World Bank calls for setting up body to review cash-basis financial reporting

The World Bank has urged Pakistan that a committee should be set up to review and steer the process to implement full-cash basis financial reporting on a continuous basis, while the audit legislation should formally provide for reports to be made public and publicly available when tabled in the Parliament.
In a sector report on 'Pakistan Public Sector Accounting & Auditing', published by 'Financial Management Unit (South Asia Region)', the WB suggested that financial reporting specialists should steer the process as key members of the committee. Upon implementation of the Cash Basis International Public Sector Accounting Standard (IPSAS) as additional reporting requirements of the government, the committee should gradually begin the transition to adopting accrual-based IPSAS.
The Bank report said that the Commercial Audit Wing of the Auditor-General of Pakistan should perform a stronger review role for the compliance with International Accounting Standards and International Financial Reporting Standards (IASDFRS) by state-owned enterprises. Since the financial statements of many of the state-owned enterprises (SOE) are not audited by the Auditor General of Pakistan, there are transparency issues relating to the use of public funds in these enterprises that may not be subjected to legislative scrutiny by the Public Accounts Committee.
The reasons include, but are not limited to, lack of capacity in the office of the Auditor-General to co-ordinate and review the work of external auditors of these enterprises. There is a need for specialised training in the use of international accounting and auditing standards, and in using the work of other auditors.
Many of the state-owned enterprises are outside the IAS/IFRS and other financial reporting and enforcement regimes of the Securities and Exchange Commission of Pakistan and State Bank of Pakistan. Those state-owned enterprises registered by the Securities and Exchange Commission of Pakistan should be audited by professional accounting firms that are selected by, and report through, the Auditor General.
There is a need for the DAGP Commercial Audit Wing (after it is strengthened) to review all state-owned enterprises for IAS/IFRS compliance. In addition, the Corporate Finance Wing in the Ministry o f Finance, whose responsibility is to do more general monitoring, will be strengthened under a proposed capacity-building project. This project, funded by the World Bank, has not yet started.
Continuing to improve public financial management through the reform program, the WB report said that Public Financial Management relies on a comprehensive and timely accounting and financial reporting system. This system should be supported by a professional audit function that assures competency and reliable information within the system.
Current enforcement of adequate compliance with financial regulations in the general budget sector and corporate governance in the public enterprise sector falls short of satisfactory performance. The Country Financial Accountability Assessment for Pakistan concluded that there are significant challenges remaining within the country's public financial management reform agenda to improve the effectiveness and productivity of public spending. Ongoing reforms and capacity-building measures will help to strengthen performance in the PFM arena.
Accountability, based on formal adoption of international accounting and auditing standards, is a timely step for the Government of Pakistan to take now. And the implementation of these standards needs to be supported by a more comprehensive PFM reform program to achieve substantial positive impact.
The PIFA-II is covering most of the required reform elements. The Finance Division had issued in September 2006 a memorandum covering a new system of financial control and budgeting, which, inter alia, includes the specific duties and responsibilities of Principal Accounting Officers, Chief Finance and Accounts Officers, and Financial Advisers. Economy and regularity are the two main principles to be observed, the report added.
The report urged that legislation should provide an environment in which the Auditor General is free to meet with the media on audit reports. In Pakistan, unlike in other countries, the audit report is never discussed with the media. The only point in time when the press gets formal acknowledgement of an audit report is when the Public Accounts Committee deliberates on audit observations.
The model legislation for Supreme Audit Institutions reads, 'The Auditor General or his/her authorised staff may provide comments and interviews to the press or other media on the subject of any published audit reports.'
The WB report said that the Controller General of Accounts (CGA) program, to provide annual accounts in the International Public Sector Accounting Standard (IPSAS) format, needs to be established reliably. The timetable and program for implementation of the newly adopted Financial Audit Manual needs to be specified to accord with the availability of auditable accounts. The Manual is aimed at forming an opinion on the truth and fairness of the financial statements so that the Auditor General can sign an opinion in accordance with ISA 700. The audit methodology specifies how the audit work can be planned to meet the confidence level that is implicit in the audit opinion, and identify the level and extent of audit testing required in order to express that opinion.
The World Bank report has identified three gaps:
(1) Accounting policies and notes to the accounts are absent.
