Financial Accountability Assessments (CFAAs) for Governmental Financial Management

1. Country Financial Accountability Assessments (CFAAs)20th International Conference on New Developments in Governmental Financial Management May 8-12, 2006 Miami, Florida USAAdriana Arroyave & Deborah Sprietzer, IDBPatricia Hoyes, The World Bank

2. CFAAs • Background II. Baseline Indicators III. Procedures IV. Conclusions

3. CFAAs Background- Scope • Diagnostic evaluations - not audits. • High-level, strategic evaluations of the country. • Not evaluations of a sector, project or executing agency. • Performed at the National level but sometimes also include evaluations of municipalities.

4. CFAAs I.Background - History: Began as part of the World Bank’s Economic Sector Work (ESW) Mandate by the WB’s Board of Directors to complete all CFAAs by 2004 After the Rome Declaration on harmonization, the MDBs decided to perform the CFAAs jointly. The IDB has been conducting joint CFAAs with the WB since 2001

5. CFAAs I. Background - Objectives: • Strengthen the capacity of the country to effectively manage and monitor public funds, in addition to their oversight. • Promote the rendering of accounts, as well as the integrity and transparency of the process, and reduce the possibility of corruption. • Facilitate compliance with internationally accepted principles and practices.

6. CFAAs I. Background Use by the Country and the Bank as a diagnostic of: • Financial management framework. • Institutional, organizational and fiduciary risks. • Level of risk associated with financial management.

7. CFAAs I. Background Use for the Country and the Bank: • Basis for dialogue between the government and the Bank to simplify and improve the economy, efficiency and transparency of government financial management. • Action plan for institutional strengthening. • Identification of possible projects eligible for Bank financing.

8. CFAAs I. Background Use for the Country and the Bank: • Selection of appropriate lending instruments, based on the level of risk and institutional capacity of the country (Policy Based Loans, Performance Driven Loans, Sector Wide Approaches). • Important element as an input to the country strategy.

9. CFAAs I. Background - Donor efforts to increase the effectiveness of its assistance: Harmonization of the MDBs in procurement and financial management • Memorandum of Understanding between the IDB and the World Bank (updated in 2004) • Common sectoral work in procurement and financial management - Joint Country Procurement Assessment Reports and CFAAs performed

10. CFAAs Joint CFAAs Performed: • Since 2002, nineteen CFAAs have been performed. • In 2005, two CFAAs were conducted in Argentina and Panama and one was updated in Honduras.

11. CFAAs • Bolivia • Brazil • Colombia • Costa Rica • Chile • Dominican Rep. • Ecuador • El Salvador * • Guyana • Honduras * • Jamaica * • Mexico • Nicaragua • Panama* • Paraguay • Uruguay • Argentina • El Salvador* • Guatemala • Panama* • Jamaica* • Peru • Barbados • Bahamas • Belize • Haiti • Suriname • Trinidad • Venezuela * Update of Prior CFAA Completed

12. CFAAs II. Baseline indicators used as a reference point to evaluate financial management systems: • PEFA - Public Expenditure and Financial Accountability, Public Financial Management, Performance Measurement Framework (www.pefa.org) • It is a program sponsored by several donors, including the World Bank, the International Monetary Fund, the European Commission, and DFID.

13. CFAAs II. Baseline indicators used as a reference point to evaluate financial management systems (PEFA): • Consist of 28 high-level performance indicators, classified into 3 categories: - Public financial management out-turns (results) - Key cross-cutting issues (comprehensiveness and transparency) - Budget cycle

14. CFAAs II. Baseline indicators used as a reference point to evaluate financial management systems (PEFA): • In addition to the performance indicators related to the country’s public financial management, this framework also includes Donor Practices (3 indicators)

15. CFAAs II. Baseline indicators used as a reference point to evaluate financial management systems (PEFA): Use of indicators in recent CFAAs (2006) • Some CFAAs are being conducted, taking into account the PEFA indicators (for example, Panama) • Thought to be used in all future evaluations

16. CFAAs III. Procedures - Steps • Scoping mission and preparation of the planning document, which includes the date of the main mission, risks, background, team members (IDB, WB, and consultants), and the focus and scope of the assessment • CRG Meeting (ICM for the WB) • Main mission (Fact Finding Mission) and preparation of the draft report. • CRG Meeting (Decision Meeting for the WB)

17. CFAAs III. Procedures - Steps • Submit the draft report to the government. • Hold a workshop with the government, donors, and members of civil society. • Finalize and publish the final report.

