Some issues with rating of PI 25 – Quality and timeliness of annual financial statements Sanjay Vani Lead FMS OPCFM Fiducairy Forum March 2008

Dimension 1 – Completeness of the Financial Statements Description of the Issue In many countries consolidated financial statements, in true accounting sense, are not produced. In view of this, it is suggested that minimum requirement for score B and score C be amended as follows:

B Financial statements are produced annually for all central government ministries, departments and agencies. They include, with few exceptions, full information on receipts, payments and financial assets/liabilities. C Financial statements are produced annually for all central government ministries, departments and agencies. Information on receipts, payments and bank account balances may not always be complete, but the omissions are not significant.

Analysis Preparation of consolidated financial statements is generally accepted as an “international good practice” and consistent with the principle of comparing high level indicators with international good practices, it is appropriate to set the preparation of consolidated financial statements as a benchmark to measure the actual performance in a country. The question then is whether we should change the scoring requirement for B and or C in such a way as to totally negate the key benchmark requirement for consolidated financial statement by not referring to it at all.

Proposal The language could be tightened a bit to provide better consistency between score B and score C requirements as follows:

B A consolidated government statement is prepared annually. They include, with few exceptions, full information on revenue, expenditure and financial assets/liabilities C A consolidated government statement is prepared annually. Information on revenue, expenditure, and financial assets/liabilities and bank account balances may not always be complete, but the omissions are not significant.

Dimension 2 – Timeliness of submission of the Financial Statements Description of the Issue There are two issues being raised here – one is to delete the reference to consolidated financial statement and replace it with individual line ministry financial statement. And the second suggestion is to reduce the timeframe for submission of financial statements to the auditors.

A The financial statements for 90% of ministries, departments and agencies are submitted for external audit within 4 months of the end of the financial year B The financial statements for 90% of ministries, departments and agencies are submitted for external audit within 6 months of the end of the financial year C The financial statements for 80% of ministries, departments and agencies are submitted for external audit within 10 months of the end of the financial year

Analysis It is important to maintain consistency with the principle of comparing high level indicators with international good practices. It is therefore appropriate to retain reference to consolidated financial statements. Consistent with the IPSAS (Cash Basis – Para 1.4.4), which recommends a timeframe of no more than 3 months for issuing financial statements, the requirement for score A could be revised to 3 months (from 6 months), for score B could be revised to 6 months (from 10 months), for score C is revised to 10 months (from 15 months), and for score D could also be revised based on the non-compliance with score C timeframe. The revised language is:

Minimum requirements (Scoring methodology: M1) A (ii) The consolidated financial statement is submitted for external audit within 3 6 months of the end of the fiscal year. (ii) The consolidated financial statement is submitted for external audit within 3 6 months of the end of the fiscal year. B (ii) The consolidated financial government statement is submitted for external audit within 6 10 months of the end of the fiscal year. (ii) The consolidated financial government statement is submitted for external audit within 6 10 months of the end of the fiscal year. C (ii) The consolidated financial statements are is submitted for external audit within months of the end of the fiscal year. (ii) The consolidated financial statements are is submitted for external audit within months of the end of the fiscal year. D (ii) If consolidated financial annual statements are is prepared, it is they are generally not submitted for external audit within months of the end of the fiscal year (ii) If consolidated financial annual statements are is prepared, it is they are generally not submitted for external audit within months of the end of the fiscal year

Dimension 3 – Accounting Standards Used Description of the issue Since only a handful of countries have actually adopted Cash Basis IPSAS, Dimension 3 should not expect a country to adopt Cash Basis IPSAS. Recommends that score B be amended as follows (while no change is recommended for other scores).

B Requirements for the scope, basis, content and format of the annual financial statements are included in reasonable detail in the appropriate law, financial regulations or authoritative accounting standards

Analysis While in many countries, accounting standards are embodied in laws, regulations, decrees rather than as a separate body of accounting standards, the dimension compares national standards with IPSAS, which are generally accepted accounting standards in the public sector and evaluates actual application of the national standards. In view of the guidance provided in the IPSAS, the timeframe for the issue of consolidated financial statements could be revised including tightening of the language

Minimum requirements (Scoring methodology: M1) A (iii) National Standards corresponds fully with IPSAS. IPSAS or corresponding national standards are applied for all financial statements. (iii) National Standards corresponds fully with IPSAS. IPSAS or corresponding national standards are applied for all financial statements. B (iii) National Standards corresponds with IPSAS with few exceptions, which are not significant. IPSAS or corresponding national standards are applied for all financial statements with few exceptions. (iii) National Standards corresponds with IPSAS with few exceptions, which are not significant. IPSAS or corresponding national standards are applied for all financial statements with few exceptions. C (iii) National Standards corresponds with IPSAS with some exceptions. IPSAS or corresponding national standards are applied for all financial statements with some exceptions. Statements are presented in consistent format over time with some disclosure of accounting standards. (iii) National Standards corresponds with IPSAS with some exceptions. IPSAS or corresponding national standards are applied for all financial statements with some exceptions. Statements are presented in consistent format over time with some disclosure of accounting standards. D (iii) National Standards do not correspond with IPSAS. IPSAS or corresponding national standards are not applied consistently for all financial statements. Statements are not presented in a consistent format over time or accounting standards are not disclosed. (iii) National Standards do not correspond with IPSAS. IPSAS or corresponding national standards are not applied consistently for all financial statements. Statements are not presented in a consistent format over time or accounting standards are not disclosed.