(2) (2) Third party transactions are not included and
(3) (3) Controlled entities' financial information is not consolidated.
The functions of the chief financial officer and internal auditing within each government entity should be strengthened to assist with the reliability of the reporting. Duality of control by provincial and national governments over some offices under the CGA authority needs to be resolved for coherent reporting and undiluted administration of the accounting and reporting function, the report suggested.
The Auditor General needs improved legislation to exclude limitations on jurisdiction, mandate, and function of this position; and improved offence clauses together with enhancement in transparency and disclosure of audit conclusions. While not mandatory, the national audit legislation should match international model.
The WB Sector report said that the assessment of public sector accounting and auditing is generally meant to help implement more effective public financial management (PFM) through better quality accounting and public audit processes in Pakistan and to provide greater stimulus for more cost-effective outcomes of government spending.
More specific objectives are:
(a) to provide the country's accounting and audit authorities and other interested stakeholders with a common, strongly-founded, knowledge as to where local practices stand against the internationally developed norms of financial reporting and auditing;
(b) to assess the prevailing variances;
(c) to chart paths for improving the accordance with international standards; and
(d) to provide a continuing basis for measuring improvements.
The WB report said that at the present time, Pakistan does not comply with the International Public Sector Accounting Standard (IPSAS) in preparing its annual accounts. The country's accounts do not provide a statement of cash receipts and payments which (a) recognises all cash receipts, cash payments, and cash balances controlled by the entity; and (b) separately identifies payments made by third parties on behalf of the entity in accordance with paragraph 1.3.24 of this IPSAS.
In addition, the country's accounts do not provide accounting policies and explanatory notes. A general program is underway for the adoption of accounts in a form specified in its New Accounting Model (NAM).
This form of reporting was developed in 1998 and adopted the proposed modified cash basis of accounting standard. The modified cash basis of accounting helps in controlling not only cash but also commitments against budget, allowing the production of a statement of receipts and payments, a statement of assets and liabilities, and a cash flow statement, the report added, and said that the IPSASB has not approved this form of reporting as an official standard. It has established standards for accrual-based reporting and also the Cash Basis IPSAS together with guidance for transition to an accrual basis of accounting.
Under the guidance of the Auditor General of Pakistan (AGP), the Controller General of Accounts (CGA) needs to restructure the present cash basis of financial reporting to conform fully to the Cash Basis IPSAS. While the IPSAS-2 reporting format has been designated by the Auditor General as additional reporting requirements for the government, it would be appropriate to set up a committee to review and steer the process to implement Cash Basis IPSAS on continuous basis. With strengthened capacity effected by recruiting financial reporting specialists for the CGA administration, a transition to full Cash Basis IPSAS--while also adopting the Modified Cash Basis IPSAS as per the New Accounting Model (NAM)--can be smoothly accomplished, although the problem of consolidation of controlled entities would still persist.
The Government noted in its response to the draft report that the requirements of cash basis of accounting had been incorporated in the NAM Manual of Accounting Principles and its Procedures Manual and that the progressive implementation of the NAM would meet all requirements. As a next step, a transitional path should be developed that presents the full accrual information to best serve the general financial statements as required under Section 7(b) of the CGA (Appointment, Functions and Powers) Ordinance 2001.
The Auditor General of Pakistan has approved the new Financial Audit Manual, which follows the modern risk-based certification audit approach. A program for implementation of this Manual is in preparation. The Auditor General has already formally adopted the INTOSAI Auditing Standards with minor modifications. The INTOSAI recognises that its Auditing Standards are broad in nature and that the IFAC-issued International Standards on Auditing provide a further level of detail for public sector audit guidance. The INTOSAI is working with IFAC in the longer term to develop practice notes to assist with the implementation of each ISA in the public sector.
The WB report urged to improve the jurisdiction, mandate, and functions of the Auditor General of Pakistan as envisaged in the Auditor General Ordinance 2001, and strengthen the reporting and disclosure processes of audit conclusions. Auditing practices need to be revised in line with the INTOSAI Auditing Standards, IFAC-issued International Standards on Auditing, and the new Financial Audit Manual. Reporting of audit results needs to be more timely and to be disseminated more publicly. The incentives for auditees to take action on audit findings would increase by facilitating easy access to, and greater dissemination of, audit reports. And this would be helped by more focused and effective report writing and report follow-up processes.