Madagascar - Accounting and Audit Organization and Training Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3151-MAG MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT STAFF APPRAISAL REPORT May 11, 1981 Energy and Water Supply Division Eastern Africa Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1.00 = FMG 200 FMG 1.00 = US$0.005 ABBREVTATIONS BEFEC Bureau d'Etudes Financieres et de Controle Comptable CFC Centre de Formation en Comptabilite CSR Supreme Council of the Revolution CUR University Regional Center (University of Madagascar) EPIC Industrial and Commercial Public Establishment FF French Franc FMG Malagasy Franc ILO International Labor Organization INPF Institut National de Promotion-Formation MEC Ministry of Economy and Commerce MHE Ministry of Higher Education PMM Peat, Marwick, Mitchell and Co. PNA Popular National Assembly RINDRA Malagasy Audit Organization UNDP United Nations Development Program FISCAL YEAR July 1 - June 30 This report is based on the findings of the appraisal mission consisting of Messrs. J. Shaukat, J. Boutan, and R. J. Bourque (consultant), who visited Madagascar in May and June 1980.  FOR OFFICIAL USE ONLY MADAGAS CAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT Table of Contents Page No. I. ACCOUNTING AND AUDIT IN MADAGASCAR Background ........................................... 1 Need for Accounting, Audit and Management Consulting Services .......................................... 3 Sector Constraints ..................... 4 II. THE PROJECT Project Objectives ..................... 4 Project Description and Scope ............... . 4 Project Cost Estimates ...................... 8 Basis for Cost Estimates ...................... 9 Financing Plan ...................... 9 Implementation Schedule .............................. 10 Procurement .......................................... 10 Disbursement ......................................... 11 Project Alternatives ................................. 11 Alternative Locations for Accounting Training Center . 12 Alternative for Number of Classes and Students . . 12 Foreign Training vs. Local Training ......... ......... 13 Monitoring .......................................... 13 III. IMPLEMENTING AGENCIES General ........................................... 14 Ministry of Higher Education and Scientific Research . 14 Ministry of Economy and Commerce .......... ........... 14 RINDRA-s: Order of Incorporation ......... ................... 14 Management ........................................ 15 Consultant ........................................ 15 Operations ........................................ 16 Accounting and Auditing ........................... 16 IV. FINANCIAL ASPECTS Accounting Training Center ............. ............. 16 Past Operations and Financial Position of RINDRA .... 17 Level of RINDRA's Fees .............................. 18 Future Financial Position of RINDRA ......... ........ 18 Local Consulting Firms .............................. 20 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Table of Contents (Continued) Page No. V. JUSTIFICATION AND RISKS Justification. 21 Benefits ............................................. 21 Risks ................................................ 22 VI. AGREEMENTS TO BE REACHED AND RECOMMENDATION .... ........ 22 LIST OF ANNEXES 1. Educational Facilities 2. Existing Company and Accounting Legislation 3. Major Accounting and Management Services Firms 4. Charter of Socialist Enterprises - 1978 5. Project Description 6. Outline of Proposed Legislative Measures 7. Estimated Disbursement Schedule 8. ?roject Monitoring 9. RINDRA - Balance Sheets 1980-1989 10. RINDRA - Income Statement 1980-1989 11. RINDRA - Projected Funds Flow Statement 1981-1989 12. RINDRA - Notes and Assumptions for the Financial Statements 13. Selected Documents and Data Available in Project File MAP - Madagascar (IBRD 14160)  MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT I. ACCOUNTING AND AUDIT IN MADAGASCAR Background 1.01 The Democratic Republic of Madagascar, one of the thirty poorest countries in the world, had a per capita GNP of US$240 in 1977. Although the country has some favorable conditions for economic development, such as a wide range of natural resources, a pleasant climate, and a population that is receptive to innovation, economic growth has been sluggish and the balance of payments is adverse. Real GNP has increased by barely 3 percent since 1970. The goal of the Government is to promote rapid economic development to achieve a higher growth rate and to establish a just and equitable social order. Government action to further this plan includes restructuring and nationaliza- tion of companies in order to make them more responsive to national neecs. In the course of restructuring these enterprises Madagascar felt the need for more accurate and informative financial reporting. The Government had requested Bank assistance and has agreed to implement a project to train accountants and auditors, to upgrade the expertise of local financial management consultants, and to review legislation related to auditing and financial reporting require- ments. 1.02 In 1960, when the country gained its independence from France, there was little industrial development, except for some foodstuff processing and minerals, so the Government has since then encouraged investment in commerce and industry. As a result the industrial sector share of value added increased from 5% of GNP in 1960 to about 17X of GNP in 1977 1/. The majority of the largest enterprises were French-owned at the time of independence while a high proportion of smaller businesses were owned by South Asians. 1.03 Immediately after independence, management positions in Malagasy enterprises continued to be staffed mainly by French nationals, but in 1972 a change in Government resulted in major policy changes and many French managers and technicians started to leave the country. Most of those who had remained left-in 1975, following the nationalization of major foreign-owned enterprises, and many enterprises thereby lost their senior managers and accountants. The accounting departments of those enterprises continued to be staffed by well- trained junior and middle level Malagasies, but the senior and top managerial accounting positions were filled, in most cases, by civil servants without experience of commercial accounting, or by inadequately qualified accountants from the private sector. 1.04 Since the early 1970s, the accounting profession as a whole, has stagnated. The "Ordre des Experts Comptables et des Comptables Agrde's' 1/ Madagascar: Recent Economic Developments and Future Prospects, World Bank, October 25, 1979.  - 2 - (Order of Accountants) was created in October, 1962, but has only 36 members with no admissions since 1971. Apart from this group, there are only 40 other accountants in Madagascar who have overseas accounting qualifications, the majority being employed in commercial organizations. Out of the 36 members of the Order of Accountants, six are "Experts Comptables" 1/ and thirty are "Comptables Agrees" 2/. Despite a demand for accountancy training, no accountant of either category has qualified in Madagascar since 1971, as the educational and training facilities (Annex 1) for the high academic achievement required are not available in Madagascar. Degrees in accounting are not offered at the University of Madagascar or by any other training school. The only accounting courses offered are at elementary level as a part of the economics or management degree courses. 1.05 Development of the accounting profession has not progressed in Madagascar because existing legislation governing audit and financial reporting is outdated (Annex 2), and does not specify accounting and auditing standards to be met by commercial enterprises and auditors. At present, the only effective Government requirement for financial statements comes from the Income Tax Department, which demands accounts in support of tax returns from companies with annual sales of more than FMG 30 million (above US$150,000). The 1867 law relating to limited liability companies (Societes Anonymes) only requires that financial statements be submitted to shareholders after they are reviewed by a "Commissaire aux Comptes" whose qualifications are not specified. Neither the content of the financial statements, nor the extent to which the investigation should be carried out by the Commissaire aux Comptes is specified by law, and so the review of companies' accounts is often superficial. The 1925 law relating to limited liability partnerships (Societes 'a Responsibilite Limitee) is similarly undemanding. 1.06 Consultancy services in Madagascar relating to financial systems and procedures (Annex 3) lack an adequate number of professionals with accounting and auditing skills. Most of these organizations are linked with or rely, to varying degrees, on the assistance of expatriate personnel or foreign manage- ment consulting firms, whose availability is severely restricted by exchange control constraints. Although the quality of these services is generally satisfactory, their dependence on outside assistance indicates the need for technical assistance in the training of local accounting consultants. 1/ An Expert Comptable is required to have studied accounting and auditing for four years, to have had two years of accounting experience, and to have passed an examination equivalent to the French Expert-Accountant examination, the highest accountancy qualification in France. Experts Comptables, under Madagascar's 1962 Ordinance, are authorized to verify, prepare and analyze accounts of enterprises and to act as legal arbitra- tors in related matters. 2/ A Comptable Agree is required to have studied accounting and auditing for two years and to have had two years of practical accounting experience. Comptables Agrees have the same responsibilities as Experts Comptables, except that they are not statutorily authorized to analyze accounting data or serve as arbitrators.  - 3 - 1.07 In recent years the Government has taken measures that will ensure greater Government control over major commercial enterprises and has made an effort to improve the standard of accounting and auditing. To these ends, a Charter of Socialist Enterprises (the Charter) (Annex 4) was promulgated in May 1978 and a national audit company, RINDRA, was established in April 1979. The Charter covers all types of public enterprises in which the state owns directly or indirectly 51 percent or more of the equity capital. Due to administrative difficulties, only 19 enterprises were so controlled by April 1980, but it is estimated that perhaps 150 enterprises would eventually be regulated by the Charter. 1.08 According to the Charter, each economic sector will have its own "Orientation Council" which will oversee all the Socialist Enterprises in that sector. Auditors will be appointed by the Council and will be required to submit an annual report. The duties assigned to auditors are broad in scope. 'hey are not only required to report on the fairness, accuracy and correctness of accounts, but also to report on management-s performance and on the enter- prise's operational aspects, such as whether or not the enterprise has met objectives set by the Orientation Council. The stipulations of the Charter, particularly those relating to auditing and reporting, will thus necessitate a rapid improvement in quality as well as in the volume of accounting informa- tion required of accountants and auditors. 1.09 RINDRA provides audit services principally to those enterprises owned or controlled by the Government, and particularly, to those enterprises which come under the domain of the Charter. It is the first audit organization of its kind in Madagascar as the accounting requirements of the French, from whom the Madagascar system was inherited, did not include detailed audit. Need for Accounting, Audit and Management Consulting Services 1.10 Preparation by commercial enterprises of accurate, timely and com- prehensive accounts is essential for efficient planning and for management and financial control. Furthermore, reliable financial reports and statements are essential for managers, investors, creditors and government agencies. Audit of these accounts and certification of statements by independent auditors is necessary to determine their reliability. Financial control is important in the socialist environment of Madagascar where major commercial enterprises are government-controlled and where operations, planning and control functions are to be performed on an impersonal and centralized basis. The Government recognizes the importance of financial control (para. 2.01) and has clearly expressed in the Charter its intention to improve the quality and reliability of financial reporting. However, at present, there are insufficient accountants who can prepare such accounts or audit them satisfactorily. Once the Charter is fully applied and audit of enterprises both in public and private sectors becomes a statutory requirement, all the 150 government- controlled enterprises (para. 1.07) and about 350 private sector enterprises incorporated under the company and partnership laws of 1867 and 1925 (Annex 2), whose sales exceed FMG 30 million per year (para. 1.05), will require to have their accounts audited. Consequently, the number of companies needing audit services will total about 500, whereas at present only 45 to 50 could be served by the existing auditors with acceptable levels of competence.  - 4 - 1.11 Similarly, in the field of management consulting related to financial systems and procedures, the organizations which provide these services have limited capacity and generally provide these services with the assistance of foreign experts (para. 1.06). The proposed legal requirement that the commercial entities in the public and private sector (para. 2.03) have their accounts audited will correspondingly increase the demand for management services. Enterprises with inadequate financial systems and procedures will require consultancy and training assistance to achieve adequate standards of accounting and management. 