Colombia - Country financial management assessment

 72015 ... • l COLOMBIA COUNTRY FINANCIAL MANAGEMENT". ASSESSMENT .' September 1998 , GLOSSARY OF TERMS AND ABBREVIATIONS CBA Central Board ofAccountancy Junta Central de Contadores CGN National Accounting Office Contaduria General de la Naci6n CGR Office ofthe Comptroller General Contraloria General de la Republica DNP National Department ofPlanning Departamento Nacional de Planeaci6n Accountant General ofthe Nation Contador General de 1a Naci6n Comptroller General Contralor General de la Republica Comptrollers General Comptrollers at different levels ofgovernment (National, Departmental or MunicipJJ) FR Fiscal Reviewer Revisor Fiscal Technical Council for Public Consejo Tecnico de la Contaduria PUblica Accounting lASC International Accounting Standards Committee IBRD The Bank International Bank for Reconstruction and Developmen INC National Institute of Accountants Instituto Nacional de Contadores PA Public Accountants Contadores PUblicos PAC Monthly Cash Flow Program Programa AnuaI Mensualizado de Caja PUC Unifonn Chart of Accounts Plan Vnieo de Cuentas PCU Project Coordinating Unit --: I  FOREWORD The Loan Administration Change Initiative (LACI) is based on the fundamental premise that .. sound financial management is essential for project success. LACI is designed to help the Borrower build capacity in-country for strong financial management, not just for Bank­ supported projects, but for all development activities it undertakes. In the spirit of the above statement, during the period May 20 through 30, 1998, the Latin America and Caribbean Region's Accountability Team (LCOAA) conducted a Country Financial Management Assessment in Colombia in order to assess the structure and performance of financial management, financial reporting, and auditing. The team, which perfonned the review, consisted of Roque Ardon (Mission Leader), Adriana Weisman and Orville Grimes (World Bank), and Gennan Escobar (Consultant). The review aimed to: (i) provide to the Government an analysis of the contribution of firpnr.~~: management to public sector programs, including those assisted by the B :t~.lJ.: {I.. ) recommend improvements in financial management practices of selected .':' .It;':;,t implementing agencies; and (iii) help Bank project staff and others evaluate the finanCIal management ofcurrent and prospective projects financed by the Bank in light of the existing regulations. To accomplish the assessment's objective, the mission held meetings with those responsible for accounting and financial management in the public and private sectors. For the pubiic sector, the institutions contacted included the National Accounting Office, the Office of the Comptroller General, the National Department of Planning, the Ministry of Finance (Treasury and Budget offices), the Central Board of Accountancy, and the Technical Council for Public Accounting. In the private sector, meetings were held with universities, organizations of professional accountants, and private accounting firms. Finally, for the perspective of operations, project-level assessments were conducted for the following four projects whose financing is assisted by the Bank: Agricultural Technology Transfer (pRONATTA, Ln. 3871-CO); Secondary Education (pASES, Ln. 3683-CO); MUlridpal Health Services (pSMS, Ln. 36IS-CO); and Urban Environmental Technical AssistarKe (Ln. 3973-CO). The mission wishes to thank all those institutions and individuals who contributed to its work. It is especially grateful to the World Bank Resident Mission for its invaluable insights into the issues and for its logistical support. . ii ..  COLOMBIA COUNTRY FINANCIAL MANAGEMENT ASSESSMENT CONTENTS • Chapter 1. Introduction 2. Financial Management and Public Sector Accountability 3. Accounting and Financial Reporting 4. The Accounting and Auditing Profession S. Application to Development Projects: The World Bank Portfolio 6. Summary of Conclusions and Recommendations Annex 1. The Planning and Budgeting Context of Financial Management 2. Accounting Structure and Standards 3. Office of the Comptroller General 4. Financial Management in the Bank-Financed Portfolio Attachment 1: Agricultural Technology Transfer Project Attachment 2: Secondary Education Project Attachment 3: Municipal Health Systems Project Attachment 4: Urban Environment Technical ~istance Project iii - I 1. I  CHAPTER1.~ODUC110N 1.1 A popular saying in Colombia is "If it is not in the law, it doesn't exist." Thus Colombia is a country of laws, in which most aspects of the economic and social life of the country are regulated by law. Financial management is not an exception, and unlike other countries, even the accounting and auditing standards -as well as standards of ethics for the • practice of the accounting profession- are promulgated by law. 1.2 The Framework 1.2.1 Logically, the general framework for financial management at the country level is already in place, duly legislated for both the private and the public (governmental and quasi­ governmental) sectors. Furthermore, the law also appoints the executing entity, such as the National Accounting Office (Contadurfa General de la Nacion, CGN) for governmental accounting, and the controlling institutions in charge of monitoring compliance, such as the ten Superintendencies in charge of overseeing economic sectors (e.g. financial and banking, commerce and industry, etc.), as well as the Office of the Comptroller General (Contraioria General de la Republica, CGR) for most ofthe public sector. 