Liberia Workshop Developing Internal Audit

1. Liberia WorkshopDeveloping Internal Audit March 1, 2011 Mario Pessoa

2. Good PFM Systems Require Attention to Multiple Issues • Legal and institutional framework • Medium-term planning • Budget preparation and execution • Internal Control and Internal Audit • Cash and Debt Management • Asset Management • Accounting and Reporting • External Audit

5. Internal Audit Function in the World • Indicator 21 on Internal Audit: (i) Coverage and quality of the internal audit function; (ii) frequency and distribution of reports; (iii) extent of management response to internal audit findings • PEFA Assessments in 106 countries appoints that “indicator 21” on Internal Audit scores “C” or “D” in 101 countries, “B” in 3 (Mozambique, Mauritius, Seychelles), and “A” in only 2 (South Africa and Brazil)

6. INTOSAI INTERNAL AUDIT STANDARDS • Basic postulates: the development of adequate information, control, evaluation, and reporting systems facilitates the accountability process. Authorities should ensure the promulgation of acceptable accounting standards for financial reporting and disclosure relevant to the needs of the government. Each audit body should establish a policy to ensure its work is of high quality • General standards: individual auditors and the audit body must be independent of the executive, of the individual entity being audited, and of any political influence; they must possess the required competence; and they must exercise due care and concern in complying with specific auditing standards • Field standards: auditors should design procedures for the completion of regularity audits to provide reasonable assurance of detecting errors, irregularities, and illegal acts that could have a direct and material effect on the financial statement amounts; auditors should evaluate the reliability of internal controls; and a regularity audit should provide assurance that the budget and accounts are complete and valid • Reporting standards: following each audit, the chief auditor should prepare a written opinion or report setting out the findings in an easy-to-understand form, including only information that is supported by competent and relevant audit evidence; audit reports should be independent, objective, fair, and constructive (i.e., they should address future remedial action)

7. Definition of Internal Audit (IA) • IA is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations • IA evaluates and improves effectiveness of internal control processes and risk management • It Improves an organization’s operations, particularly internal control • It helps an organization accomplish its objectives

8. IAA Standards • The International Standards for the Professional Practice of Internal Auditing issued by theInstitute of Internal Auditors (IIA) are: • The purpose, authority, and responsibility of the internal audit activity must be formally defined • The internal audit activity must be independent, and internal auditors must be objective in performing their work • The chief audit executive must communicate and interact directly with the board • Internal auditors must have an impartial, unbiased attitude and avoid any conflict of interest • Internal auditors must possess the knowledge, skills, and other competencies needed to perform their individual responsibilities • The chief audit executive must establish risk-based plans to determine the priorities of the internal audit activity

9. IAA Standards (cont.) • The chief audit executive should share information and coordinate activities with other internal and external providers of assurance and consulting services to ensure proper coverage and minimize duplication of efforts • The internal audit activity must evaluate and contribute to the improvement of governance, risk management, and control processes using a systematic and disciplined approach • Internal auditors must document relevant information to support the conclusions and engagement results • Communications must include the engagement's objectives and scope as well as applicable conclusions, recommendations, and action plans • Communications must be accurate, objective, clear, concise, constructive, complete, and timely • The chief audit executive must establish and maintain a system to monitor the disposition of results communicated to management

10. IA Models • Centralized – third-party ex-ante approach – MOF directly intervenes in ex-ante controls placing its own staff in Line Ministries • Decentralized – management responsibility approach – Each line ministry takes full responsibility for spending its own budegt and for ensuring appropriate checks and safeguards on the way this is spent

11. Country’s Approach • France, Portugal, Spain – strong focus on ex-ante control • UK – decentralized with centralized guidance from the Treasury • USA – IA inspector general reports to the head of the agency but reports go to Congress • Germany – is part of the external control system. Federal Court of Audit supervise and guide the work of the IA. Report only to external auditor. Pre-audit role.

12. Country’s Approach (cont.) • Anglophone African Countries – Westminster model – MOF is primarily an office of superintendence and appeal. The IA can be viewed as support to the MOF in the monitoring of compliance by the line ministries with financial regulations and accounting procedures. But there are two ambiguous roles: central control and service provided to the accounting officers.

13. Country’s Approach (cont.) • Francophone African Countries – centralized IA function. Pre-audit role performed by financial comptroller and public accountants, centrally managed. The FC and accountants approve payments individually after authorization issued by financial controller. IA has a more investigative approach in case of irregularities. Sometimes functions are not well defined.

14. Country’s Approach (cont.) • Latin America – centralized and focused in pre-audit of payments. Some Contralorias accumulate accounting and auditing functions (Chile, Colombia, Mexico). Most recently some countries adopted an independent, centralized IA that is focused in pre-audit, reports to the SAI, defines audit standards, and has expanded the scope to work also with performance audit (Argentina, Brazil).

15. LM Brazil – Comprehensive Approach Compliance Performance MTEF/BUDGET Legal and Accounting Rules Resources FINANCE

16. Brazil - Organization of the Internal Control System Evaluation of Program Performance Evaluation of Rules and Procudures IA Evaluation of Fiscal Rules

17. $ 100% 95% 80% C Asymetric B A Systematic Actions 20% 50% 100% A = Essential Program B = Relevant Program C = Non Critical Program ABC Curve of Program Hierarchy (Relevance, Materiality, Risk)

18. GENERAL SPACIAL DISTRIBUTION Pacific Ocean Atlanfic Ocean

19. PARANÁ – SAMPLE REGIONAL DISTRIBUTION

20. HousingProgramInspection House made of gross sand (saibro) previously inhabited Habitational Unit Built

21. TRANSPARENCY PORTAL

22. TRANSPARENCY PORTAL

23. Key challenges in this area Design level issues: • Scope of IA • Its central role in the context of the trend toward devolution of controls to line agencies • IA is a tool of the management (In addition to compliance and financial audits, to what extent the IA should focus on ensuring efficient and effective use of resources to achieve the management’s objectives?) • Organizational structure for IA • Degree of centralization: role of central ministry of finance vs. line ministries/agencies • Should IA units be established in all or in key ministries/agencies? • Role and responsibilities of Internal Auditors • Internal audit vs. External Audit • Ex ante control vs. Internal Audit • Staging/sequencing of IA reform and linking it to reforms in related PFM areas

24. Key challenges in this area Implementation issues: • Overall PFM structure as a foundation for IA • Is the basic PFM structure adequate to make an IA system functional? (sequencing of reforms is important) • Professional proficiency • Appropriate audit methodology, work practices • Technical competence of Internal Auditors • Management of IA function • Identifying risk and evaluating internal control systems and procedures to counter risk • Audit planning and personnel management • Ensuring complementarity with external audit • Follow-up (on findings of IA) and oversight (by Parliament and external audit) • Culture • “Open” culture to detect irregularities or non-compliance • Integrity of top management (to whom Internal Auditors report) • Scope for collusion

25. Discussion and Questions and Answers

26. Reference • http://www.theiia.org/ • http://blog-pfm.imf.org/pfmblog/research-papers.html - Jack Diamond - The Role of Internal Audit in Government Financial Management – IMF WP/02/94