World Bank Project Financial Management Guidelines

8/3/2019 World Bank Project Financial Management Guidelines

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WORLD BANK PROJECT FINANCIAL

MANAGEMENT GUIDELINES

ART. III, SEC. 5 (B), OF THE WORLD BANKS

ARTICLES OF AGREEMENT:

The Bank should make arrangements toensure that borrowers use loan proceeds:

Only for the purposes intended With due attention to economy and

efficiency


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WORLD BANK

PFM GUIDELINES (contd)

SOME POLICIES AND GUIDELINES TOFACILITATE 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


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WORLD BANK


OP 10.02

The definitive bank guideline on project financialmanagement

Describes the minimum fm requirements for everybank 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 theevent of non-compliance


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WORLD BANK


Bank Procedures (BP 10.02) Describes application of OP 10.02

in the project cycle

Recognizes the CFAA as a starting

point


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PHASES OF A TYPICAL

PROJECT CYCLE

Identification

Preparation

Appraisal Negotiations

Board Presentation

Effectiveness

Implementation

CompletionN.B. The focus of this session is on the Financial Management

activities that are performed during all eight stages


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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 staffhave a trackrecord of managing and accounting for anexternally-funded project

PHASES OF A TYPICAL

PROJECT CYCLE (Contd)


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There is usually a difference betweenborrower and lender FM requirements

An example of a borrower FM requirementis ensuring availability of enoughcounterpart funds before requesting foreignproject financing

Lender staffhave to ensure that the FMarrangements for the project will facilitatecompliancewith their organizationsfiduciary requirements.

PHASES OF A TYPICAL

PROJECT CYCLE (contd)


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Typical case of the very first externally-

financed project in a sector

Most pre-implementation activities areconceptual

FM arrangements may not be created andFM staff may not be hired hired until justbefore effectiveness

The FM arrangements for the project need tobe conceptualized and described in detail

CASE 1: NEW PROJECT

WITH A PROPOSED PIU


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Conceptualization of FM arrangementswould

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 staffwill be hired

Remuneration of FM staff

CASE 1: NEW PROJECT WITH

A PROPOSED PIU (contd)


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A project organization chart incorporating an FM

organization chart is a good starting point for

designing th

e 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 1: NEW PROJECT WITH

A PROPOSED PIU (contd)


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This is the easiest FM design situation

PIU is a known entity with a track record

The design and description of FM structureand functioning must still be as completeand detailed as in case 1

Emphasis should be on the modifications to

the existing structure and skills mix that areneeded to cope with new project

Such modifications must be made before thenew project becomes effective

CASE 2: FOLLOW-UP PROJECT

IN AN EXISTING PIU


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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

CASE 3: BRAND NEW PROJECTIN AN EXISTING PIU


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NEGOTIATIONS STAGE

The Negotiations state is when borrower and lender

Agree on, among other things:

Structure, functioning, staffing of the FMsystems 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


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PROJECT LAUNCH

WORKSHOP

To be organized immediately after loan or credit

effectiveness, but before implementation begins, it:

Brings togeth

er everyone likely to be involved inproject implementation

Discusses lender and borrower procurement,accounting, reporting, disbursement, auditingand other FM (and non-FM) arrangements

FM discussions at the workshop are facilitated bythe existence of a Project Financial ManagementManual (PFMM)

Anticipates and resolves problems


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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


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BORROWER ROLE VERSUS

LENDER ROLEPre-implementation FM activities

The borrower has the primary responsibility forimplementing all the FM activities

The lenders primary responsibility is to ensurethat the borrower carries out its responsibilities tothe lenders satisfaction

Borrower and lender share the responsibility forensuring that FM arrangements are accurately

and adequately reflected in the minutes ofnegotiations

Although the lender often request the projectlaunchworkshop, it is usually organized by theborrower


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FM ACTIVITIES DURING

IMPLEMENTATION

Borrower is responsible for

all record keeping, systemsmaintenance, and reporting

activities

Lender requires adequateborrower reporting for

fiduciary purposes


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FM PROJECT

COMPLETION

Overall evaluation of implementation experience includes

a review of FM performance throughout project life: the

reviewwill 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


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PROJECT FINANCIALMANAGEMENT (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.