1.2.2 Financial management in Colombia is based on article 334 of the Constitution, which states that the general direction of the economy is the responsibility of the State. Within this constitutional framework, financial management is structured as follows: 1.2.3 The National Congress promulgates the laws for both the public and private sectors, and supervises the performance of public and private administrators. Supervision is done through the Office of the Comptroller General. 1.2.4 The Presidency of the Republic (the Executive) is responsible before Congress for the efficiency, effectiveness and economy of the governmental entities' financial management, and for accounting for their performance. To this effect, the Executive relies on several entities for planning, budgeting, executing, accounting, reporting and monitoring. The National Accounting Office manages the recording of the public accounts, the consolidation of the financial statements of the public sector, and the submission to the President and to Congress ofthese financial statements. 1.2.5 The Executive supervises the economic activities of the private sector through the Superintendencies. The Legislative (Congress) monitors the internal controls and performance of the public entities through the comptrollerships (at National, Departmental!, Municipal and District levels). For example, the financial reports submitted by the Accountant General are audited by the Office of the Comptroller General (CGR). To this effect, the CGR performs comprehensive and/or operational audits of public entities and . ... others that manage public funds. Each year the CGR must submit to Congress its report on I Pertaining to political territorial divisions similar to the counties in the United States.  the Accountant General's consolidated fmancial statements by June 30. Lower-level comptrollerships report to the corresponding Departmental or Municipal councils. 1.2.6 The law also regulates the requirements for entry into the public accountancy profession, and assigns to members of the profession (public Accountants, PAs) the responsibility for most activities related to financial management in Colombia, both in the public and the private sectors. For example, the PA working as an accountant, along with the I­ entity's management, is responsible for assuring that accounting records are maintained in accordance with applicable accounting standards and legal requirements, and for the existence of internal controls sufficient for the preparation of reliabJe, useful and timely fmancial information. Also, a PA independent of the administration, designated in Colombia as "Revisor Fiscal," performs a comprehensive audit (financial, internal control, operational and compliance) and issues the corresponding audit opinions. The Fiscal Reviewer, who can be a natural person or a partnership of accountants, reports to the highest levels of the entity, but has total independence for performing hislher functions. Finally, PAs are the only professionals autliorized to perform independent external audits ofthe entity. 1.3 The Issues 1.3.1 Overall, Colombia doe~ not have a problem for lack of laws and regulations concerning financial management or the practice of the accounting profession. The principal issues lie elsewhere. They concern, for example, the degree to which accounting and financial management activities mandated by law are actually performed as intended by the legislator. They have to do with whether activities that should be done are not being done, because they are not established by law. Finally, they relate to the fact that financial management in Colombia (and everywhere else) should be at the service of national goals. Inefficient use of such measures results in lost opportunities to pursue national development objectives. Inappropriate use will typically make these objectives more difficult to achieve. Our recommendations are designed to provide the means to address these issues effectively. 1.4 Organization of the Report 1.4.1 Chapters 2, 3 and 4 of this report discuss the legal framework for: (1) national planning and budgeting; (2) accounting in the public and private sectors, including generally accepted accounting standards; and (3) the practice of the public accounting profession in the public and private sectors, including generally accepted auditing standards, code of ethics and licensing requirements. 1.4.2 Chapter 5 provides an assessment of the financial management system in four projects financed by the Bank, including the main issues and recommendations for improving their financial management capabilities. Chapter 6 presents a summary of conclusions and recommendations to improve financial management as a whole. 1.4.3 Annexes 1, 2 and 3 include detailed information on selected topics discussed in the text. Annex 4 and its attachments detail the results of financial management reviews for 2  four projects in the World Bank portfolio, which illustrate the application of financial management systems to development operations. • .. 3 .  CHAPTER 2. FINANCIAL MANAGEMENT AND PUBLIC SECTOR ACCOUNTABILITY • 2.1 Basic Overview for Colombia 2.1.1 Located in the northern part of South America, Colombia borders the Caribbean Sea and the Pacific Ocean, as well as Panama, Venezuela, Ecuador, Peru and Brazil. It covers a total area of almost 1.14 million square kilometers, and as of July 1995 had a population of 36.2 million with an estimated population growth rate of 1.7%. 2.1.2 Colombia is politically organized as a Republic with Executive, Legislative and Judicial branches of government. Its territory is divided into Departments,· which in tum are divided into Municipalities. 