Nepal Public Financial Management Multi-Donor Trust Fund

Nepal Public Financial Management Multi-Donor Trust Fund

Strengthening the Office of the Auditor General Project

(Grant No: TF010455)

Implementation Review and Support Mission

March 22 to 29, 2016

Aide Memoire

1. Introduction

1. A World Bank Implementation Review and Support Missionfor Strengthening the Office of the Auditor General Project (SOAGP) led by Akmal Minallah, was fielded during March 22 to 29, 2016. The objectives of the mission were to assess implementation progress since the last review in July 2015,to brief all stakeholders on achievements made under the project, and to identifyfuture reform areas to inform the draft concept note for the next phase of reforms under the Multi-Donor Trust Fund (MDTF).

1. The mission would like to thank the officials of the Government of Nepal and the Auditor General and his staff, the Secretary of the Public Accounts Committee (PAC) and the officials ofthe National Reconstruction Authority as well as the development partners for the support and cooperation extended to the mission. The list of people met is attached in Annex I.

1. The Aide Memoire summarizes the mission’s findings, suggestions and recommendations which were discussed in a wrap-up meeting chaired by the Auditor General Mr. Bhanu Prasad Acharya on March 24, 2016. As agreed during the meeting, this Aide Memoire will be classified as a public document, as per the World Bank’s Access to Information Policy.

II.Key Project Data

Project Data / Project Performance Ratings
Approval Date: August 16, 2011 / Summary Ratings: / Previous / Current
Effectiveness Date: February 23, 2012 / Achievement of PDO / MS / S
MTR Date: January 26-29, 2014 / Implementation Progress / MS / S
Closing Date: June 30, 2016 / Project Management / MS / S
Grant Amount: $2.3 million / Financial Management / S / S
Amount Disbursed
(As of March 31, 2016): $2.15 million (94%) / Procurement / MS / S
Monitoring and Evaluation / MS / MS
Counterpart fund / S / S

Ratings: HS=Highly Satisfactory; S=Satisfactory; MS=Moderately Satisfactory; MU=Moderately Unsatisfactory; U=Unsatisfactory; HU=Highly Unsatisfactory

III.Achievement of Project Development Objective

1. The Project Development Objective (PDO) is to enhance the quality and impact of public sector audit in Nepal and all the activities undertaken under the project support this objective. Despite recent challenges like disastrous earthquakes in April and May 2015, OAGN was able to substantially complete all milestones of the project.A comprehensive risk-based financial audit methodology, aligned with the International Standards of Supreme Audit Institutions (ISSAIs), and standard audit working papers were developed and translated in Nepali language. National Audit Management System (NAMS), along with a robust Electronic Working Papers were designed, developed and deployed in the Office of the Auditor General (OAG). To further support this system, National Audit Management Information System (NAMS)manuals were developed and 30 officials were trained as trainers, besides providing end-user training to181 OAG staff. In 2014 and 2015, 28 pilot financial audits were carried out, along with complete quality assurance, andhands-on training to the auditors on the use of Electronic Working Papers( EWP) in field audits. Target for in-depth performance audits were also met, paving the way for meaningful future audits and better performance accountability. OAGInbecame one of the pioneers in use of International Organization of Supreme Audit Institutions)(INTOSAI) Performance Management Framework. Peer review of OAG was done by SAI India on the basis of Performance Management Framework (PMF) , leading to dissemination of a comprehensive report and preparation of a Strategic Plan by OAG. Besides peer review through SAI India, South-South exchange programme was undertaken with number of SAIs including Malaysia and Indonesia for risk based audit practices and use of IT; Philippines on Citizen Participatory Audits; and Pakistan on audit of recovery and rehabilitation. Due to this significant progress, the rating for achievement of PDO is now upgraded from Moderately Satisfactory to Satisfactory (see progress against Revised Results Framework at Annex II). Furthermore, since all project activities have now been completed, the rating for project management is also upgraded fromModerately Satisfactory to Satisfactory. Contract with Cowater, the implementation firm, has been completed in a satisfactory manner and no contractual issues remain, therefore rating for procurement is also upgraded from to Satisfactory.