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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 ofeach functional part and individual

The quality ofhuman resources


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MAIN COMPONENTS OF A

PFM ENVIRONMENT

Vertical and horizontal flows ofinformation, 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 properfinancial accountability and management


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PROJECT FINANCIALMANAGEMENT (PFM)

ENVIRONMENT (contd)

Elements of good PFM Systems:

Planning and Budgeting

Internal Controls

Records Management and IT

Book-keeping and accounting Financial reporting

Auditing


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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


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CATEGORIES OF

INTERNAL CONTROL

Main categories of Internal Control

Control Environment

Risk Assessment

Control Activity

Information and Communication

Monitoring


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INTERNAL CONTROL (IC)

Internal control is a key component of a goodfinancial management system.

A Weak System: Endangers the security of project assets

Facilitates unauthorized transactions

Facilitates fraud and mistakes

Leads to inaccurate and/or unreliableinformation

Endangers the integrity of project or Businessrecords


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INTERNAL CONTROL (IC)(contd)

The Control System Environment is veryimportant and includes:

Ethical values

Competent staff

Good organization methods

A clear definition of responsibilitiesand reporting relationships

A clear separation of functions


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Good internal control requires anexcellent IC culture.

IC culture requires:

Understanding

Acceptance

Involvement of all project staff


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Other important aspects of internal controlthat are sometimes overlooked :

Procurement procedures

Internal audit department

Documentation: creation, storage,retrieval and security (i.e., Records

Management)


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Designing of IC system can beapproached from viewpoint of:

Organization of function

Transactions

Records/documentation Combination of all above (probably

best)


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IC SYSTEM FOR A MULTI-DONOR-FINANCED PROJECT

By way of example only, a project shouldinclude:

A. Project receipts Special bank account for each donor source

Prompt notification of receipt to PIU by the bank

Regular and prompt month

ly bank statements Monthly and prompt bank reconciliation

statements, prepared by cashier, reviewed by thefinance director, signed by both


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-DONOR-FINANCED PROJECT(contd)

B. Procurements by purchase orderto be signed by everyone responsible

for follow

ing: Initiation of order

Authorization

Placing of order

Receipt and confirmationquantity/quality

Payment


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IC SYSTEM FOR A MULTI-DONOR-FINANCED PROJECT

(contd)C. Salaries

To be carefully compiled,

independently checked, and paid toauthentic recipients

Special procedures for authenticatingpayment to any sick or absent staff

A monthly salary charge to theproject form should be used forsalary IC and accounting


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F. Journal

Record every transaction, includingadjustments, before any entry ismade in the ledger

Access should be restricted to staff in

charge

Entries should be regularly checkedby finance director

-DONOR-FINANCED PROJECT(contd)


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G. Ledger accounts

To be maintained by qualified staff andsecured 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

DONOR-FINANCED PROJECT(contd)


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PRE-IMPLEMENTATION P&B

PRE-IMPLEMENTATION P&B INCLUDE:

Pre-feasibility and/or feasibility study

that contains details of Project justification

Market analysis

Tech

nical analysis Planning of project activities and timing

Critical path analysis

Project cost estimates


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PRE-IMPLEMENTATIONP&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


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P&B DURING PROJECT

IMPLEMENTATIONAt 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


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P&B DURING PROJECT IMPLEMENTATION(contd)LINKING REPORTING/ACCOUNTING/BUDGETING FORMAT

PAD Cost Tables

Budget Format & Content

Accounting Systems

Reporting Content & Frequency

Stakeholder Information Needs


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P&B DURING PROJECTIMPLEMENTATION (contd)

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


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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,

ch

ange The longer the project period, the more likely

are project circumstances to change, necessitating

adjustments of plans and budgets


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Techniques employed to minimize impact of

uncertainty include:

Contingency provisions (physical and price)

Pilot projects

Flexible design of project and loan, matchingcommitments and disbursements to varying

project circumstances during implementation

P&B FOR

UNCERTAINTY AND TIME


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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 OF UNCERTAINTY ANDTIME (contd)


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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

P&B FOR UNCERTAINTYAND TIME (contd)


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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)


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(contd)

Having ascertained stakeholderrequirements, the third question is:

What do we need to account for?

