). The audit includes: Assessment of adequacy of accounting and internal control systems Determination of maintenance of adequate documentation of all transactions Verification of eligibility of transactions
AUDITING ARRANGEMENTS
The three most common types of audit are: Financial statement audit, verification/confirmation Compliance audit, usually by internal audit, to confirm compliance with rules and regulations Operational audit, to assess performance, efficiency and effectiveness, requiring more than accounting skills
AUDITING ARRANGEMENTS (contd)

Normally Bank-financed projects require only financial statement audits. Any other type of audit shall be specifically indicated in the TORS. Distinguish between: Revenue-earning projects requiring audits of both entities and project financial statements Non-revenue-earning projects requiring audits only of project financial statements

The overall audit objective is to express an opinion on: Fair presentation of financial statement in conformity to IAS and GAAP Basis consistent with preceding year Such audits must be in accordance with international standard on auditing (ISA) promulgated by IFAC.

Professional and ethical principles, required by ISA from all auditing firms and individuals, include: Independence Integrity Objectivity Professional competence Confidentiality Professional behaviour Technical standards MODULE 1

Auditors, members of IFAC institutions or associations, generally adhere to these principles.
NON-REVENUE-EARNING ORGANIZATIONS
The Bank may accept audit of financial statements of non-revenue-earning organizations and projects by SAI, provided they apply auditing standards of international organisation of supreme audit institutions (INTOSAI) to audit accounts of revenue-earning entities.
NON-REVENUE-EARNING ORGANIZATIONS (contd)

INTOSAI standards promote: Independence Competence Due care Field standards are based on: Planning, supervision and review Study and evaluation of internal control Compliance with applicable law and regulations Audit evidence Analysis of financial statement

Constitution of most countries creates SAI and mandates it to audit all government revenues and expenditures, including projects.

Overall objective of audit project financial statements is to confirm that: Financial statements, particularly sources and application of funds, are fairly presented Disbursement is in accordance with loan agreement and PAD Balance sheet (if any) fairly presents assets and liabilities

Audit procedures are similar to those of audit financial statements of revenue-earning projects. They involve: Evaluation of internal controls Tests of transactions with supporting documents Other procedures, including physical observation of significant assets, third party confirmation of balances, etc.
AUDIT SOEs AND PMRs
Audit of statements of expenditure (SOE) and project management reports (PMR) involve more compliance checking, since their supporting documents are not sent to the Bank, but retained in PIUS.
AUDIT OF SA
Audit of the special account (SA) statement verify that: SA transaction have been fairly presented Are in accordance with the loan agreement Funds have been used solely for project purposes
SELECTION OF AUDITORS
Auditor are selected according to Bank guidelines for the selection of consultants. Terms of reference (TORS) are necessary, to cover auditor responsibilities peculiar to Bank-funded projects (e.g. SOES and SAS). TORs must be clear, specific and comprehensive, without in any way limiting auditor obligation to apply ISAS or GAAS. Samples of TORS are in FARAH.
SELECTION OF AUDITORS (contd)

Many auditors provide their letter of engagement, containing: Acceptance of appointment, with reference to TORs Auditor responsibilities Access to clients premises, staff and records Form of audit reports Involvement of internal or other external auditors Report timing Fees: computation, mode of payment
SELECTION OF AUDITORS (contd)

Three things are generally required by the auditor: Opinions on: Annual financial statement of entire project (sources and application of funds, balance sheet, etc.) SOE/PMR summary SA statement A management letter Coverage of all project expenditures, not just those financed by the Bank
AUDIT REPORTING COMPLIANCE SYSTEM (ARCS)

The Bank has an audit reporting compliance system (ARCS) for monitoring borrower compliance with the audit covenants. Bank has also remedies in event that: Audited financial statements are not received when due Opinion indicates deficiency in accounting, internal control or reliability of financial statements The Bank considers scope or quality of audit unacceptable
AUDIT REPORTING COMPLIANCE SYSTEM (ARCS) (contd)

In any of these events, normally the Bank: Will not extend loan closing date Delays negotiations or board presentation of any new loan benefiting defaulting entity until: Acceptable audited financial statements are received A remedial action plan is agreed

In addition, if audited financial statements are not received within 4 months, the Bank discontinues use of SOE procedure. In addition, if acceptable audited SA financial statements are not received within 4 months, the Bank normally withholds SA replenishments. In addition, after 9 months following due date, the Bank may suspend all disbursements on the loan.