IV.Implementation Progress

Component I:Enhancing the Quality of Financial Statement Audit

1. The mission noted significant progress since the last review in July 2015. The Financial Audit Manual (FAM) has been approved by OAG and subsequently translated into Nepali language. FAM provides guidance on risk-based audit and the annual audit plan is prepared based on this new methodology, whereby a large number of cost centers audited by OAG are classified in specific categories, enabling OAG to deploy scarce resources on need basis into targeted areas. Not only the new audit methodology is compliant with International Standard Supreme of Audit Institution (ISSAI) butstandard audit working papers and templates also ensure uniform implementation of methodology.

1. The updated financial audit methodology can be used to conduct both the traditional financial/compliance audit of the ‘audit units/cost centers’ as well as the auditof National Public Sector Accounting Standards (NPSAS/IFRS-)based financial statements prepared by the line ministries and state-owned enterprises, resulting in expression of an audit opinion. In total, sevenfinancial statement audits were completed and ISSAI compliant financial audits of 21 spending units were also completed.

1. The lessons from these audits were documented andwere used as case studies in successfully delivering financial audit training to the OAG auditors. After each round of pilot audit, de-briefing workshops were held for the pilot audit team members to capture the lessons learnt and to further refine the methodology andaudit working papers to make them responsive to local needs. Amongst OAG management and staff, there is now increased awareness and knowledge of the international auditing standards, ISSAI and SAI best practices. Furthermore, use of upgraded methodology and availability of working papers will enable OAG auditors to produce sound and better quality audit outputs.

1. During this period, NAMS was tested in 15 pilot audits. It must be noted that development and implementation of the NAMS be-spoke solution, along with risk-based financial audit methodology/manual, has been the most significant deliverable of the project. NAMS is a multi-user enterprise-level software solution that automates the entire business process chain for audit, bringing OAG in the league ofonly a few SAIs to have successfully developedthis capability. The NAMS, after its complete deployment, will also result in an efficient paperless environment in OAG.

1. For the Year-2 pilot audits, the Treasury Single Account (TSA) data was readily made available by Financial Controller General Office FCGO and Computer Assisted Audit Techniques (CAATs) analysis, supported through IDEA software, was extensively used, enabling OAG to perform vertical risk-based financial audits of ministries’ financial statements and move away from ‘unit-based’ audits. This new approach has also developed the capacity in OAG to narrow the scope of audit, making the process much more efficient and targeted and ensuring optimal use of limited audit resources. This will be done through identifying cost centers under a particular ministry/agency and perform detailed audits of selected cost centers on the basis of arisk assessment exercise.

1. Strategic Plan 2016-2020.As mentioned earlier, OAG has developed and approved a strategic planin January 2016 that sets out priorities for the next five years. The plan rests on five strategic imperatives namely: improving quality and impact of audit;strengthening independence and mandate of OAG; developing organizational capacity; enhancing professional relations with external stakeholders; and enhancing internal governance.

Component 2: Upgrading the Capacity to Conduct Performance Audits

1. Performance audits provide assurance to all stakeholders thatfunds are being utilized in economical, efficient and effective manner for achieving the stipulated programme objectives. To support robust performance audits in the government, Performance Audit Manual was updated and aligned with ISSAIs (ISSAIs 300, 3100 and 3200) and training on performance audit methodology was conducted in close cooperation with SAI Norway. Following the training, performance audit teams conducted three in-depth performance audits, through assistance from consultants, for Local Governance and Community Development Program (LGCDP) and Social Security Program;Health Sector; and Kathmandu Valley Road Improvement Project.
2. Performance audit reports of the Health Sector and Kathmandu Valley Road Improvement Project were incorporated in the 51st Annual Report of the Auditor General, while the report on Local Government and Community Development Programme (LGCDP) and Social Security Program is being incorporated in the52nd Annual Report.