These are typically project activities andtransactions, including:

Receipts

Commitments

Expenditures Inputs

Outputs

Results


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(contd)

Project transactions are either generic or specific.

Generic activities and transactions include:

Receipts of government, lender, or donordisbursement

Payment of salaries

Procurement of vehicles and computers Payment of consultants

Payment for local training workshops


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(contd)

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 ofnewwagons

After listing what needs to be accounted for, the fourthquestion is:

What kinds of records are needed to account for them?


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(contd)By way of illustration only, a traditional

project accounting system should include:

Purchase orders, receipts, check books andother similar evidence of receipt,commitment or expenditure of funds

Ajournal for primary entry of all items(including adjustments) destined for ledgerposting

A petty cash book (PCB) for very smallpayments, with credit side analysed byproject component


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(contd)

A bank cash book for each source of financing,with the credit side analysis columns by

component (like th

e PC

B) A ledger with a separate account for each

component, and the debit side analysed with acolumn for each procurement and disbursementcategory (e.g.Civil works, vehicles, etc.)

A fixed assets register, recording location priceand date of acquisition of each project fixedasset, and divided into sections for buildings,vehicles, computers, etc.


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The accounting system should help to generate atthe end of eachmonth, at least, the following:

Total project expenditures Total contribution from each financier

Total expenditure on each projectcomponent

Analysis of all project expenditures into civilworks and all other procurement anddisbursement categories

ACCOUNTING SYSTEM

(AS) (contd)


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(contd)

Having decided on books and records to keep,the fifth question is:

What entries should be made in these bookson the occurrence of each transaction?

It is useful to record these in the form of

accounting instructionswh

ich

sh

ould be partof the project financial management manual(PFMM) for all project staff.


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COMPUTERIZATION

Computerization of accounting

systems does not tell uswh

atinformation we need, or what to do

It merely helps us to obtain faster or

more easily the information we havealready decided should be prepared


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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


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COMPUTERIZATION

STRATEGY (contd)

CASE 1

PIU already has knowledge and experienceof computerized system

Staff may be able to modify the existing

softwarewith or without outside help

New software is desirable

This would involve many of theconsiderations applicable to a case 2 or 3scenario


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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 pre-

selected suppliers


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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


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OTHER DESIRABLE MEASURES

Put project needs in writing and requirevendors to state in writing how they

would respond to all needs Review all responses in detail and

match them up

Seek independent views, particularlyfrom persons who have used the samepackage in implementing multi-donorfinanced projects


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OTHER DESIRABLE

MEASURES (contd)

Require each vendor to give a

demonstration, showing howhis/her

package responds to all project needs

Before inviting vendor proposals it is

important to distinguish between

mandatory and optionalrequirements.

The mandatory requirements should be

clearly communicated to vendors


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MANDATORY

REQUIREMENTS

The system must be:

Capable ofhandling provincial district aswell 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 financialmanagement initiative (formerly LACI)


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MANDATORY

REQUIREMENTS(contd)

Capable of providing clear audit trails

Able to track actual, budget, forecast andproject life per the pad

Able to link financial figures to physicalperformance 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 eachtransaction or by cheque number)


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A A O Q S


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MANDATORY REQUIREMENTS

(contd)

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 reasonablelimits



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(contd)

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 resolvingtechnical issues


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SOFTWARE SELECTION PROCESS

SOME TIPS

The committee should assess:

Technical and functional quality of solution

Overall quality of proposed relations

h

ip Reliability of company

Quality of support staff

Training facilities

Help desk service Documentation available

Future development plans

Policy for upgrades of previous version


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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


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PERIODIC PROGRESSREPORTS

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


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CHARACTERISTICS OF FMR

FMR replaces theProject Management Reports (PMR),introduced by the World Bank on July 1, 1998, under

th

e loan administration ch

ange initiative (LAC

I)The distinguishing characteristics of FMR are:

Distinction between project management (byBorrower) and project monitoring (by lender)

New emphasis on maximum reliance on borrowersAccounting/reporting systems/format Format, content, and frequency more flexible