18. CFAAs III. Procedures – Audit vs. CFAA • Not a financial audit. It is a diagnostic evaluation. • A major difference between an audit and this type of diagnostic is that the government is a part of the CFAA process, and is a very important player. • We do not conduct a CFAA, if the government does not want it done (for example, the CFAA in Brazil).

19. CFAAs III. Procedures – Audit vs. CFAA • At the end of the CFAA, we deliver a draft report to the government for its review and comments. If the government is not in agreement with part of the report, we are obligated to come to an agreement and prepare a report that is acceptable to all parties involved. • If the government does not want to publish the report, it is not published (for example, the fiduciary risk assessment).

20. CFAAs III. Procedures – Audit vs. CFAA • However, as part of an audit (for example, an audit of the financial statements of a Bank-financed project), the auditors can report what they want to report, regardless of whether the government is in agreement or is pleased with the contents of the report.

21. CFAAs III. Procedures– Audit vs. CFAA Both CFAAs and audits involve: • Interviews, • Reviews of documentation (for example, legislation, manuals, organizational charts, procurement documents, typical contracts, documents related to the fight against corruption), and • Observation of systems and financial and procurement processes. But...

22. CFAAs III. Procedures – Audit vs. CFAA • A CFAA does not included detailed tests of financial transactions, amounts, internal controls, or documents specific to a project, as required as part of a financial audit. • The CFAA report includes the team’s conclusions, but it is not an “opinion” and does not comply with any auditing standards.

23. CFAAs III. Procedures – Audit vs. CFAA • The CFAA report includes an action plan, based on the conclusions agreed upon with the government. • An audit report includes the recommendations of the auditor to resolve or mitigate the condition or lack of adequate internal control. The auditors can decide to incorporate or not incorporate the suggestions made by the government (auditee). • The results of the CFAA are for the use of the government, the Banks, and the donors, to make key management decisions (i.e., to decide whether we can rely on country systems for a SWAp).

24. CFAAs III. Procedures – CFAA – Significant Areas of Focus • Legal and Institutional Framework • Economic and Political Environment and the Private Sector • Financial management system (budget, treasury/accounting, debt management, revenue) • Evaluation of risks • Internal and external control

25. CFAAs III. Procedures – Legal Framework • Review and evaluate the applicable laws, regulations, policies, and procedures related to the country’s public financial management systems

26. CFAAs III. Procedures – Economic and Political Environment • Determine whether the economic and political environment of the country has (or will have) an impact on financial management • Identify when a change in government is going to occur, and consider its impact (i.e., if it is thought that the party in power will change) • Consider the country’s level of debt, forecasts, level of inflation

27. CFAAs III. Procedures – Economic and Political Environment • Private sector practices in relation to financial management systems, and the private sector’s attitude toward financial management systems (actions and perceptions)

28. CFAAs III. Procedures – Financial Management Systems • In each of the systems (revenue, budgetary, accounting and debt management), evaluate if the planning, execution, reporting and internal controls related to revenues and public expenditures are adequate. • This implies that an evaluation of the budgetary, accounting, audit, and procurement systems will be conducted.

29. CFAAs III. Procedures – Internal Control • In each Ministry and within each financial management system • Internal Audit • Preventive or detective controls • Manual and automated controls

30. CFAAs III. Procedures – External Control • Independence of the Controller General of the country (CG) and the Solicitor General – the Controller and his staff – both in name and in practice, including his budgetary and human resources • Capacity and competence of his staff • Control environment and whether there is a tolerance for fraud and corruption • The Congress/Public Accounts Committee • Civil Society

31. CFAAs IV. Conclusions • CFAAs are key instruments for establishing the level of country fiduciary risk. • Constitute an essential element of good government and therefore are key to effective development.

32. CFAAs IV. Conclusions • Use of the results as input to: determining country risk, level of reliance on country systems (for PDLs, SWAps, PBLs and sector loans), country strategy, and the identification of new loans.

33. Questions