1. In Year 2, after the second round of training on modern performance audit methodologies, three more in-depth performance audits were conducted. The audited programmes included: Effectiveness of Social Security Programme and Effectiveness of Plan Selection and Implementation by Local Bodies – District Development Councils (DDC); Effectiveness of Health Service Delivery System in selected districts; and Melamchi Drinking Water Development Committee. After completion and Quality Assurance Review of these audits by the Consultant, a second debriefing workshop was organized in order to capture the lessons learnt from this new round of audits.

1. South-South Knowledge Sharing on Citizen Participation in Performance Audit.The officials from OAG participated in a south-south exchange with Commission on Audits (COA) of the Philippines during November 23 -27, 2015. The exchange was supported by the Governance team at the World Bank Country Office in the Philippines through joint collaboration between three Bank programs: ‘Strengthening civil society organizations' use of social accountability to improve PFM 2 in Nepal’, ‘strengthening the Office of the Auditor General’and‘Advancing Public Participation in Budgets and Audit Process’. The Auditor General himself participated in the exchange program and the exchange visit provided the OAG delegation with a unique opportunity to learn more about the Citizen Participatory Audit (CPA) program and to witness how ‘citizen auditors’ participate and support the auditing process in key sectors such as education and disaster risk management.Post knowledge exchange visit, OAG has reviewed the audit mandate to ensure that CPA is included and added it as a key action in the operational plan. Currently, a draft operational manual on CPA is under review.

1. South-South Exchange to Learn about Reconstruction and Rehabilitation Audit.In the wake of recent major earthquakes in Nepal, the Government through legislation has created the National Reconstruction Authority, a new body with mandate to oversee disaster management work. Due to significant quantum of funding channeledfor reconstruction and rehabilitation, transparency and accountability takes paramount importance.OAG realizes this need and its relative lack of experience in this domain and therefore an exchange program wasdeveloped with SAI Pakistan, which had extensive experience in this area. As per request from SAI Nepal, SAI Pakistan developed a special course on Disaster Management Audit for OAG officials. The objective of the course was to provide orientation on disaster management audit to a high level team of 16 SAI Nepal officials, who visited Pakistan for training and exposure visit during the period of January 4-14, 2016. The OAG team included senior and mid-level officials. The team included oneDeputy Auditor General, four Assistant Auditor Generals, six Directors and five audit officers who attended this program. The course was designed on ISSAI 5000 series on disaster audit,especially focusing on performance audit. The program included one week of classroom training in Pakistan Audit and Accounts Academy (PAAA) in Lahore, meeting with relevant stakeholders such as those from National Disaster Management Authority (NDMA) in Islamabad, meeting with high level officials of SAI Pakistan field visits to some disaster affected areas. The training was timely because SAI is expected to provide assurance on recovery related activities.
2. The team met officials at National Reconstruction Authority along with officials from OAG to discuss scope and audit methodology of expenditure related to reconstruction. Government has issued simplified guidelines for procurement related to reconstruction. It was agreed that similar audit guidelines will be developed for financial audit. The expenditure will be recorded in TSA which provides good opportunity to the auditors to apply Computer Assisted Audit Techniques.As a follow up, OAG will be developing simple procurement audit guidelines to sensitize the auditors on procedures specifically adopted for recovery and rehabilitation related procurement and exploring the possibility of providing real time assurance on the basis of concurrent audit.

Component 3: Enhancing the Impact of Audits

1. This component includes provision of technical support to the Public Accounts Committee (PAC) Secretariat, such as support for extracting key recommendations from audit reports; designing and implementing a communications strategy; and redesigning and digitizing the databank of audit and PAC recommendations. It must be noted that PAC was constitutedonly in April 2014, consisting of 51 members and has not been in place for most of the time during project implementation. Initially there was no documented protocol or procedure to guide collaboration between OAG and PAC and till datecapacity of PAC Secretariat remains weak. During the period, a report on PAC has been developed, with comprehensive analysis of the PAC operations and collaborative arrangements between PAC and OAG for identifying the gaps and challenges faced by the PAC Secretariat. The report also proposes specific recommendations for enhancing the capacity of the PAC Secretariat, which e include creation of full time parliamentary liaison in OAG to provide guidance to the Secretariat; improving communication between the two entities; developing operating procedures and building human resource capacity; and strengthening the follow-up process for PAC audit recommendations.Implementation of these recommendations will be a key priority in next phase.