Reflecting project size, sector, and complexity

GUIDING PRINCIPLESGUIDING PRINCIPLES


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GUIDING PRINCIPLESGUIDING PRINCIPLESOF FMROF FMR

The overall objective is to provide regularinformation that gives necessary fiduciaryassurance to the Bank

FMRwill be less detailed than the reportprepared for project management

Borro

wers o

wn system s

hould be used asfar as possible in producing FMRs

GUIDING PRINCIPLES OF FMR


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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 completionreports (ICRs)

As far as possible, borrowers should not berequired to provide the Bankwith information

already available to the Bank The requirements for financial and procurement

monitoring should, as far as possible, be alignedwith other bank requirements for projectprogress reporting and monitoring

GUIDING PRINCIPLES OF


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GUIDING PRINCIPLES OFFMR (contd)

While the reports to be submitted to the Banksshould meet certain minimum requirements,they should be flexible and customized to each

project or where possible, to each countryand/or sector

Monitoring expenditures in relation to physicalprogress is a key aspect of ensuring that the

project is under proper financial control

Wherever possible, common reporting andmonitoring arrangements should be agreedwith other donors involved in the project


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STRUCTURE OF THE FMR

The FMR should normally include:

Financial reports Physical progress reports, and

Procurement reports


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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 toprocurement/disbursement categories

(although this may be reported as an

addition)

PHYSICAL PROGRESS


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PHYSICAL PROGRESSREPORT

Physical progress reports should link

physical outputs or implementation

progress to costs of achieving them

Indicators of physical progress andoutputs should be selected during project

preparation, stated in the ProjectImplementation Plan (PIP)


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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


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MATTERS TO BE AGREED ATNEGOTIATIONS

Explains deviations from plan, and proposes

solutions to problems identified

Format, content, frequency, and currency ofreports

Project outputs and other indicators formonitoring physical or other progress towardachieving project results

How to deal with multiple implementationagencies, scattered project locations, andcommunity-based project activities


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ANNUAL FINANCIAL


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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


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REVENUE-EARNING ENTITIES

Projects implemented by revenue-

earning entities typically involve on-lending Bank/IDA funds from

government to the implementing agency

through a subsidiary loan agreement

between government and agency.



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(contd)

They also usually involve the Bank requiring,

not only annual financial statements of the

project, but also those of the implementingagency, 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



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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


(contd)



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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 theorganization, and any resources or

obligations not recognized in the financial

statement


(contd)



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Sometimes the project financial statements

are integrated in the entity financial

statements.

In other cases they are shown as a separateattachment to the entity financial statements.

Whichever solution is adopted, the Bankalways requires, through the DCA, thatproject expenditures be accounted separatelyfrom other entity expenditures.


(contd)



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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.



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NON-REVENUE-EARNING

ENTITIES (contd)

For non-revenue-earning agencies, the

main feature of the annual financial

statements is the statement of sources andapplication 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.



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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.

NON-REVENUE-EARNING

ENTITIES (contd)

SOME ISSUES IN PROJECT


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ANNUAL FINANCING REPORTING

Application of IAS to projects in agencies that do not apply

IAS

This requests project reporting standards that differ fromthose 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



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SOME ISSUES IN PROJECTANNUAL 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 inreporting format, and

Napoleonic law (practised in most western Europe,

French, Portuguese and Spanish speaking countries)

where financial statement format must conform to a

standard.



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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 whichwould not exist otherwise.

How to report on a project with multiple implementing

agencies


REPORTING (contd)



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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 th

e 10 agencies in th

atumbrella and send only one consolidated annual

financial statement to the Bank.


REPORTING (contd)



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In practice, apart from entity financial

statements, a typical world Bank-financed

project produces the following annual financialstatements:

A statement of sources and application of

funds, or A receipts and payments account, showing

cash received and paid by the project


REPORTING (contd)



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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


REPORTING (contd)



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ANNUAL FINANCING

REPORTING (contd)

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, whereapplicable



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ANNUAL FINANCING

REPORTING (contd)

A list of important financial commitmentswhich,although they are not yet payable, will definitely

become payable in the future, showing whenpayments will become due (e.g. Scholarshippayments during the next 7 years).

Specific financial reporting requirements vary

from project to project, even th

ough

generalrequirements in article iv of the DCA arestandard. The specific requirements are alsoincluded in financial covenants in the DCA.