In addition, if audited financial statements reveal major deficiencies in internal control, or inadequate evidence that funds have been used for only eligible expenditures, Bank may suspend all disbursements on that loan until satisfied that adequate remedial actions have been taken.
FIXED ASSET MANAGEMENT, ACCOUNTING AND AUDITING

Scope and definition
Project fixed assets comprise mainly civil works, vehicles and equipment. International accounting standards (IAS16) defines as property, plant and equipment, those assets which are: Used in production or supply of goods or services, rental to others, or for administrative purposes Expected to be used during more than one accounting period (typically one year)
FIXED ASSET MANAGEMENT, ACCOUNTING AND AUDITING (contd)

Section 5 (b) of Article III of the IBRD articles of agreement states that the Bank shall make arrangements to ensure that the proceeds of any loan are used only for the purposes for which the loan was granted, with due attention to economy and efficiency and regardless to political or other non-economic influences or considerations. Similar provisions are included in IDA articles of agreement. MODULE 1

Fiduciary and accountability obligations require to: Ensure delivery of project assets to right place and Monitor use of assets Not jeopardize achievement of project objectives by allowing assets to be diverted to non-project use Therefore, concern for project fixed asset management has two main objectives: Protecting project implementation and objectives Satisfying the Bank fiduciary and accountability obligations under article iii

Therefore, concern for project fixed asset management has two main objectives: Protecting project implementation and objectives Satisfying the Bank fiduciary and accountability obligations under article iii

Some issues in fixed asset management Tying expenditures to actual fixed assets Identification of project fixed assets and their separation from other fixed assets of the implementing agency Accurate valuation of fixed assets, especially in civil works

Condition and fitness for intended purpose at time of purchase Repair and maintenance program to protect value and fitness Ownership versus control: interference between one and the other or with use of asset for intended purposes Incidence of non-project use Insurance: protecting value until end of economic life, or end of project, whichever comes first

Arrangements for disposal of fixed asset at: End of useful life End of project period Accounting records maintained for fixed assets (register, ledger, etc.) Disclosure of fixed assets in annual financial statements, particularly if accounting on cash basis Auditor verification of asset existence, value and use
OTHER PFM PROBLEMS: STAFFING

Staff for PFM presents problems of: How to find and pay qualified staff to operate double entry project accounting system in a PIU How to hire staff What will happen to project staff at the end of project
OTHER PFM PROBLEMS: STAFFING (contd)

These problems are minimized in case of: Project implemented by revenueearning entity Follow-on project with existing PIU New project in ministry involves most difficult problems
OTHER PFM PROBLEMS: STAFFING (contd)

A typical efficient solution is to hire temporary staff or consultants on fixed term, with renewal option, paid by project, provided that expenditures were included in project cost estimates.
OTHER PFM PROBLEMS: PROJECT PREPARATION FACILITIES (PPF)

PPF presents a challenge and an opportunity: Challenge: how to ensure proper FM or funds and activities for a project which is not effective and may never materialize Opportunity: PPF provides funds to hire appropriate staff for its management, provided this was included in the PPF request
OTHER PFM PROBLEMS: PROJECT PREPARATION FACILITIES (PPF) (contd)

One of the best ways to look at PPF is to consider it as a pilot project or a preliminary part of the project. This approach ensures that: All PPF funds are properly accounted for There is a viable and tested fm system in place at loan/credit effectiveness
OTHER PFM PROBLEMS: PROJECT PREPARATION FACILITIES (PPF) (contd)

Substantial (e.g. US$1 million and more) PPF should send the Bank a simple audited financial statement, if it remains active for more than one year. No PPF request should be considered complete unless it includes arrangements and financing for proper accounting, and for audit if active for more than one year.
OTHER PFM PROBLEMS: SMALL OPERATIONS

Article iii of the Banks articles of agreement and OP/BP apply to all projects financed by the Bank, no matter how small. This means that even small grants require: Satisfactory fm system before Board Agreed reporting formats and audit terms of reference at Negotiations Periodic Financial Monitoring Reports Audited financial statements within 6 months MODULE 1 following end of fiscal year
OTHER PFM PROBLEMS: SMALL OPERATIONS (contd)

How does one manage all this in a small grant of, say, US$500,000, without using a sledge hammer to crack a peanut?: Planning, budgeting, internal controls, accounting and reporting should be kept simple, reflecting small amount involved, but without compromising basic principles Audit could be part of a larger audit contract for a bigger operation, ensuring appropriate audit expertise at reasonable cost
OTHER PFM PROBLEMS: GOVERNMENT COUNTERPART FUNDS

Many Bank-financed projects have problems obtaining governments financial contribution to the project. Bank insists on, at least, minimal government financial participation, to ensure government interest and commitment. Difficulty of counterpart funding arises, despite ministry of finance participation in negotiations and being named government representative in practically all loan agreements.
OTHER PFM PROBLEMS: GOVERNMENT COUNTERPART FUNDS (contd)

Problems have more to do with government planning and budgeting system, than with absolute lack of funds. Lack of co-ordination of numerous entities in some projects may also be a problem. It may happen that there are communication problems among some ministries responsible for projects and ministry of finance.

Furthermore, government typically budgets once a year, but enters project commitments all year. Another common practice is to commit funds only when they become available, regardless of budgetary provision.