1. Creation of a database of past audit observations and supporting PAC in tracking progress against audit recommendation was an activity envisaged in this component. As mentioned above, NAMS software has been implemented and tested in the field and the system is now configured to support recording past audit observations and follow them up with concerned audit entities. Now there is a need to fully capitalize on this newly developed feature of repository of audit objections in NAMS/EWP software, by populating the database to improve the effectiveness of PAC.

1. One of the key activities in this component was to support OAG for designing a communication strategy paper, which was prepared and submitted during the reporting period. The communication strategy advocates extending OAG’s outreach programme to create awareness about its functions; deepen citizen engagement in the audit process; and enhance the quality of information broadcast to the citizens, media and civil society groups about its work and audit results. The strategy also addresses the problems of communication with both external and internal stakeholders and contains recommendations for strengthening the communication functions of OAG including establishment of a dedicated Communications Cell, which has also been recommended by the Human Resources report as part of proposed institutional reorganization.

Component 4: Project Management

1. OAG has now substantially completed all the milestones of the project. Risk-based financial audit methodology has been aligned with the ISSAIs and standard audit working papers have been developed and implemented. National Audit Management System and Electronic Working Papers be-spoke solution was designed, developed and installed in OAG server. NAMS Manuals were developed and 30 officials trained as trainers while 181 OAGN staff members were provided end-user training in NAMS. Target for in-depth performance audits was achieved and Quality Assurance of 28 pilot financial audits was completed. OAG also pioneered the use of INTOSAI Performance Management Framework. Since all project activities were completed despite a number of political and environmental challenges, the rating for project management is upgraded to ‘Satisfactory’. In June 2014, revised Results Framework with simplified indicators and updated targets was approved. Progress against Revised Performance Indicators is presented in Annex II.

1. Financial Management. The budget of NPR 103.13 million was approved for 2015/16, while total expenditure of NPR 66.50 million was incurred up to March 14, 2016 (65% of approved budget). There are no pending trimester implementation progress reports and audit reports. The audit report was provided with unqualified audit opinion. Based on continued good performance in financial management, the FM rating continues to be ‘Satisfactory’. Counterpart fundingalso remains‘Satisfactory’. The project is scheduled to close on 30th June 2015. To sustain the reforms, some technical staff is engaged and paid out of unspent balance of the project. It is important that critical activities like retention of staff, maintenance of equipment and training is funded out of government budget.

1. Monitoring and Evaluation. Monitoring and evaluation continues to be ‘Moderately Satisfactory’. The result framework was revised in beginning of 2015. The new result framework is more realistic. Progress against the targets and indicators of results framework can be seen at Annex II.

1. Procurement. The entire procurement under the project has been successfully completed before the project closing date of June 30, 2016. It must be noted that a single consulting contract (USD 1.7m) constituted bulk of the project amount (USD 2.3m) and was the core activity for strengthening OAG. Other small procurement activities for office equipment have also been fully completed. Considering the progress made towards the achievement of the PDO and successful completion of all the procurement, overall procurement performance rating has been upgraded to ‘Satisfactory’.

1. Implementation Completion Report (ICR). A team has beenformedto undertake ICR for the project. Completion reports have also been prepared by consultants, which have been approved by OAG. Second completion report is prepared by DFID. Both reports confirm satisfactory completion of project milestones. Detailed discussions were held with the Auditor General, Secretary PAC, OAG staff and other stakeholders on priorities areas for the next phase of the project. On the basis of discussions and findings of the team assigned for ICR for the project, a concept note for the next phase will be prepared.

V.Agreed Actions