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ANNUAL FINANCING

REPORTING (contd)For most projects, relevant grouping for

annual financial reporting are determined by:

Project components as presented in t

he

PAD

Procurement/disbursement categories in

the DCA

Under a good PFM system, projectscomponents in the pad and disbursement

categories determine:



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ANNUAL FINANCING

REPORTING (contd)

The ledger and other accounts tomaintained by the project

The FMR reporting format

The annual project financial statementformat

It is important to this bear in mind whenpreparing the PAD and the DCA



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ANNUAL FINANCING

REPORTING (contd)

Note also that having the same format

for both the FMR and the annual

financial statements, particularly thestatement of sources and application of

funds, means that last annual FMR is

effectively th

e annual financialstatement.

AUDITING ARRANGEMENTS


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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 andinternal control systems

Determination of maintenance of adequatedocumentation of all transactions

Verification of eligibility of transactions



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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



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(contd)

Normally Bank-financed projects require onlyfinancial statement audits. Any other type of

audit sh

all be specifically indicated in th

eTO

RS.Distinguish between:

Revenue-earning projects requiring audits ofboth entities and project financial statements

Non-revenue-earning projects requiringaudits only of project financial statements



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(contd)

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 withinternational standard on auditing (ISA)

promulgated by IFAC.



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(contd)

Professional and ethical principles, requiredby ISA from all auditing firms andindividuals, include:

Independence

Integrity

Objectivity

Professional competence Confidentiality

Professional behaviour

Technical standards



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(contd)

Auditors, members of IFAC institutions or

associations, generally adhere to these principles.

NON-REVENUE-EARNING


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ORGANIZATIONS

The Bank may accept audit of financial

statements of non-revenue-earningorganizations and projects by SAI,

provided they apply auditing standards

of international organisation of supreme

audit institutions (INTOSAI) to auditaccounts of revenue-earning entities.

NON-REVENUE-EARNING


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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 andregulations

Audit evidence

Analysis of financial statement

NON-REVENUE-EARNING


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Constitution of most countries creates SAI and

mandates it to audit all government revenues and

expenditures, including projects.

NON-REVENUE-EARNING


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Overall objective of audit project financial

statements is to confirm that:

Financial statements, particularly sourcesand application of funds, are fairly presented

Disbursement is in accordancewith loanagreement and PAD

Balance sheet (if any) fairly presents assetsand liabilities

NON-REVENUE-EARNING


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Audit procedures are similar to those of auditfinancial statements of revenue-earning projects.

They involve: Evaluation of internal controls

Tests of transactions with supportingdocuments

Other procedures, including physicalobservation of significant assets, third partyconfirmation of balances, etc.

AUDIT SOE AND PMR


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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


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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


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Auditor are selected according to Bankguidelines for the selection of consultants.

Terms of reference (TORS) are necessary,to cover auditor responsibilities peculiar toBank-funded projects (e.g. SOES and SAS).

TORs must be clear, specific and

comprehensive, without in any way limitingauditor obligation to apply ISAS or GAAS.

Samples ofTORS are in FARAH.



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(contd)

Many auditors provide their letter of engagement,

containing:

Acceptance of appointment,w

ith

reference toTO

Rs 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



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(contd)

Three things are generally required by the auditor:

Opinions on:

Annual financial statement of entire project(sources and application of funds, balancesheet, etc.)

SOE/PMR summary

SA statement

A management letter

Coverage of all project expenditures, not justthose financed by the Bank

AUDIT REPORTING


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COMPLIANCE SYSTEM (ARCS)

The Bankhas an audit reporting compliance system(ARCS) for monitoring borrower compliance with theaudit covenants.

Bankhas also remedies in event that:

Audited financial statements are not receivedwhen due

Opinion indicates deficiency in accounting, internalcontrol or reliability of financial statements

The Bank considers scope or quality of auditunacceptable

AUDIT REPORTING



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(contd)

In any of these events, normally the Bank:

Will not extend loan closing date

Delays negotiations or board presentation ofany new loan benefiting defaulting entityuntil:

Acceptable audited financial statementsare received

A remedial action plan is agreed

AUDIT REPORTING COMPLIANCE


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SYSTEM (ARCS) (contd)

In addition, if audited financial statementsare not receivedwithin 4 months, the Bankdiscontinues use of SOE procedure.