The possible solutions are: Those responsible for project preparation and implementation should constantly remind ministry of finance to provide for government commitments in budget For many projects, funds would need to be budgeted by government up to 12 months before they are actually needed Dealing with cash-based allocations requires specific knowledge of how things work and how to get the necessary cash allocations in a particular country and in particular circumstances
OTHER PFM PROBLEMS: ORGANIZING AND FINANCING THE FINAL AUDIT

Organizing and paying for a final audit can pose a problem, particularly when the project is expected to pay for the audit. The Bank expects to receive audited financial statements of the fiscal year in which the last disbursement is made. Project managers need to ensure that the final audit is completed and paid for, before the loan or credit closes.
OTHER PFM PROBLEMS: ORGANIZING AND FINANCING THE FINAL AUDIT (contd)
This needs to be planned, discussed with the task leader and disbursement officer and all detailed steps agreed, at least one year before the closing date. Failure to plan for this well in advance of the closing date could result in borrower having to finance the audit from its own resources after the closing date.

World Bank Project Financial Management Guidelines

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World Bank Project Financial Management Guidelines

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WORLD BANK PROJECT FINANCIAL MANAGEMENT GUIDELINES

WORLD BANK PFM GUIDELINES (contd)

WORLD BANK PFM GUIDELINES (contd)

WORLD BANK PFM GUIDELINES (contd)

Bank Procedures (BP 10.02)

PHASES OF A TYPICAL PROJECT CYCLE

PHASES OF A TYPICAL PROJECT CYCLE (Contd)

PHASES OF A TYPICAL PROJECT CYCLE (contd)

CASE 1: NEW PROJECT WITH A PROPOSED PIU

CASE 1: NEW PROJECT WITH A PROPOSED PIU (contd)

CASE 1: NEW PROJECT WITH A PROPOSED PIU (contd)

CASE 2: FOLLOW-UP PROJECT IN AN EXISTING PIU

CASE 3: BRAND NEW PROJECT IN AN EXISTING PIU

PROJECT LAUNCH WORKSHOP

PROJECT PREPARATION FACILITY (PPF)

BORROWER ROLE VERSUS LENDER ROLE

FM ACTIVITIES DURING IMPLEMENTATION

PROJECT FINANCIAL MANAGEMENT (PFM) AND ITS ENVIRONMENT

MAIN COMPONENTS OF A PFM ENVIRONMENT

MAIN COMPONENTS OF A PFM ENVIRONMENT

MODULE 1 Unit 1 - Tr. no. 21

CATEGORIES OF INTERNAL CONTROL

MODULE 1 Unit 1 - Tr. no. 24

INTERNAL CONTROL (IC)

INTERNAL CONTROL (IC) (contd)

INTERNAL CONTROL (IC) (contd)

INTERNAL CONTROL (IC) (contd)

INTERNAL CONTROL (IC) (contd)

INTERNAL CONTROL (IC) (contd)

IC SYSTEM FOR A MULTIDONOR-FINANCED PROJECT

IC SYSTEM FOR A MULTIDONOR-FINANCED PROJECT (contd)

IC SYSTEM FOR A MULTIDONOR-FINANCED PROJECT (contd)

IC SYSTEM FOR A MULTIDONOR-FINANCED PROJECT (contd)

IC SYSTEM FOR A MULTIDONOR-FINANCED PROJECT (contd)

IC SYSTEM FOR A MULTIDONOR-FINANCED PROJECT (contd)

IC SYSTEM FOR A MULTIDONOR-FINANCED PROJECT (contd)

IC SYSTEM FOR A MULTIDONOR-FINANCED PROJECT (contd)

IC SYSTEM FOR A MULTIDONOR-FINANCED PROJECT (contd)

MODULE 1 Unit 1 - Tr. no. 39

PLANNING AND BUDGETING (P&B)

Pre-feasibility and/or feasibility study that contains details of

PRE-IMPLEMENTATION P&B (contd)

P&B DURING PROJECT IMPLEMENTATION

P&B DURING PROJECT IMPLEMENTATION (contd)

P&B DURING PROJECT IMPLEMENTATION (contd)

MODULE 1 Unit 1 - Tr. no. 45

P&B DURING PROJECT IMPLEMENTATION (contd)

THE IMPACT OF UNCERTAINTY

P&B FOR UNCERTAINTY AND TIME

P&B FOR OF UNCERTAINTY AND TIME (contd)

P&B FOR UNCERTAINTY AND TIME (contd)

ACCOUNTING SYSTEM (AS)

ACCOUNTING SYSTEM (AS) (contd)

ACCOUNTING SYSTEM (AS) (contd)

ACCOUNTING SYSTEM (AS) (contd)

ACCOUNTING SYSTEM (AS) (contd)

ACCOUNTING SYSTEM (AS) (contd)

What kinds of records are needed to account for them?

ACCOUNTING SYSTEM (AS) (contd)

ACCOUNTING SYSTEM (AS) (contd)

ACCOUNTING SYSTEM (AS) (contd)

ACCOUNTING SYSTEM (AS) (contd)

ACCOUNTING SYSTEM (AS) (contd)