1.12 The proposed project has been designed to help redress the shortages of skilled accountants, auditors and specialists in financial systems and procedures that persist due to the lack of adequate teaching and training facilities for professionally-qualified persons (para 1.04), and to provide the legal base requiring commercial enterprises to prepare accounts and financial reports in accordance with prescribed accounting and auditing standards. Sector Constraints 1.13 The principal constraints in the education and training of senior- level accountants and auditors to be addressed by the proposed project, are the lack of qualified teachers and of textbooks, both resulting from a shortage of foreign exchange. Intermediate or advanced level textbooks on accountancy and related subjects are not produced locally and their import is limited. II. THE PROJECT Project Objectives 2.01 In mid-1978 the Government requested IDA assistance in developing the commercial accounting and auditing sector in Madagascar, and the proposed project was appraised in June 1980. The primary objective of the project is to develop suitable legislation for the sector and upgrade the current level of expertise of accountants and auditors so as to help develop efficient management, planning, and financial control of Malagasy commercial enter- prises. The proposed project also provides for the development and strengthening of related educational, training and professional institutions through appropriate legislation and training programs. Project Description and Scope 2.02 The proposed project consists of the following components (a detailed description is provided in Annex 5): (a) The improvement of accounting, audit and related institutions and the strengthening of the profession through the development of proposals for legislation which would help establish professional and ethical standards and would require companies to prepare audited accounts in accordance with specified standards (para. 2.03);  (b) Setting up and staffing a pilot accounting training center in Antananarivo to be called Centre de Formation en Comptabilite (CFC) and providing the books, course materials, supplies, services and equipment required for operation of the center for six years (para. 2.04); (c) Training and supervisory services to assist the national audit organization, RINDRA (para. 2.05); and (d) Training and technical assistance to Malagasy management consulting firms to upgrade their expertise in financial systems and procedures (para. 2.06). 2.03 Proposals for new legislation would require (a) commercial enter- prises, particularly those in the public sector, and those in the private sector with diverse shareholders, to keep proper books of account and prepare and publish annual financial statements within a specified period in accordance with specified standards of minimum disclosure and in conformity with a national accounting classification code; (b) financial statements to be audited by qualified independent auditors who would certify whether they give a true and fair presentation of the state of affairs of the enterprise on a consistent basis; (c) persons authorized to act as auditors to have speci- fied minimum qualifications; and (d) professional auditors and accountants, as a group or society, to promulgate, under the authority to be provided by the Government, accounting and auditing standards, keep them under review, and issue recommendations to revise them, as well as to investigate departures from those standards by their individual members. The audit requirement would be enforced gradually, starting with the largest enterprises in the public sector. The legislative measures are essential to the project. Firstly, they would help meet the overall objective of providing timely, informative and reliable financial reports for effective management control and planning. Secondly, they would provide incentives for accountants and auditors to acquire expertise by creating the demand for the level of competence needed to produce, analyze, interpret and verify financial reports of legally prescribed professional standard. An outline of legislative measures needed is in Annex 6 and the project includes twenty man-months of consulting services to help the Government draft suitable legislation to give effect to these measures, which would be enacted after consultation with the Association (para. 2.10). The Government has agreed that it would take all steps necessary to ensure prompt enactment of legislation in accordance with an agreed schedule (para. 2.10). 2.04 Educational facilities (Annex 5) would provide classroom instruction for potential professional level accountants and teachers at an estimated cost  of some US$2,000 (equivalent) per student year 1/. A full-time five-year accountancy education program would be provided for students with appropriate high school (or equivalent) qualifications in day time classes. Similar courses would be provided for working accountants in evening classes and by correspondence. For evening classes, CFC would exempt students from those courses in which their knowledge was judged to be sufficient. CFC as a pilot institution would start with enrollment well below both the level of demand for its courses and the level adequate to meet the need for trained accountants. To help plan for its future level of activities, the Government would carry out a survey of projected future demand for trained accountants in the country (para. 6.01). The demand would be materially affected when the standards for accounting and auditing, and for qualification of auditors, are established through the proposed legislation (para. 2.03), the survey would therefore be made by December 31, 1983 for a ten-year period. The Government has agreed to carry out such a survey (para 6.01). The level of student attendance is expected to be substantially increased after the demand survey has been completed in 1983, and consequently the cost per student-year would decrease when the student enrollment is enlarged. Demand by high school graduates for courses in accounting subjects is considerable as is evidenced by the enroll- ment of up to 900 in the existing first year university classes. The appraisal mission discussed with officials of the Order of Accountants an outline of the syllabus (Annex 5-para 5.10) for the five-year courses proposed to be conducted at CFC. This outline would form the basis for CFC to develop detailed syllabi in consultation with the members of the Malagasy accounting profession and commercial organizations, and to select course materials and suitable textbooks. Qualified, internationally recruited staff would be employed for a total of about 279 man-months to organize CFC and conduct classes with the help of local training assistants who would be trained as teachers. The Government has agreed to appoint a Management Committee which will establish policies to be followed by CFC in its operation, management and planning. The Management Committee will comprise representatives of the relevant Government departments, accounting profession and the business community. The Committee will also help CFC ensure that its activities meet the requirements of Madagascar-s accounting and audit profession and commer- cial enterprises (para 6.01). 2.05 An efficient and creditable audit organization needs to provide considerable on-the-job training to its staff, in addition to theoretical instruction. Realizing this necessity, particularly in the context of the situation in Madagascar (para. 1.10), the Government, with the help of an international firm of accounting consultants, has been providing training 1/ During the four year period FY1983-86 (when CFC would not have full enrollment and much of the initial work of repairing, equipping and furnishing CFC, establishing syllabi, survey of demand for accountants and their training requirements would be carried out) the average cost per student-year in December 1980 constant prices is estimated at $4,900. In FY1987, after CFC has achieved its full planned level of daytime student attendance for all of its courses, the cost is estimated at $3,700 per student-year, decreasing to $2,000 in 1990 when CFC would be entirely staffed by Malagasy teachers.  - 7 - to RINDRA's audit staff, totalling about 30, since October 1978. Considerable progress has been achieved by RINDRA (a) in impressing upon managements of major commercial enterprises the need for and importance of proper accounting and impartial independent audit for their organizations; (b) in instituting selection and recruitment procedures for employment of RINDRA-s audit staff; (c) in training the staff in generally accepted accounting, auditing and related professional standards, and application of those standards in practice; and (d) in instituting basic time recording and audit planning procedures in RINDRA. RINDRA-s ongoing efforts to develop into a viable audit organization would be supported and continued under the project. The project therefore includes a five-year program for on-the-job training of RINDRA staff with the help of an estimated 156 man-months of accounting consultants, to be appointed in 1981. The program for on-the-job training would include various aspects of professional accounting and external audit services to clients such as review of internal audit procedures and internal control, detailed examination of documents and records, special investigations, taxation, preparation and certification of accounts statements, and report writing. To establish and implement the internal procedures for RINDRA, the program would include staff recruitment and training, business promotion and client relations, as well as planning, organizing, staffing, supervising, controlling and carrying out of audit and other professional assignments, negotiation of fees with clients, and billing and collection of fees. 2.06 Practical training, with the assistance of foreign consultants, in accounting systems and procedures would help local consultants to provide technical services to local commercial enterprises who need to improve their accounts and management reporting for better control and planning. Training in this field would include: (a) review of the accounting procedures followed by a client enterprise, relating to functions such as budgeting, purchases, sales, payroll, payments, credit and collections, inventory and stock control, construction, manufacturing, and operational and internal management reporting; (b) assessment of adequacy of those procedures for establishing internal control and for collection of operational and financial data; and (c) design and implementation of suitable procedures where they are inadequate. These specialized services are important to help achieve the project's objectives and the related assistance is included in the project to enable local consult- ing firms who are mostly in the private sector but include some public sector organizations to train their staff in this field. Assistance under the project would be provided for proposals approved by the Association. The Government would send such proposals to the Association, together with the justification and particulars in respect of the qualifications and experience of directors and staff of the local firm which would implement it, and the foreign consultants and experts providing the assistance with details of staff experience, timetable, fees and services to be rendered. The Ministry of Economy and Commerce will supervise and monitor the performance of local firms and their consultants. The project also includes a study to review existing management consulting services and organizations in the country, demand for such services and recommendations for coordination of activities of the existing organizations in this field and development of a suitable public organization in the future.  -8- Project Cost Estimates 2.07 The total cost of the project is estimated at FMG 2.8 billion (US$14.2 million), including foreign exchange of FMG 1.8 billion (US$9.1 million). The project cost estimates relate to the four components of the project: (a) the review of existing legislation and drafting of new legisla- tion; (b) CFC; (c) the training and supervisory services for RINDRA; and (d) the assistance to local enterprises and consulting organizations for services in financial systems and procedures and a study for providing management services in the future. The estimates are as follows: Summary of Project Cost Estimates (FMG 200 = US$1) % of FMG Millions US$ Millions Base Local Foreign Total Local Foreign Total Cost (a) Review of Existing Legislation and Draft New Legislation 20 60 80 0.1 0.3 0.4 4 (b) CFC Contract Staff 1/ Salaries, Travel and Housing 60 320 380 0.3 1.6 1.9 21 Regular Staff Salaries and Benefits 2/ 280 - 280 1.4 - 1.4 15 Furniture and Equipment 20 - 20 0.1 - 0.1 1 Textbooks and Supplies - 120 120 - 0.6 0.6 7 Building Rent, Repairs and Maintenance 60 - 60 0.3 - 0.3 3 Other Expenses 40 - 40 0.2 - 0.2 2 Total Training Center 460 440 900 2.3 2.2 4.5 49 (c) Assistance to RINDRA for Consulting and Management Services, Books and Publications 60 560 620 0.3 2.8 3.1 34 (d) Technical Assistance for Financial Systems and Procedures 40 200 240 0.2 1.0 1.2 13 Total Base Cost 580 1,260 1,840 2.9 6.3 9.2 100 Contingencies - Physical 3/ 60 120 180 0.3 0.6 0.9 - Price 380 440 820 1.9 2.2 4.1 Total Project Cost including contingencies 1,020 1,820 2,840 5.1 9.1 14.2 1/ Contract staff comprises qualified teaching and managing staff recruited internationally for specific periods. 2/ Regular staff comprises teaching assistants and other local staff most of whom would be permanently employed. 3/ Physical contingencies include any unforeseen requirement for additional teachers and consulting services.  -9- Basis for Cost Estimates 2.08 The project cost estimates are based on the cost of similar services in other countries, but allow for conditions in Madagascar, where man-month costs charged by consultants are higher than average for similar consultants in the East Africa Region due to difficult working conditions in Madagascar. Costs are expressed in December 1980 prices. Customs duties and sales taxes are not included since these are expected to represent an insignificant amount of the cost of goods and services included in the project. Physical contingencies are calculated at a rate of 10 percent of basic cost for all project components. Price contingencies have been calculated at the following annual escalation rates: Percent (%) 1981 1982 1983-1986 Local Products and Services 12 12 12 Foreign Products and Services 9 8 7 Man-month costs (excluding local travel and transport) for RINDRA-s consultants, and of legislation review have been estimated at US$15,200 (in December 1980 constant prices), for 156 and 20 man-months, respectively. CFC would employ technical assistance staff for 279 man-months, at average cost, including remuneration, travel and housing estimated at US$7,200 per man-month. Financing Plan 2.09 The proposed financing plan for the project covering the period 1981-87 is as follows: ------------US$ Millions---------- Local Foreign Total Proposed IDA credit (a) Legislation review 0.3 0.3 (b) CFC 2.4 3.6 6.0 (c) RINDRA 3.7 3.7 (d) Local consulting firms 1.5 1.5 Total 2.4 9.1 11.5 Government budget allocation (a) Legislation review 0.2 0.2 (b) CFC 1.4 1.4 Total 1.6 1.6 Internally generated funds (a) RINDRA 0.8 0.8 (b) Local consulting firms 0.3 0.3 Total 1.1 1.1 Total Project Cost 5.1 9.1 14.2  - 10 - The financing requirements for the project are estimated at US$14.2 million equivalent, including foreign exchange of US$9.1 million or 64% of the total requirements. The financing plan proposed for the project includes an IDA credit of US$11.5 million which would meet 81% of the total financing require- ments, Government budget allocations that would finance US$1.6 million or 11% and internally generated funds of RINDRA and other local firms that would finance US$1.1 million or 8%. The proposed IDA credit would finance: foreign exchange costs of the project totalling US$9.1 million equivalent; US$2.4 million of local costs of the project consisting of 95% of the local costs of technical assistance to and goods for CFC; and 60% of the cost of local staff of CFC. CFC would not have any significant revenues and its expenses and those of the legislation review would have to be met almost entirely by Government allocations (para. 4.01) from annual education budgets and from the proposed credit. Local consulting firms would pay to the Government local currency equivalent of the foreign exchange utilized by them out of the proposed credit (para 2.12 f). Implementation Schedule 2.10 Legislative changes (para 2.03 and Annex 6) would be enacted in accordance with a schedule agreed with the Government and made applicable to a progressively large group of enterprises over the project implementation period. The Government has agreed that it would prepare and implement appro- priate legislative measures in consultation with the Association (para. 6.01). The project would be implemented over a six-year period FY1982-1987. The initial months of the project would be devoted to: (a) the selection and appointment in 1981 of CFC's and RINDRA's key management and senior staff and RINDRA-s consultants; (b) the repair and rehabilitation of training facilities and offices; (c) the preparation of course materials; and (d) the procurement of books, supplies and equipment. The Government has indicated that it would soon begin recruitment procedures and would invite from consulting firms proposals for assistance to RINDRA. CFC is scheduled to start day classes and evening classes in 1982 and 1983, respectively. The Government agreed to a timetable for items (a), (b), (c) and (d) above, and to arrange for suitable premises in Antananarivo to be made available to CFC in time for CFC to comply with the agreed timetable (para 6.01). Consultancy services for the training of specialists in financial systems and procedures would be provided as needed by Malagasy organizations concerned. CFC-s director is expected to be appointed by September 1, 1981 and teaching staff required by March 1, 1982, and CFC is expected to commence classes in May 1982. RINDRA's director general is expected to be appointed by September 1, 1981 and consultants by October 1, 1981. Procurement 2.11 Procurement of goods relating to purchase of books, training aids, office equipment and vehicles would be for relatively small amounts and would be made in accordance with the Government-s normal procurement procedures. These procedures are similar to the French "Reglementation des Marches Publics" and are satisfactory to the Association. All foreign and domestic purchases for contracts exceeding $20,000 (FMG 4 million) would be subject to  - 11 - Association-s prior approval. Selection and appointment of expert staff for legislation review, CFC and RINDRA would be covered by contracts concluded in accordance with terms and conditions acceptable to the Association. RINDRA's consultants would be appointed in accordance with terms and conditions acceptable to the Association on the basis of proposals to be invited from a selected number of international audit firms. Malagasy consulting firms would employ foreign consultants for financial consultancy assignments on the basis of contracts and terms of reference approved by the Association. Disbursement 2.12 Disbursements are expected to be completed by September 30, 1987-and an estimated disbursement schedule is provided in Annex 7. Funds from the proposed IDA credit would be disbursed to meet the cost of: (a) Experts for legislation review (US$0.3 million) for 100% of foreign expenditure. (b) Experts for CFC (US$3.0 million) for 100% of foreign expenditure and 95% of local expenditure on all contract staff salaries, emoluments and costs. (c) Local teaching and other staff for CFC (US$1.3 million) for 60% of local expenditure on all local salaries and emoluments. (d) Textbooks, equipment and supplies for CFC (US$1.7 million) for 100% of foreign expenditure and 95% of local expenditure on all purchases. (e) Consulting services for RINDRA (US$3.7 million) for 100% of foreign expenditure on consultant firm costs. Disbursement would be made against certification that the work charged for had been carried out by the consultants or was otherwise chargeable in accordance with the contract of the consultants. (f) Training of Malagasy consultants (US$1.5 million) for 100% of all foreign expenditure on foreign consultant contracts for approved sub-projects. Disbursement would be made against certification that the local currency equivalent of each disbursement application had been paid by the local consultants to the Government and that the work charged for had been carried out by the foreign consultants or was otherwise chargeable in accordance with the contract of the foreign consultant; and for 100% of all foreign expenditure on consultants study for management consulting services in the country. Project Alternatives 2.13 In designing project components that would help to achieve the project's aim, various alternatives were considered. These are discussed in the following paragraphs.  - 12 - Alternative Locations for Accounting Training Centre (CFC) 2.14 Before recommending that CFC be located in Antananarivo the proposed location of CFC was discussed by the mission with the Government and it was discovered that a diversity of opinions was held by the Government. Toamasina and Antananarivo were considered as alternative locations for CFC. Although Toamasina has the advantage of the presence of the University Regional Center (CUR), with its business administration and management faculty which would be able to teach some courses at CFC, Antananarivo is the preferred alternative because - CFC would have to be located away from the CUR campus in a newly con- structed building in Toamasina to avoid any risk of unrest among the CUR students because of the difference in teaching environments, in that CFC students will have better facilities than the CUR students (in the form of smaller classes, fewer formal class sessions and adequate textbooks and course materials). A new building would be costly whereas Antananarivo has classroom space which could be rented. - A CFC located in Toamasina would only provide daytime courses. As most accountants who would be interested in evening school, work in Antananarivo, a separate teaching facility would still have to be set up there to provide evening courses for working accountants. - If CFC were located in Antananarivo, a Management Committee composed of representatives of related Government departments, of commercial and indus- trial enterprises, and of the Order of Accountants, most of which are located in that city, would be able to function more effectively to coordinate the Center's activities to meet the needs of the business community (Annex 3). Alternatives for Number of Classes and Students 2.15 Because CFC is a new institution and the magnitude of demand for professional accountants and auditors is not yet well defined, CFC would begin its operation on a small scale with limited student enrollment of two classes. Details of student enrollment and classes in the daytime and evening programs are stated in Annex 5. It is generally recognized that for a school of this nature a manageable class size should not exceed 50 students, and this is the preferred maximum class size for the project. Usually the Government's policies discourage restrictions regarding university admission on any basis other than completion of high school. However, in this case the Government recognizes that as CFC would be a specialized school, limited enrollment would be essential. Initially, no more than two classes of 50 students each would be started for first year students. It is envisaged that the number of students would be reduced by attrition to one class of 50 students by the third year. The Government has agreed that there would be no more than two classes for new daytime student enrollments in each of the first two years and that class size would not exceed 50 students. The student enrollment envisaged under the project is substantially below the demand for trained accountants. However, an important aim of the project is to train local teachers (para. 2.04), and the student enrollment can be increased in the future when an  - 13 - adequate number of local teachers has been trained under the project. More- over, the demand for accountants to be trained would be affected by the legislative measures (paras 2.03 and 2.10) when they have been enacted, and a more realistic estimate of demand would be prepared in 1983. Foreign Training vs. Local Training 2.16 The alternative of encouraging students to train and study abroad by providing access to foreign exchange was considered. While this alterna- tive has the advantage of offering training and educational facilities abroad which are well established and highly developed, it could be costly in the long term since, apart from substantial training cost and living expenses abroad as well as travel costs, a number of students would be tempted to remain abroad after completing their training and the effort and expense spent on them would be wasted. While there are measures which can be instituted to encourage students to return after completion of studies such as requiring service bonds, these usually do not provide satisfactory results since, even if these measures are enforceable, persons repatriated against their wishes do not perform effectively. The promotion of training facilities within the country, as proposed under the project, has the advantage of developing institutions, and planning growth of such institutions to meet the future needs of the country on a basis which would be more economical in the longer term (para. 2.04). Additionally, the promotion of training facilities within the country would help the local institutions, such as RINDRA and other professional accounting and consultancy organizations, provide marketable services and generate revenue (para. 5.04) within the project implementation period. This would not be the case if students were sent abroad for training. Monitoring 2.17 Monitoring standards will be established to achieve efficient imple- mentation of the project and to help develop RINDRA and CFC as operation- ally viable institutions. Some of the significant project activities to be monitored against target dates are: (a) the selection and appointment of expatriate and local staff of RINDRA and CFC, (b) the development of detailed syllabi, and (c) the start of CFC's daytime and evening classes conducted at the center at each course level. Training activities will be monitored by comparing them with the CFC school program for the number of teaching hours and the number of students at each course level in day and evening classes. Operational monitoring of RINDRA will be in respect of the number of enter- prises audited, hours billed to clients, expatriate and local staff hours billed and not billed, and collection of billing revenues. The progress made in implementing changes in legislation relating to the accountancy profession, audit and accounts would be monitored against the agreed program. Target dates to be used for monitoring the program (Annex 8) were agreed with the Government (para. 6.01). 2.18 Supervision of the project by the Association would be performed in two parts: (a) that of CFC by the Education Projects Division and (b) that  - 14 - of RINDRA, assistance to local management consulting firms and the legislative measures by the Energy and Water Supply Division. Initially the interval between supervision missions should be about six months. III. IMPLEMENTING AGENCIES General 3.01 The implementing agencies would be (a) the Ministry of Higher Education,for CFC; (b) the Ministry of Economy and Commerce (MEC)r for the consultancy services in financial systems and procedures assistance and for legislative measures (para 2.06); and (c) RINDRAjfor technical assistance in auditing. These ministries and organizations are briefly described below. Ministry of Higher Education and Scientific Research 3.02 The Ministry of Higher Education has under its responsibility the University of Madagascar, and the country's technical schools. CFC would be classified as a technical school and the Secretary General of the Ministry would deal with its budgetary and related matters. The Director would be responsible for the administration and implementation of the training program, and would coordinate CFC's activities in relation to the needs of the account- ing profession and commercial enterprises. CFC would be established in Antananarivo. Its chief executive would be its Director who would report to a Management Committee consisting of CFC's Director, and representatives of relevant Government departments, accounting profession and the business community. Ministry of Economy and Commerce 3.03 The Ministry of Economy and Commerce (MEC) established RINDRA to promote the development of audit services in the public sector. One of the responsibilities of the Director-General of MEC, a new post recently created in the Ministry, is overall coordination of project activities. Government proposes to appoint the Director-General of MEC at the beginning of project implementation and the MEC through the Director General or otherwise would be responsible for the legislative changes (paras 2.03 and 2.10), as well as supervision of assistance to local consulting firms (para 2.06). RINDRA's Order of Incorporation 3.04 RINDRA was created in April, 1979 as a socialist enterprise by a Government order. Prior to this date, audit services were provided by foreign accounting firms on specific assignments and were used by a small number of businesses in Madagascar. The Government does not intend that RINDRA be a monopoly, but RINDRA's charter provides that it should have preference over other audit firms in auditing socialist enterprises. As a Socialist Enter- prise, RINDRA is responsible to the appropriate Orientation Council (Annex 4). Its Order of Incorporation provides, however, that RINDRA is solely respons- ible for the contents of its reports which are to be prepared "freely and independently" in accordance with the rules governin; the profession.  - 15 - 3.05 The Charter of Socialist Enterprises (Annex 4) divided the country's commercial activities into 16 economic sectors. RINDRA is in the "Control" sector and its Management Committee comprises seven members: the Chairman (a State Inspector of Accounts), appointed by the Prime Minister; four members (representing the President of the Republic, the Prime Minister, the Supreme Revolutionary Council, and the Minister of Economy and Commerce); RINDRA's Director-General; and a representative of the staff. RINDRA's Management 3.06 RINDRA is in the early days of establishing itself as an audit organization and is in competition with existing firms in the private sector. RINDRA-s chief executive is its Director-General who is respon- sible for RINDRA's level of activity, quality of professional services and day-to-day management. He is responsible for signing all audit and other reports in respect of RINDRA's professional work for its clients. 3.07 The present Director-General has been appointed to the post from a background and experience restricted to government accounting and methods rather than the required experience with a professional audit firm. 3.08 In order to operate effectively it is essential that RINDRA's Director-General be an experienced and professionally qualified accountant with appropriate experience. The Government has agreed to appoint and have in post a Director-General with qualifications and experience acceptable to the Association before the effectiveness of the proposed credit (para 6.02), and that RINDRA shall at all times employ an appropriately qualified and experienced person in this position; and that the Director-General would be responsible to take all necessary decisions for the day-to-day management and auditing activities of RINDRA including supervision of audit or other professional work, signing or countersigning all audit reports, selection, employment and development of audit staff, relations with RINDRA's clients, and supervision of any consultants working for RINDRA (para 6.01). RINDRA's Consultant 3.09 On October 1, 1978 the Government signed a six-month contract with an international accounting consultants firm, Peat, Marwick, Mitchell and Co. (PMM) to help establish RINDRA. Six months later, when RINDRA was incorporated in April 1979, RINDRA signed a further contract with PMM for 27 months,which expires on June 30, 1981. Under these contracts, PMM undertook to assist RINDRA in recruiting audit staff, to implement basic as well as advanced training programs in auditing, accounting and management systems and proce- dures, to supervise work performed by RINDRA staff on audit assignments; and, in collaboration with the Director-General, to manage RINDRA's overall opera- tions. PMMs performance in the training of local staff and the quality of its audits is satisfactory. However, assistance provided by PMM in introduc- ing procedures for RINDRA's management (required under their contract) was unsatisfactory (para 3.11).  - 16 - RINDRA's Operations 3.10 During 21 months, from October 1, 1978 to June 30, 1980, RINDRA's staff under the supervision of PMM carried out auditing and related assignments for about 40 enterprises which are among the larger companies in Madagascar. About two-thirds of these assignments were for audit and the others were partial reviews either for specific problems or because clients' accounts were not ready for audit. Although the audit and other assignments completed were carried out satisfactorily, RINDRA did not reach its planned level of audit activity during the first two years of operation. This lower level of audit activity was mainly due to uncompetitive fees (para 4.04) demanded for RINDRA's services and to the lack of awareness by its potential clients of the value of its services. RINDRA's operations include a substantial element of training, both classroom and on-the-job, which its consultants carried out satisfactorily. RINDRA's Accounting and Auditing 3.11 In their report on RINDRA's accounts for the period to June 30, 1980 its auditors state that the accounts require many corrections and adjust- ments, that RINDRA has not observed certain fundamental accounting principles and that RINDRA's management of audit assignments is inadequate. 3.12 The Government has agreed that RINDRA and CFC would maintain satis- factory accounts, RINDRA would have its accounts audited every year by inde- pendent external auditors acceptable to the Association and CFC by Inspection Generale de l'Etat and that copies of audited financial statements would be submitted to the Association within five months after the end of each finan- cial year (para 6.01). RINDRA's accounts are audited by a local firm of auditors who are satisfactory to the Association. IV. FINANCIAL ASPECTS Accounting Training Centre 4.01 CFC's estimated operating cost for the six years 1981 through 1986, including contingencies, is FMG 1.46 billion (US$7.3 million) (para 2.09). CFC-s students would only pay token fees as is the case in the University, and costs would be funded by the project and by the Government. The Government has agreed that it would, at the beginning of each fiscal year, provide a budgetary allocation in the name of CFC, against which CFC would make payments as and when they were required by the project (para 6.01).  - 17 - Past Operations and Financial Position of RINDRA 4.02 RINDRA's audited balance sheet, as of June 30, 1980, after 21 months of operations (including 6 months before it was incorporated, para. 3.09) is summarized below: RINDRA Audited Balance Sheet as at June 30, 1980 Millions Millions FMG US$ FMG US$ Assets Liabilities and Equity Current assets Current Cash 100.77 0.50 liabilities 268.78 1.34 Accounts receivable 89.41 0.45 Other 85.63 0.43 Total Current Assets 275.81 1.38 Advance from Government 212.00 1.06 Deposits 1.37 0.01 Deposits 0.70 0.01 Equity Capital 50.00 0.25 Fixed assets at cost 40.57 0.20 Accumulated less depreciation 4.89 0.02 loss -218.62 -1.09 Net fixed assets 35.68 0.18 Total Equity -168.62 -0.84 312.86 1.57 312.86 1.57 RINDRA's financial position on June 30, 1980 was marked by (i) an accummu- lated loss (para 4.03); (ii) receivables of FMG 89.41 million (about US$0.45 million), representing close to five months billed fees, which is unsatis- factory; (iii) an interest free advance with unspecified repayment period from the Government to provide working capital; and (iv) some FMG 112 million (about US$0.56 million) debt to its consultant PMM representing about 7 months charges for their services.  - 18 - 4.03 RINDRA's audited income statement for the first 21 months of operation ended June 30, 1980, is summarized below: Audited Income Statement for 21 Months Ended June 30, 1980 Millions Revenue FMG US$ Professional fees 288.01 1.44 Expenses Personnel 66.35 0.33 PMM's fees and expenses 387.37 1.94 Administrative expenses 48.02 0.24 Depreciation 4.89 0.02 Total expenses 506.63 2.53 Deficit 218.62 1.09 RINDRA's revenues were 57% of the total expenses for the period and only covered 74% of its consultants' fees and expenses. RINDRA's level of activity was only about 65% of what was planned. This was in part due to its uncom- petitive scale of fees. However, even the planned level of activity would not have been sufficient to cover the expenses including all of the consultants' costs. Level of RINDRA's Fees 4.04 RINDRA's average hourly fees were FMG 8,500 for the first nine months of operation and FMG 9,500 since August, 1979. Its fees were about 40% higher than those of other accounting firms, whose average hourly fees ranged between FMG 6,000 and 7,000. This accounts for clients' resistance to RINDRA's services. Any further increase of RINDRA's fees in the near future would exacerbate this resistance and RINDRA instead needs to reduce costs (para. 4.05). Future Financial Position of RINDRA 4.05 The financial year ending on June 30, 1981 will be the last year of PMM's existing contract. Certain measures will have to be taken if RINDRA is to be competitive with other accounting firms and have a positive cash flow and operating income. It would be necessary to: (i) bring its average hourly fees down to the equivalent of FMG 7,000 (in December 1980 constant prices) in FY 1982, (ii) spread technical assistance expenses under the project over a period of say five years, to reflect the outside aid-s lasting benefits and (iii) obtain a loan to meet its financing requirements. The Government would relend to RINDRA, at 12% annual interest and with repayment in ten years,  - 19 - including a grace period of three years, the FMG equivalent of the amount estimated at US$3.7 million to be utilized from the proposed credit to meet RINDRA's expenditures. The proposed interest rate is similar to the expected inflation rates in Madagascar which are expected to be about 12% annually during the period 1980 to 1987, and averaged 9% per year during the years 1976 to 1979. The Government would assume the risk of foreign exchange rate fluctuations subsequent to disbursement from the proposed credit. The Govern- ment has agreed that execution of a relending agreement with RINDRA on these terms would be a condition of effectiveness of the proposed credit (para. 6.02). RINDRA is expected to be in a position to reimburse by FY1990 the Government's loan. The FY 1980-1989 financial statements and explanatory notes thereon are presented in Annexes 9, 10, 11, and 12. 4.06 RINDRA's financial objectives are to provide professional accounting and audit services to its clients at competitive rates, achieve and maintain a sound financial and working capital position, and operate profitably so that it can repay its debts and pay reasonable dividends to the Government. 4.07 RINDRA's Funds Flow Statement covering the six-year period, FY1982-1987, is summarized below:  - 20 - RINDRA's Funds Flow Statement for Six Years 1982 to 1987 FMG Million US$ Million Sources of funds Internal generation of funds before charging technical assistance Net operating income 328 1.64 Add: Depreciation 54 0.27 Amortization of technical assistance foreign costs 615 3.07 Total internal cash generation 997 4.98 Government Loan (IDA funds onlent) 740 3.70 Total sources 1,737 8.68 Application of Funds Technical assistance payments in foreign currency 740 3.70 Additions to fixed assets 43 0.21 Repayment of Government loan, and interest 554 2.77 Increase in working capital 400 2.00 Total applications 1,737 8.68 This table indicates that over the six-year period, FY 1982 through 1987, RINDRA would: (a) pay for the local cost of its technical assistance; (b) reimburse about FMG 554 million (US$2.77 million) of Government loan and interest while reducing its fees to a more competitive level (para. 4.05); and (c) improve its working capital position. Local Consulting Firms 4.08 The local consulting firms would pay to the Government the FMG equivalent of amounts utilized by them out of the proposed credit and would thus meet the entire costs, both local and foreign, for assistance provided to them under the project. The Government has agreed to appropriate procedures for collecting such payments (paras 2.06 and 2.12).  - 21 - V. JUSTIFICATION AND RISKS Justification 5.01 The purpose of improving accounting performance is to provide a continuous flow of reliable accounting information about commercial enter- prises to their managements, shareholders, the Orientation Councils, and the Government of Madagascar. Audit of accounts of commercial enterprises by qualified professionals will ensure that accounts are prepared in compliance with acceptable accounting principles and that they provide reliable informa- tion. 5.02 Madagascar lacks qualified accountants, and only a small number of enterprises accounts are audited. Neither the management nor the Government has been able to obtain adequate and reliable financial information about enterprises. Since Government has assumed control of a number of these enter- prises, it recognizes this situation as a critical deficiency and has, (a) promulgated the Charter of Socialist Enterprises which requires that enter- prises be independently audited; and (b) set up RINDRA, the national auditing company which will provide an audit service. There is thus a potential demand for professional accountants to staff enterprises financial departments, for qualified auditors to staff RINDRA and other accounting firms, and for experienced management consultants to reorganize financial systems and procedures of commercial enterprises. 5.03 This project, the first IDA project of its kind in East Africa, attempts to meet these demands for Madagascar. Benefits 5.04 The benefits of the project are considerable though not fully quantifiable. Assistance to be provided under the project for changes in legislation relating to accounting and audit would help create a suitable commercial environment by setting minimum standards of financial reporting to develop uniform practices, the benefits of which for those making use of the reports would be considerable. Education at CFC, when fully established, would cost about US$2,000 per student year (para. 2.04), while its benefits are potentially substantial considering the improvements in operation, manage- ment and planning of organizations which would make use of the persons trained at CFC. Training of the staff of RINDRA and of other local consulting firms, on the other hand, would produce more apparent benefits by developing and improving the quality of services which are readily marketable. RINDRA is expected to have a positive operating income during virtually the entire project period indicating that even the apparent benefits of providing assis- tance to RINDRA would be in excess of its cost. Similarly, local consultants would provide services to their clients at the same time as their staff are being trained, and earn revenue for those services which are expected to be no less than the cost of training and other costs related to providing such services.  - 22 - Risks 5.05 The physical risks of the project are negligible since no major construction of facilities would be involved. Initial major repairs and furnishing of CFC's rented classroom facilities are not expected to present unusual risks. 5.06 The appointment of technical assistance staff for RINDRA and CFC in accordance with the scheduled requirements is vital to the success of the project. The Government has agreed that it will at all times employ appro- priately qualified and experienced staff in CFC and RINDRA inluding their Director and Director-General respectively. Delays in implementing the project would be minimized since the Government has agreed that a Director- General for RINDRA with qualifications and experience acceptable to the Association would be in post before the effectiveness of the proposed credit, and that RINDRA's consultants would be appointed after July 1, 1981 (para 6.01), that CFC would be established at suitable premises in Antananarivo (para 2.10) and that a Director for CFC with qualifications and experience acceptable to the Association would be employed before the effectiveness of the proposed credit (para 6.02). The Director General of RINDRA and the Director of CFC, would be responsible for the timely selection and appointment of other technical assistance staff for the two respective organizations (para 6.01). 5.07 Local currency funds required for CFC's operation would be provided partly by the proposed credit and partly by the Government out of the recurrent expenditure budget of the Ministry of Higher Education. However, during the implementation period the budget allocation would not need to be financed entirely from the Government general revenues because funds would also be generated from the receipt by the Government of the local currency equivalent of the foreign exchange IDA credit disbursements from the proposed credit for assistance to local consultants (para. 2.12). To reduce the risk of shortage of funds to meet CFC's cash requirements, suitable arrangements will be made by the Government to provide funds (paras 4.01 and 6.01). 5.08 As the Government has agreed to a schedule for enactment of legisla- tion for accounting and audit (para. 2.03), which is essential to the project, chances of achieving optimal benefits for the project would be enhanced. VI. AGREEMENTS TO BE REACHED AND RECOMMENDATION 6.01 During negotiations satisfactory agreements and assurances were obtained from the Government with regard to the following: (a) A survey would be completed by December 31, 1983 of the needs for qualified accountants and auditors projected for a ten-year period (para. 2.04). (b) A Management Committee for CFC would be appointed (para 2.04); (c) Target dates have been agreed for the proposed CFC program (para. 2.10);  - 23 - (d) The Government would arrange for the timely provision of suitable premises in Antananarivo for CFC (para. 2.10); (e) The Government would take all steps necessary to prepare appropriate legislative measures in consultation with the Association, and implement them according to an agreed schedule (para 2.10); (f) A maximum of 100 students would be admitted to the CFC for each of 1982 and 1983 respectively, and divided into two classes each of no more than 50 students (para. 2.15); (g) Target dates to be used in monitoring the Project have been agreed (para. 2.17). (h) The Director-General of RINDRA and the Director of CFC would be responsible for the timely selection and appointment of their respective organization-s staff (paras. 3.08 and 5.06); (i) CFC's and RINDRA's accounts would be audited annually by auditors acceptable to IDA and their reports would be avail- able within five months after the end of each financial year (para. 3.12). (j) An allocation of the local currency requirements of CFC would be established annually by the Government against which CFC would draw its local currency funds as and when required by the Project (para. 4.01); (k) A firm of consultants to assist RINDRA would be appointed soon after July 1, 1981 (para. 5.06); (1) RINDRA and CFC would employ at all times appropriately qualified and experienced staff including the Director of CFC and Director-General of RINDRA (para. 5.06). 6.02 The following should be conditions of effectiveness of the proposed credit: (a) Effective appointment of RINDRA's Director-General with quali- fications and experience acceptable to the Association (para. 3.08). (b) Execution of an appropriate agreement between the Government and RINDRA for a loan equivalent to US$3.7 million (para. 4.05). (c) Establishment of CFC at suitable premises in Antananarivo (para. 5.06). (d) Appointment of CFC's Director with qualifications and experience acceptable to the Association (para 5.06). 6.03 With the above agreements, the proposed project would be suitable for an IDA credit of SDR 9.4 million (equal to US$11.5 million) on standard terms.  - 24 - ANNEX I Page 1 of 2 MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT Educational Facilities 1.1 The University of Madagascar and secondary technical schools in the formal education system, and the Chambers of Commerce and private commer- cial schools outside that system, offer accounting courses. University of Madagascar 1.2 The University of Madagascar consists of six university regional centers 1/ (CUR) and has a combined enrollment of about 28,000 students. Each CUR specializes in a field of education and the CUR at Toamasina provides courses in business administration and management. It offers four-year degree programs leading to a Bachelor in Business Administration (with Manage- ment as a major) and Bachelor of Economics (with an economics major). The accounting taught in these programs is of a general level as a subject of secondary importance. 1.3 In general, the CUR-s are inadequately staffed. For example, the CUR at Toamasina has only 30 teachers for 1,400 students. In the larger classes (which sometimes means 900 students) almost the entire teaching time is devoted to dictating lengthy notes which are used in lieu of textbooks, as there is a shortage of books and teaching materials. Secondary Technical Schools 1.4 Secondary technical schools (lycees techniques commerciaux) offer business education programs in secretarial and commercial/accounting subjects. The four-year commercial/accounting graduates receive a diploma and afterwards attend University or become bookkeepers or assistant accountants. A secondary school is located in each province and Antananarivo is the largest with 700 students and 34 teachers, while the country's other five schools together equal this number of students and teaching staff. 1.5 Until 1978 a post-secondary two-year technical education program was offered in Antananarivo. That program led to a diploma which was equivalent to two years of university credit. 1.6 The secondary schools have a good reputation and the program of studies is sound. Classroom facilities and teaching staff are adequate considering present enrollment. The program is somewhat weak in financial 1/ Antananarivo, Antsiranana, Fianarantsoa, Mahajanga, Toamasina, Toliary.  - 25 - ANNEX 1 Page 2 of 2 mathematics and in general business subjects, and course materials need updating. As at the University (para. 1.13), textbooks are not available and much of teacher and student time is spent preparing course materials. 1.7 The Malagasy Chamber of Commerce, which has ten locations 1/ through- out the country offers adult education courses in business and various trades. Courses are designed for those employed in industry or commerce and consist of one or two-hour evening classes. General enrollment requlires that a student has completed seven years of school. To enroll for the third-year business education course a student must be a general office clerk, and, for the fourth year course, must be a bookkeeper. Diplomas are awarded at the end of the third and fourth year of the program. 1.8 The Chambers of Commerce attempt to satisfy a strong need for adult education, but are impeded by various factors: teachers have two to three years of university training but no teacher training and thus are not fully qualified; the teaching program itself lacks a director and is not well organized; and course selection is limited and there is a shortage of books and materials. In general, due to a lack of qualified teachers, administrators, and insufficient funds, the Chamber's classroom facilities are underutilized. Private Commercial Schools 1.9 A large number of small, private, commercial schools with varying standards of quality, provide training for general office clerks and typists. 1/ Antananarivo, Toamasina, Antsiranana, Mahajanga, Toliary, Fianarantsoa, Toalanaro, Antsirabe, Antalaha, and Sambara.  - 26 - ANNEX 2 MADAGASGAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT Existing Company and Accounting Legislation 2.1 Limited liability companies (societes anonymes) are governed by a law of 1867, and limited liability partnerships (societes 'a responsabilite limite'e) by a law of 1925. These two laws apply to all the companies in Madagascar other than the socialist enterprises (Annex 4). 2.2 The law of 1867 governing societes anonymes provides for annual general meetings of shareholders to elect directors (the Board comprises between 3 and 12 directors, for a term of six years) and to appoint Commis- saires aux comptes as auditors. The law also requires that, at the end of each fiscal year, the Board of Directors submit to the shareholders a profit and loss statement and balance sheet, together with a report on the company's operations. These documents are required to be accompanied by the report of the Commissaires aux comptes on his verification of the company's books, the consistency of procedures, correctness of inventories and balance sheets, and the accuracy of the company's accounts. 2.3 The law of 1925 governing Societes a responsabilite limitee provides for management committees of 3 partners, annual general meetings of partners, and formal annual reports to the partners only if the number of partners is more than 20. Few partnerships with limited liability are of that size in Madagascar. 2.4 Neither of these laws specify any mandatory qualification for Com- missaires aux comptes (although in the case of a company issuing its shares to the public, the Commissaire must be chosen from a list established by a Court of Appeal); or the extent of their audit; or the required content of the financial statements to be provided. No minimum qualifications are laid down for Commissaires aux comptes. In practice the audits may well be inadequate since the procedure established over the years is that the Commissaires aux comptes, who are generally "Experts Comptables" or "Comptables Agrees", are paid scale fees according to the size of the company concerned and these fees are so inadequate that they allow for only a superficial review of the companies accounts. 2.5 A decree of January 7, 1969 provides an accounting classification (plan comptable) that, in practice, is enforced by the tax inspectors in the case of the 500 companies with turnovers exceeding FMG 30 million (US$150,000) that are required to submit detailed accounts in support of their tax returns. However, the plan comptable relates to details of accounting heads for book- keeping and does not regulate annual accounts statements themselves.  - 27 - ANNEX 3 Page 1 of 3 MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT Major Accounting and Management Services Firms Fivoarana 3.1 In 1975 Raymond Rabenoro and Denis Rakotomanga established Fivoarana, an accounting firm. Mr. Rabenoro had been Secretary-General of Finance in the Ministry of Finance from 1960 to 1972, and Financial Adviser to the President of the Republic from 1972 to 1975. Mr. Rakotomanga has a French engineering degree in Telecommunications, a MBA from Fontainbleau-s European Business School and, prior to 1975, had worked for the French Telecom- munications Administration. 3.2 Fivoarana provides three types of services: -- auditing; -- review, design and implementation of accounting systems and procedures; -- computer systems applications. 3.3 Fivoarana's 17 member staff was hired out of European technical schools and all are Malagasy. Twelve of them are both auditors and management consultants and the other five are computer-specialists, of which four are programmers. Staff size is temporarily less than usual due to staff turnover but will soon return to its normal size of twenty. 3.4 Fivoarana has about 20 clients most of which are public sector enterprises. Staff time is devoted in about equal proportion to providing audit, organizational, and computer systems services. Fivoarana does not wish to expand its audit services beyond its present level of activity of ten or twelve clients. 3.5 Fivoarana's Port of Toamasina work on accounting procedures was satisfactory. Fivoarana was also retained to prepare a study for the Malagasy Railways in connection with an IDA-financed development program. This study is now proceeding. Mrs. Madeleine Ramaholimihaso-s Firm 3.6 Mrs. Ramaholimihaso, an Expert Comptable, is head of the largest accounting firm in the country. Three years ago it began to provide limited management services to its clients but since RINDRA was established the  - 28 - ANNEX 3 Page 2 of 3 firm has developed its management and audit capability. The country's most important enterprises are among this firm-s 65 clients. This firm offers the following services: Certification Auditing (still on a limited basis) Management services in accounting and finance Legal advice Arbitration Financial advice 3.7 Mrs. Ramaholimihaso estimates that 60 percent of her firm's time is devoted to providing certification and audit, and 40 percent to other services. Whenever there are assignments beyond her firm's capability, Mrs. Ramaholimihaso is aided by the French accounting and audit firm, Bureau d'Etudes Financieres et de Contr'ole Comptable (BEFEC). At present the firms are working together to reorganize and computerize JIRAMA's 1/ accounting and financial procedures. BEFEC intends to provide Mrs. Ramaholimihaso-s firm with assistance in auditing techniques and, in the fall 1980, will conduct auditing seminars for her staff and some other accounting firms associated with the Order of Accountants. 