2.1.3 Some of Colombia's social and economic indicators are: Government projections _ %1 1997 1998 Economic Growth 3.2 4.5 Inflation 17.7 16.0 Government expenditure 27.6 18.0 Public sector deficit 3.7 3.0 Deficit 5.6 4.2 2.2 Financial Management System 2.2.1 Financial management systems can be taken to include a wide range of finance- related activities, including objectives, plans, budgets, organization, policies and procedures, accounting, reporting, monitoring and auditing. For purposes of this Financial Management Assessment, however, we focus primarily on the system of expenditures, payments, disbursements, financial reporting, and evaluation (through auditing) that occur after the budget is determined. The process by which the budget itself is determined, adopted, and adjusted during the year mainly lies upstream of our analysis. 2.2.2. Essential elements of good financial management include, inter-alia, qualified personnel, clear and appropriate assignment of duties and responsibilities, and adequate keeping of records and other supporting documentation. The ultimate purpose of fmancial management is to assure proper accountability, transparency, efficiency, effectiveness and economy in the management of monetary and nonmonetary resources . . 2 Source: Ministry of Finance. 4 2.3 General Structure of Financial Management in Colombia 2.3.1 Financial management in Colombia is based on Article 334 of the Constitution, which states that the general direction of the economy is the responsibility of the State (Estado). The State, by means of the law, will intervene in the exploitation of natural resources; use of the soil; production, distribution, use and consumption of goods, private .. and public services; and the rationalization of the economy in order to improve the quality of life for its citizens, achieve a just distribution of opportunities, share the benefits of economic development, and preserve the environment. 2.3.2 Within this constitutional framework, financial management has specific functions performed by interdependent entities and accounting practitioners. The National Congress issues the laws for financial administration in the public and private sectors. The Presidency of the Republic controls fmancial administration in the public and private sectors and submits reports to Congress. The National Department of Planning (DNP) prepares strategic plans for the social and economic development of the country. The Ministry of Finance prepares the national budget (revenue and expenditure) to be approved ~y Congress. The National Accounting Office consolidates fmancial information submitted by the public entities, prepares reports to evaluate their financial performance, and establishes government accounting standards. The Comptrollers General oversee the financial administration and carry out financial and performance audits of the public sector. The Public Accountants in the employ of public and private entities prepare the corresponding financial reports, which should be in compliance with the laws and with generally accepted accounting standards. Finally, independent public accountants audit the information provided and give professional opinions on fmancial statements, legal compliance, and internal controls and management. 2.4 Practice 2.4.1 The government's development plans and budget must be approved by law. Therefore, the Executive must submit to Congress its plans for the four-year presidential period. The national planning activities are performed by the National Council of Economic and Social Policy (CONPES) and DNP. Government plans are reviewed and analyzed by Congress and the National Planning Council. Citizens participate in the preparation of the plans through the communities and economic representatives in the National Planning Council. 2.4.2 The procedures and mechanisms to prepare, approve, execute, monitor, evaluate and control the national development plans are applicable to the central government units, territorial entities and public entities3• A database of programs has been established to facilitate the preparation of national and regional plans. 2.4.3 Every year DNP, with the Ministry of Finance and Public Credit, consolidates all programs and budgets and prepares the National Annual operational Investment Plan and 3 Territorial entities are entities dependent on Departmental or Municipal authorities. Public entities are decentralized bodies with largely autonomous management. 5  sends it to the Ministry's General Budget Division. The Ministry presents the national budget to Congress for approval no later than July 30. Congress must approve the budget law before October 20; otherwise the Executive can approve it by decree. 2.4.4 The Ministry of Finance is in charge of disbursing funds to government entities in accordance with the budget approved. Nevertheless, the actual allocation of resources does not necessarily match the total amounts budgeted, and budget cuts are frequent. 2.4.5 The main parameter to assess the efficiency of the public sector entities is the index of budget execution. The government has the legal power to merge, restructure or liquidate entities that are deemed inefficient. 2.4.6 According to the Constitution, the offices of the Comptrollers General have the responsibility for all the audits in the public sector, including projects receiving funds from the government. These must include financial, perfonnance and operatioruil audits, based on considerations ofefficiency, economy, equity and valuation ofenvironmental costs. 2.4.7 The Office of the Comptroller General of the Republic is an autonomous technical entity which reports to Congress. The Comptroller General is selected and appointed by Congress for the same period as the President (see sections 4.11 and Annex 3 for additional information). 2.4.8 The Comptrollers General of the Departments, District of Bogota and Municipalities have the same functions and responsibilities as the Comptroller General has for the national level, and report to their respective legislative bodies. 