In addition, if acceptable audited SAfinancial statements are not receivedwithin4 months, the Bank normally withholds SAreplenishments.

In addition, after 9 months following duedate, the Bank may suspend alldisbursements on the loan.

AUDIT REPORTING



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(contd)

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 th

at loan untilsatisfied that adequate remedial actions

have been taken.

,ACCOUNTING AND


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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 foradministrative purposes

Expected to be used during more than oneaccounting period (typically one year)

FIXED ASSET MANAGEMENT,ACCOUNTING AND AUDITING


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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.



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(contd)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 byallowing assets to be diverted to non-project use

Therefore, concern for project fixed asset management hastwo main objectives:

Protecting project implementation and objectives

Satisfying the Bank fiduciary and accountabilityobligations under article iii

FIXED ASSET MANAGEMENT,ACCOUNTING AND


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ACCOUNTING AND

AUDITING (contd)

Therefore, concern for project fixed assetmanagement has two main objectives:

Protecting project implementation andobjectives

Satisfying the Bank fiduciary andaccountability obligations under article iii



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(contd)Some issues in fixed asset management

Tying expenditures to actual fixed assets

Identification of project fixed assets andtheir separation from other fixed assets of

the implementing agency

Accurate valuation of fixed assets,especially in civil works



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(contd) 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 forintended purposes

Incidence of non-project use Insurance: protecting value until end of

economic life, or end of project, whichevercomes first

FIXED ASSET MANAGEMENT,ACCOUNTING AND


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ACCOUNTING AND

AUDITING (contd) 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:


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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


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OTHER PFM PROBLEMS:( d)


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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


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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 isnot effective and may never materialize

Opportunity: PPF provides funds to hire

appropriate staff for its management,provided this was included in the PPF request



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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. Thisapproach ensures that:

All PPF funds are properly accounted for

There is a viable and tested fm system inplace at loan/credit effectiveness



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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 formore than one year.

No PPF request should be considered

complete unless it includes arrangementsand financing for proper accounting, and

for audit if active for more than one year.

OTHER PFM PROBLEMS:


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SMALL OPERATIONS

Article iii of the Banks articles of agreement

andOP/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

following end of fiscal year

OTHER PFM PROBLEMS:( d)


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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 auditcontract for a bigger operation, ensuring

appropriate audit expertise at reasonable cost

OTHER PFM PROBLEMS:GOVERNMENT COUNTERPART


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GOVERNMENT COUNTERPART

FUNDSMany Bank-financed projects have problemsobtaining governments financial contribution tothe project.

Bank insists on, at least, minimal governmentfinancial participation, to ensure governmentinterest and commitment.

Difficulty of counterpart funding arises, despite

ministry of finance participation in negotiationsand being named government representative inpractically all loan agreements.



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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 responsiblefor projects and ministry of finance.

GOVERNMENTCOUNTERPART FUNDS


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(contd)

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 ofbudgetary provision.



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GO COU

FUNDS (contd)The possible solutions are: Those responsible for project preparation and

implementation should constantly remind ministryof finance to provide for government commitmentsin budget

For many projects, funds would need to bebudgeted by government up to 12 months beforethey are actually needed

Dealing with cash-based allocations requiresspecific knowledge ofhow things work and how toget the necessary cash allocations in a particularcountry and in particular circumstances

OTHER PFM PROBLEMS:ORGANIZING AND FINANCING


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THE FINAL AUDITOrganizing and paying for a final auditcan pose a problem, particularly when theproject is expected to pay for the audit.

The Bank expects to receive auditedfinancial statements of the fiscal year inwhich the last disbursement is made.

Project managers need to ensure that thefinal audit is completed and paid for,before the loan or credit closes.

OTHER PFM PROBLEMS:ORGANIZING AND FINANCING


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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 yearbefore the closing date.

Failure to plan for this well in advance of

th

e closing date could result in borrow

erhaving to finance the audit from its own

World Bank Project Financial Management Guidelines

Documents

Transcript of World Bank Project Financial Management Guidelines