3.8 Mrs. Ramaholimihaso's staff numbers 22 persons, 16 of whom are capable of working as accountants as well as providing some management advisory services in systems and procedures. Institut National de Promotion Formation (INPF) 3.9 The Institut National de Promotion-Formation (INPF) was set up in March 1974 as an Industrial and Commercial Public Establishment (EPIC) to replace the "Institut de Formation Professionelle des Adultes" that had been formed in 1969. 3.10 The INPF has three departments which provide consultancy and train- ing services to medium and small sized private as well as Government enter- prises. These services include: -- organization and management, i.e., dealing with personnel, financial and commercial management; 1/ JIRAMA is the Malagasy power and water supply organization.  - 29 - ANNEX 3 Page 3 of 3 -- industrial techniques, i.e., production management, elec- trical and electronic engineering, mechanical engineering. 3.11 Since its inception the INPF has been funded by UNDP and the Government. The UNDP provided US$4 million for foreign experts, operating costs of US$3 million, equipment costs of US$0.5 million and scholarship funds of US$0.4 million. The Government provided funds for training, a building at Ivato (FMG 1 billion, equivalent to US$5 million) and for a part of the oper- ating costs (FMG 1 billion, equivalent to US$5 million). The Government and UNDP funding is expected to continue until 1981. INPF's revenues from service sales (in 1979 FMG 50 million and in 1980 FMG 100 million) were equal to about half of the Government's contribution. This was due to (a) the substantial cost of the staff training program and (b) INPF-s inefficient operation caused by ineffective marketing of their services. 3.12 The INPF has obtained three experts through the ILO (one each for engineering; for medium and small size enterprises, and for finance and accounting) who help 49 Malagasy consultants trained by those experts. Five of these Malagasy are finance and accounting consultants. 3.13 In 1979, INPF provided management and training services to 25 large enterprises and organization, and gave seminars to 615 trainees for a total of about 1,000 manweeks. These services were also extended to medium and small size enterprise in 1979. In 1980, Government's contribution to INPF's operation costs was doubled and INPF plans to ask UNDP to continue its participation in the program until 1985 and to finance four additional ex- patriate experts, including one for budgetary control of commercial enter- prises. INPF hopes that with these experts, it can train 15 additional Malagasy nationals as financial and accounting consultants within 18 months, bringing the total of those consultants to 20. 3.14 INPF's services to small enterprises are of acceptable quality. Other Organizations 3.15 In addition to the above institutions, the "Centre de Formation de Cadres et d'Animation pour les Collectivites Decentralisees", trains local Government staff, and the "Centre National de Formation de Cadres Dirigeants" plans to provide short courses and seminars to management level personnel.  - 30 - ANNEX 4 Page 1 of 2 MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT Charter of Socialist Enterprises - 1978 4.1 The Government is progressively bringing under its control the principal firms in each sector through the implementation of the Charter of Socialist Enterprises. The country has been divided into 16 economic sec- tors 1/ and there will be a "Conseil d'Orientation" (Council) for each sector that will oversee all socialist enterprises. Each council will be responsible for deciding its sector policy in accordance with guidelines which are established in the national and regional plans. The Councils and their members will be responsible to the Supreme Council of the Revolution (CSR). Council members will be appointed by the Cabinet of Ministers to five- year terms and will include: two representatives of the management committees from the sector's enterprises (see para. 4.2 below); two representatives of cooperatives (if they exist); three Government representatives; two represen- tatives of the Popular National Assembly; and two elected delegates from the sector's workers. The Councils have not yet been established and the CSR's Commission for Industry and Commerce is presently performing the functions of the Conseils d'Orientation. 4.2 Each Socialist Enterprise has a Management Committee, which ensures that the guidelines and programs prepared by the Council are followed by the enterprise. The Management Committee consists of seven to eleven members including: the Chairman and three (to five) representatives of the Govern- ment (including the Director-General), who are appointed by the Prime Minister at the recommendation of the Council; one (or two) representatives of local governments (if needed); two (to four) workers' delegates; and one (to three) representatives of minority (private sector) shareholders of the enterprises, if any. 4.3 The chief executive of an enterprise is called the Director- General (or Director) depending on the importance of the enterprise, and is appointed by the Prime Minister at the recommendation of the Management Committee. The chief executive automatically becomes a member of the Manage- ment Committee. 1/ The economic sectors are: (1) agriculture; (2) fishing; (3) animal hus- bandry; (4) banking and finance; (5) water and energy; (6) transporta- tion; (7) mining and extraction industries; (8) public works and housing; (9) commerce and distribution; (10) textile and leather; (11) wood and derivatives; (12) food industries; (13) mechanical and electrical indus- tries; (14) chemical industries; (15) service operations; and (16) con- trol.  - 31 - ANNEX 4 Page 2of 2 4.4 External auditors for each enterprise will be appointed annually by the Council after approval by the Minister of Economy, Finance and Justice. The duties assigned to external auditors are very wide as they are not only required to report on the fairness, accuracy and correctness of accounts, but also on operational aspects and the performance of management. The auditors also report on whether or not the enterprise has met its objectives set by the Council. The auditor's report is submitted to the Council after the contents have been discussed with the chief executive of the enterprise.  - 32 - ANNEX 5 Page 1 of 12 MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT Project Description Changes in Legislation 5.1 The Government with the help of consultants and CFC's and RINDRA's technical assistance experts would examine existing legislation and would implement by mid-1982 such amending or additional legislation as may be necessary in regard to legal requirements for the preparation, and publishing of accounts of corporate entities; for the audit of such accounts by profes- sionally qualified auditors; and for the establishment and enforcement of appropriate ethical and professional standards for the audit and accounting profession in Madagascar. Annex 6 describes in outline the essential account- ing and auditing requirements which should be included in the legislation. CFC Component 5.2 CFC would be responsible for planning and programming the account- ancy training as well as publicizing these programs. Its Director will be assisted by an Advisory Board, who will keep abreast of training requirements so that CFC can adjust its program accordingly. After the program is in progress CFC will survey the country-s accounting needs to determine how the Centre should evolve in the future. 5.3 Costs covered in the six-year project include: (a) Repairs to the rented facility and procurement of furniture and equipment for classrooms and offices; (b) Students' textbooks and other materials; (c) Program development for daytime and evening classes and correspondence courses. (d) Expatriate and local staff remuneration and perquisites. Enrollment 5.4 It is proposed that daytime classes be limited to 50 students each while evening school enrollment be determined by demand for the courses. With an average attrition rate of 20 percent, at the completion of the program there will be about 40 students with post-graduate qualifications. The following is an enrollment schedule for full-time degree candidates:  - 33 - ANNEX 5 Page 2 of 12 TABLE PLANNED ENROLLMENTS - FULL TIME STUDENTS Year 1 Year 2 Year 3 Year 4 Year 5 Intake Intake Intake Intake Intake Total Year 1 100 100 Year 2 64 100 164 Year 3 50 64 100 214 Year 4 46 50 64 100 260 Year 5 40 46 50 64 100 300 Certificates/Honors 5.5 Graduates of the five-year daytime program, or its equivalent in the evening and correspondence programs, would receive certificates to that effect. If students fulfill the Order of Accountants training and examination requirements, they will qualify to become "Expert Comptable" and be admitted to the Order. Staff Requirements 5.6 CFC's Director would be a qualified accountant and should be appointed by June 1, 1981 to enable CFC's operations to start early in 1982. Two qualified teachers will be employed in the first year and two more quali- fied teachers will join CFC in the second year. CFC's Director and all the qualified teachers are expected to have been replaced by local teachers by the ninth year with replacements in the fifth year (one), sixth year (one), seventh year (two) and the eighth year (one). 5.7 Teachers will also be recruited on a per course basis from the IJniversity of Madagascar and local enterprises, and will teach a total of 22 courses in the full-time school. Malagasy teaching assistants would be employed to work with each qualified teacher and help them in grading papers, developing course materials and conducting classes. These assistants would assume the responsibilities of the qualified contract teachers after they have acquired sufficient experience and knowledge. The requirements for CFC's teaching staff for the first nine years are presented below:  - 34 - ANNEX 5 page 3 of 12 TABLE ESTIMATED TEACHING REQUIREMENTS Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 1/ 1. Number of students 100 164 214 260 300 300 300 300 300 2. Total number of daytime courses 24 48 58 70 79 79 79 79 79 3. Number of accounting courses taught (a) Daytime 12 30 37 48 57 57 57 57 57 (b) Evening 4 6 6 6 6 6 6 6 6 (c) Total 16 36 4354 63 63 63 63 Z3 - by contract staff 16 36 t E 43 32 21 o 0 - by regular staff 0 0 0 11 20 31 42 63 63 4. Number of non-accounting courses taught by regular staff Daytime 12 18 21 22 22 22 22 22 22 5. Courses per semester per contract staff 2/ 4.0 4.5 5.4 5.4 5.4 5.3 5.2 0 0 6. Total number of staff required for accounting courses 3/ 3 5 5 6 7 7 7 7 7 - contract staff 3 5 5 5 5 4 3 1 0 - regular staff 0 0 0 1 2 3 4 6 7 1/ See para. 5.4 2/ Total courses taught by contract staff per year (line 3c) divided by the number of contract staff required (line 6), excluding the director, divided by 2 semesters. Average training is normally 5 courses per semester each of 3 teaching hours a week at university level. 3/ Includes the Director.  - 35 - ANNEX 5 Page 4 of 12 5.8 Aside from the teaching staff the Centre will locally recruit an Assistant-Director, Dean of Students, Administrative Assistant, accountant, and two secretaries. The total permanent staff requirements including teachers by year 5 are 18 as summarized below: (a) Director of CFC (b) Assistant Director (c) Dean of Students (d) Accountant (e) Administrative Assistant (f) Accounting teaching staff (4) (g) Teaching assistants (4) (h) Secretary (2) (i) Office clerk (j) Operator for the duplicating machines (k) Janitor 5.9 CFC will require the following facilities: (a) 7 classrooms each to accommodate up to 50 students (b) 6 administrative offices (for the Director, the Assistant Director, the Dean of Students, the accountant, the Administrative Assistant, and the secretaries) (c) Office space for four teaching staff and assistants (d) Duplicating equipment and an appropriate room to house and operate such equipment. (e) Library (f) A storage room (g) A staff room  - 36 - ANNEX 5 Page 5 of 12 CFC-s Outline Syllabus 5.10 An outline syllabus prepared for CFC is described in this paragraph and would be developed into detailed syllabi after CFC has been established. First Year (a) Spoken and written Malagasy (as at present) (b) Spoken and written French (as at present) (c) Spoken and written English (as at present) (d) Financial Accounting I Introduction to accounting-bookkeeping, debits and credits, closing and other journal entries and preparation of financial statements. Use of the cash book, accounting for a distribution company, ledgers, working capital and the accounting cycle. (e) Financial Accounting II Prerequisite: Financial Accounting I. Fixed assets, investments and long-term debts. Introduction to accounting for different types of organizations (corporations, State companies, partnerships, sole proprietorships, etc.) (f) Civil Law (as at present) (g) Principles of Economics (macro): (as at present) (h) Principles of Economics (micro) : (as at present) (i) Business Mathematics I and II Review of classical algebra. Sets and operations on sets. Relations and functions, systems of linear equations. Vectors. Matrices. The inverse of a matrix. Determinants. Linear combinations. Introduction to linear programming. The simplex method. (j) Introduction to Business This introductory course presents a general idea of the business world and the principal functions of the enterprise: organization production, marketing, human relations, finance.  - 37 - ANNEX 5 Page 6 of 12 Second Year (a) Financial Accounting III Prerequisite: Financial Accounting II After a review of accounting procedures and the preparation of financial statements, the student will learn basic accounting principles and their use in an in-depth study of balance sheet items. (b) Financial Accounting IV Prerequisite: Financial Accounting III Further study of the application of basic accounting principles to balance sheet items, followed by the study of corrective entries, single entry bookkeeping, the statement of sources and applications of funds, and inflation accounting. (c) Commercial Law: (as at present) (d) Introduction to Data Processing In this course the student learns the principles of data processing and its impact on the enterprise. The course familiarizes the student with data processing by computer, with special emphasis on logic, design and process charts. Introduction to a basic language (using terminals). (e) Programming Applied to Business Prerequisite: Introduction to Data Processing Study of an advance programming language, including laboratory work. The course is oriented toward commercial applications, so that the student will be able to take part in the processing of a computer data system. (f) Business Mathematics - Calculus I Graphic representations. Functions: rational, exponential, loga- rithmic. Arithmetic and geometric series. Applications of compound interest. Continuity and limits. The derivative. Rules for taking derivatives. Derivatives of simple functions. Differentiation. Maxima and minima of functions. Rates of change. Derivatives of orders higher than one. Inflection point. Applications.  - 38 - ANNEX 5 Page 7 of 12 (g) Introduction to Finance Prerequisite: Financial Accounting II The nature of finance and its role in business, as well as its impact on all economic aspects of the modern world. The importance of understanding financial mechanisms for those concerned with management science. The tools of finance: stocks, bonds, borrow- ings, risks. Financial planning, control, distribution of profits, self-financing. Malagasy management consulting firms. Financial organization and reorganization of firms. (h) Financial Institutions Description, analysis and role of financial institutions in the economic context of Madagascar. The following institutions are discussed: banks, insurance companies, finance companies, govern- ment. (i) Principles of Management I Definition of management. The function of management. Planning and monitoring of activities, determination of objectives. Decision-making, strategies and policy, techniques of control. (j) Financial Mathematics Simple interest, compound interest, simple annuities, amortization, depreciation, debentures, general annuities, perpetual annuities. Third Year (a) Tax Law and the Tax System (as at present) (b) Specialized Accounting I Consolidated accounts (c) Cost Accounting I Prerequisite: Financial Accounting II Concepts and classification of costs. Cycle of cost accounting. Study of job cost and process cost. Valuation and accounting of byproducts and main products.  - 39 - ANNEX 5 Page 8 of 12 (d) Cost Accounting II Prerequisite: Cost Accounting I Cost accounting and control of each of the three elements of manufacturing cost: raw material, labor and overhead costs. Standard costs. (e) Corporation Finance and Financial Analysis I Prerequisite: Financial Mathematics Scope and nature of financial management. Financial analysis, forecasting and control. Management of working capital. Decision- making on long-term investments. (f) Corporation Finance and Financial Analysis II Prerequisite: Financial Mathematics and Introduction to Finance Sources of long-term financing. Financial structure and capital costs. Internal financing and dividends policy. External growth: mergers, management companies, bankruptcy, reorganization and liquidation. (g) Principles of Management II Prerequisite: Principles of Management I Organization, nature and purpose, charging of activities, hier- archical relationships, decentralization, delegation of authority. Business organization. Personnel organization. Management, motivation and leadership. (h) Elements of Production This course is an introduction to the organization of the produc- tion system, selection of equipment and processes, production facilities, identification of expenditures, inventory control and manpower planning. Fourth Year (a) Accounting Theory Prerequisite: Financial Accounting IV Historical study of accounting, bases of accounting assumptions and principles regarding various accounts, profits, the impact of inflation on profit, different types of provision, valuation of assets, and investments.  - 40 - ANNEX 5 Page 9 of 12 (b) Specialized Accounting II Prerequisite: Financial Accounting IV This course deals with the specific problems of partnerships, legal and accounting implications of the liquidation of enter- prises, estates, fund accounting. Other subjects covered: deposits, installment sales, foreign currency. (c) Theory of Auditing Prerequisite: Financial Accounting IV The-oretical study of auditing with special emphasis on internal audits and analyses performed by public auditors. Other subjects covered are: the role of the auditor, professional ethics, auditing programs, the auditor's report, statistical sampling and internal auditing. (d) Auditing Methods Prerequisite: Theory of Auditing Practical application of the theory of auditing. Principles, procedures and techniques of auditing applicable to each item of the balance sheet and the income statement; auditing programs and the preparation of internal control questionnaires; the importance of working papers that clearly reflect the results of sampling and the company s books. (e) Cost Accounting III Prerequisite: Cost Accounting II Analysis of sales and cost of sales. Fixed and flexible budgets. Accounting cycle of standard costs with calculation, interpretation and accounting of differences between standard and real costs. (f) Cost Accounting IV Prerequisite: Cost Accounting II Relationship between prices, volume and profit. Rational selection of projects for implementation. Marginal cost. Long-term planning of disbursements.  - 41 - ANNEX 5 Page 10 of 12 (g) Descriptive Statistics Analysis of data, frequency distribution, measures of central trend and measures of dispersion. Quartiles. Histograms and ogives. Elementary probabilities. Binomial distribution and Poisson dis- tribution. Normal distribution and applications. Student-s dis- tribution. Sampling. Estimation theory. Theory of tests: tests of the mean, proportion, etc. Chi-square test. Regression and correlation. Other subjects may be covered as necessary. (h) Accounting Theory II Prerequisite: Financial Accounting IV Critical discussion of such balance sheet and expense items as inventories and cost of goods sold, fixed assets and depreciation, other assets, etc. Also special items, valuation of assets, liabilities and capital stock, and accurate and complete presentation of financial statements. (i) International Finance and Economic Relations Prerequisite: Principles of Economics (macro); Principles of Economics (micro). General equilibrium and the role of international trade. Balance of payments and capital movements. Development of international trade and trade policy. Exchange rates. International financial institutions (International Monetary Fund, World Bank, etc.) and mechanisms for the financing of international trade. Eurodollars and petrodollars. Multinationals: Direct foreign investment and operations on inter- national financial markets, their sources of financing, control of multinationals, etc. -' - (j) Economic Systems and Structures Prerequisite: Principles of Economics (macro); Principles of Economics (micro) Description of different economic systems and structures. Models of modern capitalism, socialism, Marxist economies. Structure of a socialist system, Soviet Russia. Liberal socialism. Economics of social welfare. The economic system and international trade. Problems of a market economy with normative planning.  - 42 - ANNEX 5 Page 11 of 12 Fifth Year (a) Seminar in Accounting Theory Prerequisite: Accounting Theory Seminar in accounting theory aimed at developing a critical attitude in the student and a methodical questioning of the various aspects of accounting. The following subjects are among those discussed: accounting of human resources, forecast accounting, etc. (b) Seminar in Accounting Content to be determined by the professor. (Numerous case studies.) (c) Management Accounting This course is directed toward business planning and control with the aid of accounting. Results will be evaluated in terms of budgets and decisions to be taken. Great importance is attached to the analysis of costs and the use of accounting data in management decision-making. (d) Auditing and the Computer (Review) Prerequisite: Programming Applied to Business Integrated system of cards, magnetic tape and magnetic disks. Internal control of mechanized accounting systems and procedure to be followed for auditing (course intended for students interested in public auditing). (e) Data Processing and Programming Study of data processing and introduction to an advanced programming language. Work on a computer, oriented toward commercial applica- tions. (f) Management of Data Processing Systems Prerequisite: Programming Applied to Business This course prepares the student to make a better evaluation of the use of computers in data processing systems, taking into account the following aspects: benefits, costs, flexibility and other factors. Numerous case studies.  - 43 - ANNEX 5 Page 12 of 12 (g) Seminar in Data Processing Analysis and structure of data. Evaluation of information generated by the computer. Application, laboratory work, presentation of projects, etc. (h) Research Administration and Techniques Use of scientific methods in the study of business problems. Analysis of the advantages and limitations of various research techniques. Development and administration of research programs. (i) Research Project Research on a specific topic to afford a deeper knowledge of an academic subject or to explore a new field. All student projects will be supervised and evaluated by an ad hoc committee. RINDRA Training Component 5.11 It is necessary to train RINDRA's staff five years beyond the expiration date (June 30, 1981) of its contract with PMM. A firm of consult- ants would be employed to continue practical training of RINDRA-s staff. In addition, the project component would aid RINDRA in expanding its audit activity into banking and insurance, and in increasing its audit staff to a minimum of 40. 5.12 For RINDRA's effective management and operation, a professionally qualified Director-General and a firm of audit consultants would be employed for six years and five years respectively. The Director-General should have considerable experience in a comparable capacity in auditing firms and the firm of consultants would be employed from FY 1982 through FY 1986. Accounting Systems and Procedures 5.13 The project would make foreign currency available (against equiva- lent local currency prepayment) to enable foreign consultants to be employed by local firms which provide consultancy services in accounting systems and procedures. Each approved consulting assignment would become a sub-project and the Association would retain the right to monitor all subprojects (on a spot check basis). Appropriate foreign consultant proposals would be sub- mitted to the Association for approval before contracts are entered into.  - 44 - ANNEX 6 Page 1 of 4 MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT Outline of Proposed Legislative Measures 1. Proposals for legislative measures would be based on a review of the applicable laws of the Democratic Republic of Madagascar. They would also require enterprises to provide periodic audited financial statements. The accounting standards would be set out covering their preparation and contents and an accounting classification code would take into consideration the necessary linkage between commercial and national accounting. Auditing requirements would be scheduled according to auditing capabilities available in the country. Professional and ethical standards would be established. A time table (para. 17) indicates how the new legislation would be implemented. Review of Existing Laws 2. A complete review of existing laws would be carried out as a first step. Contents of the Financial Statements 3. Every enterprise should be required to keep proper books of account and prepare, at the end of each financial year, financial statements includ- ing a balance sheet, an income statement and a funds flow statement. The balance sheet should give a true and fair view of the state of affairs of the enterprise at a specified date, with respect to its assets and liabilities; the income statement should give a true and fair view of all trading income and expenditure of the enterprise and of its profit and loss during the specified period; the funds flow statement should give a true and fair view of all funds received and expended by the enterprise showing adequate details of the sources of all sums received and of each category of expenditure. 4. All assets and equity and liabilities should be classified under headings appropriate to the companyIs business and summarized in the balance sheet. Particulars necessary to disclose their general nature may be shown in notes forming part of the accounts and: (a) equity: - capital should be shown separately; - reserves and provisions should be properly classified; - grants should be shown separately.  - 45 - ANNEX 6 Page 2 of 4 (b) long term debt: - loans should be detailed separately showing the borrowing terms of each major debt; (c) assets: - fixed assets, current assets and other assets should be separately identified; - the method used to arrive at the amount of the fixed assets under each heading should be stated; the value of net fixed assets should be the difference between cost, or valuation, and depreciation; - investments and goodwill should be under separate headings; - method of valuation of inventory goods should be stated; - provision for current assets should be estimated, if their value on realization is not equal to the stated value; - the basis of conversion of foreign currencies should be set out; - the nature and amount of contingent liabilities should be shown. 5. All revenues and charges should be classified under headings appropriate to the company-s business and summarized in the income state- ments. The following should be specifically shown: - the method by which the turnover (sales) stated is arrived at; - the method of depreciation of fixed assets; - the basis on which the charges for income tax and other taxes are computed; 6. All sources and applications of funds should be properly classified in the funds flow statement, under the broad categories of internal generation of funds, external financing, long term construction, long term investments, debt service and dividends, changes in working capital.  - 46 - ANNEX 6 Page 3 of 4 Accounting Standards and Classification Code 7. Accounting standards are essential to assure comparability of accounting information of different enterprises as well as of the same enter- prise for different periods. Accounting standards and uniform account classi- fication codes are essential in Madagascar, where planning is centralized. Uniformly presented accounting information would be easier to consolidate into sectoral, regional and national statistics, and these statistics can then be used for planning at different levels. 