2.5 Issues 2.5.1 As mentioned earlier, ftnancial management systems should be at the service of national goals. The main rationale for improving financial management is not to make the system ideal, but to improve its effectiveness in the pursuit of national development objectives. 2.5.2 Among the many development objectives of Colombia, three stand out as priorities to which improved financial management systems can make the greatest contribution. They are (a) control of public expenditure; (b) decentralization; and (c) perfonnance assessment and the establishment of a results-oriented public sector. 2.5.3 Control of Public Expenditure. This objective has remained at the top of the policy agenda throughout the 1990s. The rationale for its importance has changed, from inflation in the early 1990s to the ftscal deficit beginning around 1996. The efforts deployed to this end, however, have remained strong. There is a persistent belief that any and all tools must be used to keep public expenditure under CQntrol. 2.5.4 Many direct tools are available to accomplish this goal. These tools are concentrated at the planning/budgeting stage, as is appropriate, and include budget 6  reductions and the force of the PAC to limit payments. The financial management system of carrying out expenditures that have already been authorized, making payments, and ensuring good accounting and reporting has often, unfortunately, been seen as one more tool for controlling expenditure. Inefficiencies in the financial management system are regarded benignly because they indirectly help to limit spending. This goes far to explain why complications in fInancial management systems, in which project staff have difficulty in spending and ensuring payment, have often not been seen by the financial authorities as a serious problem or even a problem at all. In reality, these complications increase the fmancial cost of investment projects, and raise obstacles to the realization of development ~~~ , 2.5.5 Decentralization. Increasingly, national goals are felt to be best pursued through strengthening of territorial (decentralized) levels of government. There has been a sharp growth ofdevelopment projects for which loans are still made to the central government, and for which the central minister is still accountable for results, but which are carried out locally. This hybrid nature of projects, with some aspects central and some local, is likely to diminish over time as territorial entities improve their capacity and more projects become local. What is certain is that good financial reporting is essential, both now and in the future, for local governments to monitor results and for the center to know what is happening locally. At present, the system is not responding well to these needs. 2.5.6 It is fully realized that fInancial management systems should not simply be transferred intact to territorial entities and be expected to work well. Instead, intermediaries such as FINDETER have been charged with facilitating the transfer of central resources to local governments, while bringing some order to sub-national expenditure and providing a window for the central government on the pace of project implementation. In practice, FINDETER's ability to perform these functions, including fmancial management, has not kept pace with decentralization. For several projects disbursements against the previous year's reserves have been slow, preventing disbursements to be made against the budgets for the present year. 2.5.7 Performance Assessment. In accordance with the 1991 Constitution and the subsequent Law and Resolution, public bodies are required to manage and evaluate for results. The financial management system is critically important for performance assessment, since there cannot be accurate measurement of results without good measurement of the costs of programs and activities which produce the results. Fortunately, the fInancial management system has been responsive to this priority. The National Accounting Office has helped to issue Uniform Charts of Account (PUCs) over the past several years, as part of the regulatory environment of the various sectors. Performance audits are beginning to be done, and are expected to expand rapidly in the future. The fIrst Efficiency Agreements, reflecting performance goals and their measurement, have been signed. 2.5.8 The chief constraint on further progress in this' area is that commitments of ... implementing agencies on the one hand, and of budgetary authorities on the other, are often not of equal strength. While agencies often commit to the achievement of specific 7  development goals, it has proved much more difficult for the Finance Ministry to commit to the budget the agency needs to achieve these goals. Instead, controls over public expenditure exercised at all levels have typically been as omnipresent for activities subject to Efficiency Agreements as for others. 2.6 Recommendations 2.6.1 Financial management systems can improve once it is realized that such improvement will not result in loss ofcontrol. This is mainly because public expenditure is well regulated by the powerful direct tools already in place. The recommendations summarized in a later chapter are made in the knowledge that they are fully compatible with, and indeed facilitate, the exercise of control over public expenditure. 2.6.2 With regard to decentralization, the financial management system needs to permit both central and local authorities to monitor expenditures, payments, and results. This is certainly true for local authorities, who now have project implementation respondbility including contracting. It is just as true for the central authorities, who remain accountable for results and who therefore must carry out adequate financial monitoring. For example, FINDETER may keep the project accounts, but should transmit records regularly so that the central Project Implementation Units (UCPs) can continue to carry . out financial monitoring in accordance with their fiduciary obligations. 