8. For the above reasons, an accounting classification code was pro- mulgated in Madagascar under a decree No. 69 002 of January 7, 1969. Since no guidelines were established for use of the code, it could not be effect- ively implemented, with the result that the Government and other interested agencies cannot obtain financial information they need for planning. 9. To correct that situation, it is necessary to devise a system by which commercial enterprises can provide necessary microeconomic information required by the Government and other agencies. To achieve this aim it would be essential to: (a) prepare a new accounting classification code which would provide for the different characteristics and needs of each sector; (b) prepare procedures and methods to collect information so compiled by enterprises, analyze and classify it for each sector and region and consolidate it on a national basis; and (c) prepare guidelines for enterprises for presenting accounts to fulfill the above requirements and accounting standards and uniform practices to be employed in doing so. 10. The aim is that a single set of standardized documents be required each year from each enterprise by a single Government agency which would then analyze, classify and consolidate the information and publish it. The enter- prises as well as the Government would benefit from availability of consoli- dated accounts and statistics. Date at which the financial statements should be available 11. The standardized balance sheet, income statement and funds flow statement of all enterprises governed by the Charter of Socialist Enterprises or the Company law for private enterprises, and the auditor-s report when required, should be available within six months after the end of the finan- cial year of those enterprises. Auditing 12. The accounts of all enterprises should be audited, but this can only be implemented progressively when the auditing capabilities of the  - 47 - ANNEX 6 Page 4 of 4 country are adequate to perform the necessary services. The auditors would submit a written report to the Orientation Council of Socialist enterprises or to the shareholders of private sector companies. In this report the auditors should state whether the 3~alance Sheet, the Income Statement and the Funds Flow Statement of the audited enterprise have been p.operl, prepared on a consistent basis, and in accordance with specified standards and whether they give a true and fair view of the state of affairs of the enterprises, of its profit and loss, of its movement of funds, and whether proper accounting and internal control procedures are followed. They should also certify that the enterprise maintains proper books of account and that its financial statements are in agreement with those books. 13. The implementation of auditing should start with the largest enter- prises, which are already subject to the Charter of Socialist enterprises or are planned to be in the near future. Auditing would then be introduced where the size of the enterprise justifies it. Accounting Profession 14. Laws concerning the "Ordre des Experts - comptables et comptables agrees" should be reviewed and minimum qualifications of persons authorized to act as auditors should be prescribed. 15. Professionally qualified accountants and auditors, as a group (such as the Ordre above), should be required to keep the accounting and auditing standards under review and issue recommendations which should be followed by the auditors and accountants, within the framework of a Committee with representatives of the Government and of the profession (Conseil superieur de comptabilite et de gestion). 16. The professional association, the Ordre, should be authorized to investigate departures by individual auditors from the minimum standards recommended by it and penalize, suspend and otherwise discipline its members. Timetable of Legislative Implementation 17. October 1, 1981 Establishment of a Committee that would be in charge of drafting proposals for legislation concerning: - applicable laws of the Democratic Republic of Madagascar - accounting and audit organization - organization of the Accounting Profession April 30, 1982 Submission of proposals for legislative measures to the Government and the Association July 31, 1982 (tentative date) Enactment of legislation  - 48 - ANNEX 7 MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT Estimated Disbursement Schedule (thousands of US Dollars) Cumulative Disbursements Undisbursed IDA Fiscal Year Quarterly at end of at end of and Quarter Disbursements quarter quarter FY 1982 December 31, 1981 600 600 10,900 March 31, 1982 200 800 10,700 June 30, 1982 400 1,200 10,300 FY 1983 September 30, 1982 500 1,700 9,800 December 31, 1982 500 2,200 9,300 March 31, 1983 500 2,700 8,800 June 30, 1983 500 3,200 8,300 FY 1984 September 30, 1983 500 3,700 7,800 December 31, 1983 600 4,300 7,200 March 31, 1984 600 4,900 6,600 June 30, 1984 600 5,500 6,000 FY 1985 September 30, 1984 600 6,100 5,400 December 31, 1984 600 6,700 4,800 March 31, 1985 500 7,200 4,300 June 30, 1985 500 7,700 3,800 FY 1986 September 30, 1985 500 8,200 3,300 December 31, 1985 500 8,700 2,800 March 31, 1986 500 9,200 2,300 June 30, 1986 500 9,700 1,800 FY 1987 September 30, 1986 400 10,100 1,400 December 31, 1986 400 10,500 1,000 March 31, 1987 400 10,900 600 June 30, 1987 300 11,200 300 FY 1988 September 30, 1987 300 11,500  - 49 - ANNEX 8 MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT Project Monitoring 7.1 CFC Appointment of: 1 CFC Director September 1, 1981 2 qualified teachers March 1, 1982 2 teaching assistants March 1, 1982 2 qualified teachers March 1, 1983 2 teaching assistants March 1, 1983 1 regular technical staff March 1, 1984 1 regular technical staff March 1, 1985 Start of: daytime classes for year 1 May 1, 1982 evening classes for year 1 May 1, 1983 daytime classes for year 2 May 1, 1983 daytime classes for year 3 May 1, 1984 daytime classes for year 4 May 1, 1985 daytime classes for year 5 May 1, 1986 7.2 RINDRA Appointment of: - Director-General September 1, 1981 - Consulting firm October 1, 1981 Billing hours; year ending June 30: 1982 40,000 1983 45,000 1984 50,000 1985 50,000 1986 50,000  - 50 - ANNEX 9 MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT RINDRA - Balance Sheets as of June 30. 1980-1989 (FMG Million) Audited Projected 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 ASSETS Fixed Assets - Revalued 40.57 48.22 66.06 76.01 87.35 100.21 116.23 135.69 159.90 189.29 Less Depreciation 4.89 9.77 16.36 24.94 35.35 47.91 63.04 81.31 103.41 130.18 Net Fixed Assets 35.68 38.45 49.70 51.07 52.00 52.30 53.19 54.38 56.49 59.11 Unamortized Technical Assistance Cost - - 124.69 251.25 349.16 335.01 233.37 124.68 47.36 12.14 Deposits 1.37 1.37 1.37 1.37 1.37 1.37 1.37 1.37 1.37 1.37 Current Assets Cash and Bank 100.77 5.57 6.96 8.85 11.40 18.09 10.74 16.86 15.80 21.72 Accounts Receivable 89.41 100.00 104.00 100.00 120.00 140.0o 150.00 170.00 190.00 210.00 Other 85.63 75.00 65.oo 65.oo 65.oo 65.oo 65.00 65.oo 65.oo 65.00 Total Current Assets 275.81 180.57 175.96 173.85 196.40 223.09 225.74 251.86 270.80 296.72 312.86 220.39 351.72 477.54 598.93 611.77 513.67 432.29 376.02 369.34 EQUITY AND LIABILITIES Equity Capital 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 Retained Earnings -218.62 -499.80 -431.51 -441.05 -452.03 -484.23 -511.72 -485.96 -377.12 -182.88 Revaluation Reserves - 3.21 6.67 11.14 15.74 20.42 25.13 29.91 34.80 39.88 Total Equity -168.62 -446.59 -374.84 -379.91 -386.29 -413.81 -436.59 -406.05 -292.32 -93.00 Loan from Government (IDA Credit Onlent) - - 155.86 353.02 563.66 666.88 611.56 499.64 379.64 189.64 Advance from Government 2J2.00 212.00 212.00 212.00 212.00 212.30 212.00 212.00 21a2.00 212.00 Deposits 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 Current Liabilities 268.78 454.28 358.00 291.73 208.86 126.00 126.00 126.00 76.0o 60.00 312.86 220.39 351.72 477.54 598.93 611.77 513.67 432.2 3 76.02 369.34 Current Ratio 1.0 0.4 0.5 o.6 0.9 1.8 1.8 2.0 3.6 4.9 1/ After 21 months of operations  - 51 - ANNEX 10 MADAGASCAR ACCOUNTINiG AND AUDIT ORGANIZATION AND TRAINING PROJECT RINDRA - Income Statement for the YearsEnding June 30, 1980-1989 Audited - Projected 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Average nunber of audit staff 17 26 32 36 40 40 40 40 40 40 Billing hours - thousands 31 21 40 45 50 50 50 50 50 50 Average fees-thousand FMG per hour - In December 1980 Prices 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 In Current Prices 9.29 9.50 7.80 8.70 9.80 11.00 12.30 13.80 15.50 17.30 (FMG Million) Revenue 288.01 199.50 312.00 391.50 490.00 550.00 615.00 690.00 775.00 865.00 Operating Expenses Salaries and allowanceas 66.35 83.20 132.00 210.00 233.00 259.00 300.00 351.00 392.oo 440.oo Administration and other 52.91 47.48 54.19 64.97 72.33 93.76 109.31 128.06 144.08 161.38 PMM fees and expenses 387.37 350.00 - - - - - - - Technical aseistance cost3 - - 48.17 95.54 140.65 154.41 155.28 118.51 77.32 35.22 506.63 480.68 234.36 370.51 445.98 507.17 564.59 597.57 613.40 636.60 Operating Income -218.62 -281.18 77.64 20.99 44.02 42.83 50.41 92.43 161.60 228.40 Interest on Loan __- 9.35 30.53 55.00 75.03 77.90 66.67 52.76 34.16 Net Income -218.62 -281.18 68.29 -9.54 -10.98 -32.20 -27.49 25.76 108.84 194.24 1/ After 21 months of operation 2/ Salaries and allowances are in respect of Malagasy staff only 3/ Technical assistance costs from FY1982 are amortized over five years. These costs before the project implementation period were not to be amortized by RINDRA.  - 52 - ANNEX 11 MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT RINDRA - Funds Flow Statement for Years Ending June 30, 1981-1989 Projected 1981 1982 1983 1984 1985 1986 1987 1988 1989 Sources of Funds Internal sources N1et operating income -281.18 77.64 20.99 44.02 42.83 50.41 92.43 161.60 228.40 Add Back: Depreciation 4.44 5.71 7.10 8.17 9.38 10.82 12.59 14.78 17.46 Amortized technical assistance cost - 31.17 70.60 112.73 137.37 146.32 116.7 77.32 35.22 Total Internal Generation -276.74 114.52 98.69 164.92 189.58 207.55 221.79 253.70 281.08 IDA Credit Onlent _ 155.86 197.16 210.64 123.22 44.68 8.08 - - Total Sources -276.74 270.38 295.85 375.56 312.80 252.23 229.87 253.70 281.08 Application of Funds Additions to fixed assets 4.co 13.50 4.05 4.50 5?00 7.00 9.00 12.00 15.00 Technical assistance payments in foreign exchange - 155.86 197.16 210.64 123.22 44.68 8.o8 - - Repayment of Government Loan - - - - - 120.00 120.00 120.00 190.00 Interest - 9.35 30.53 55.00 75.03 77.90 66.67 52.76 34.16 Total Application 4.00 178.71 231.69 270.14 203.25 249.58 203.75 184.76 239.16 Increase in Working Capital Cash -95.20 1.39 1.89 2.55 6.69 -7.35 6.12 -1.06 5.92 Accounts receivable 10.59 4.00 -4.oo 20.00 20.00 10.00 20.00 20.00 20.00 Other -196.13 86.28 66.27 82.87 82.86 - - 50.00 16.00 Total Increase -280.74 91.67 64.16 105.42 109.55 2.65 26.12 68.94 41.92 Cumulative Cash Balance 5.57 6.96 8.85 11.40 18.09 10.74 16.86 15.80 21.72 Debt Service Coverage - 12.2 3.2 3.0 2.5 1.0 1.2 1.5 1.3  - 53 - ANNEX 12 MADAGASkCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT RINDRA - Notes and Assujmptions for the Financial Statements 1. Fixed Assets Fixed assets values have been increased 9% to reflect estimated replacement costs. This weighted average rate is calculated on the assumption that 60% of the cost of fixed assets is in foreign exchange and 40% in local currency and price escalation applied at rates of 7% and 12% respectively. 2. Unamortized Technical Assistance Cost Technical assistance costs from FY 1982 payable in foreign exchange have been amortized over five years, one-fifth annually in the year of payment and in the succeeding four years. This treatment is to reflect the lasting benefit of such services. PMM costs before the project implementation period have not been amortized by RINDRA. 3. Accounts Receivable After FY1980 RINDRA is assumed to gradually improve its collection of revenue, so that at the end of FY1981 its amounts receivable will be equivalent to six months revenue declining to four months in FY1982 and three months in FY1983 and subsequent years. 4. Revenue and Operating Expenses Billing revenue, number of hours billed and operating expenses have been estimated in consultation with RINDRA and its consultants applying appropriate price contingencies. 5. Technical Assistance Costs PMM's fees and expenses are based on its present contract. Use of a consulting firm is assumed for future technical assistance to RINDRA at an average fee equivalent to US$12,000 per man month in December 198o constant prices plus travel, accommodation and transport charges.  - 54 - ANNEX 13 MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT Selected Documents and Data Available in Project File A. Documents related to RINDRA A.1 Contract with Peat Marwick Mitchell and Co. (PMM), dated July 17, 1968, and annexed documents. A.2 Detail of PMM's proposal of July 1978. A.3 RINDRA's reports of activity for the periods: - May 25 to December 31, 1979 - January to June 30, 1980 - June 30 to December 31, 1981 A.4 Audit of RINDRA-s accounts as of June 30, 1980. B. Texts of Malagasy company laws and laws concerning accounting: - Charter of Socialist Enterprises of 1978 - Company Law of 1867 - Statutes of Magistrature of 1979 (statuts de la magistrature) - Miscellaneous laws, decrees, and ordinances related to accounting  W2- ~~~~~~~4!4 4 4B' 510 MADAGASCAR ntteronana -aPaved roads All weather roads Railways -1-. Airports ohim-,n Forests -300 Contours in meters 14' Rivers 14' Prefecture boundaries srmb Provincial boundaries AIntaloha o so l~~ ~ ~~~os ISO MILES Mohapngq o so so IF 200 25,0 CtLOMETeERS Penarivo Atstnona Cbanire/ ~~~~~~~~~~~~~~ +Atooe,~ ~ ~~~ooosn c a rin c, / q \%n -/ D A} A i Mr- rond Ie,ianse h~ 2Y- ( h. b0ph,h-dbytAt. 1 4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~W, _ s/j aopen frdattk' otaff etotoninelyfo tle q,O s to h ttth,.thed Ted--;-o5a,a- -od-ad th. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~oat ,ttAn tepatoftniy) --' . r ro ~~~~~~~~ < _ - Taolunuro * = , !; . J~~~~~~~~~~~~~~~~~~~~~~~~~~~~i,s,deae o i,OOitO. n rbolobe. t, tttt h op_ 42 44~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~t- acetac of toolt Itanate _l I I-y - Iy - 20~~~~~~~ 10 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ADAGASCAR ~ 4,2 414 46 48'