2.6.3 Results·oriented management in the public sector will improve to the extent that there is greater balance between commitments to achieve results and to ensure the necessary financing. The financial management system needs to contribute, first by ensuring predictable and regular patterns of expenditure, payments, and reporting once expenditures are authorized. The system should also bring about the integration of physical and financial information in a single framework of measurement of inputs, outputs, and development results. Promising steps, especially by DNP, are being taken to move to an integrated monitoring framework. Similar steps should be taken to improve efficiency in financial management for expenditures whose amount and purpose have been agreed . - . 8 ..  · CHAPTER 3. ACCOUNTING AND FINANCIAL REPORTING Accounting in the Public Sedor 3.1 Structure 3.1.1 Article 354 of the Constitution states that there will be an Accountant General, appointed by the Executive, who will consolidate the general accounting of the nation with the territorial and decentralized entities. 3.1.2 Law 1298 of July 23, 1996 created the National Accounting Office, under the responsibility of the Accountant General of the Nation, as a technical, administrative and financially independent unit of the Presidency. The functions of the National Accounting Office are to: (a) unify, centralize and consolidate the public accounting system, (b) establish the accounting standards for the public sector, (c) keep consolidated accounting records, (d) prepare consolidated financial statements comprising the central and territorial governments, the decentralized entities and the industrial and commercial entities owned by the government, (e) publish government accounting guidelines and resolve inquiries related to the applicability of general accounting standards, and (f) supervise the public entities' compliance with the accounting standards. 3.1.3 The head of the General Budget Division provides each public sector entity with a budget certificate to initiate the execution of the operation plan. These certificates are registered in the national accounting system and compared with actual income and expenditures. 3.1.4 The main parameter to assess the efficiency of the public sector entities is the index of budget execution. The government has the legal power to merge, restructure or liquidate the entities that are inefficient. 3.2 Practice 3.2.1 National accounting standards were established by Decree 85 of January 10, 1995, and require public entities to prepare useful, reliable, complete and timely information on assets, liabilities, patrimony or equity, income and expenses, so that they can help the Government: (i) fulfill its accountability obligation to the people ~~represented by Congress~ ~ to report on the sources and uses of public funds, and (ii) evaluate efficiency, effectiveness and economy in the administration of public sector entities. The standards include the policies, principles, rules and accounting procedures to record the operations, prepare the financial information of each of the public entities, and consolidate the financial information of the public entities for the national and territorial levels, decentralized entities and government commercial and industrial enterprises. The structure of the charts of accounts and accounting codes is similar to the ones used in the private sector. Entities can use additional codes for subsidiary or detailed accounts, as needed. 9 3.2.2 The National Accounting Office has been diligent in fulfilling its mandate, and as of December 31, 1997, the application and compliance of the public entities with the accounting standards was as follows: Sector Accounting Units Information to CGN Coverage National, Centralized 70 70 10<>-10 National, Decentralized 259 256 98.8% Total National Entities 319 316 99.1% Territorial, Centralized 1,179 825 70% Territorial, Decentralized 1,308 940 72% Total Territorial Entities 2,487 1,765 71". Total Public Sector 2,816 1914 68% 3.3 Issues 3.3.1 The National Accounting Office lacks the resources for publishing guidelines on policies and procedures to complement the basic assumptions and the general chart of accounts promulgated for the public sector. Decentralization of the national and territorial accounting records and the preparation of individual fmancial statements, without proper training and technical guidelines, creates a gap between the good intentions of the National Accounting Office and the reality in the public entities' accounting and reporting systems. 3.3;2 The national accounting system is now being implemented country-wide. Although the extent of application shown above could be acceptable, there is a lack of monitoring of the accuracy of information included in the financial statements at the national and territorial levels. Neither the National Accounting Office nor the Comptroller Generals' Offices has sufficient technical, human and financial resources to perform reviews or audits in an acceptable coverage and scope. 3.3.3 The National Accounting Office has not yet developed policies and procedures for project accounting. Thus, in order to provide the information required for the project, many times the project executing entities must maintain two sets of records: one for the government and one for the agency financing the project. On other occasions the entity must spend an inordinate amount of time preparing the reports required from records which are not appropriate for the task. According to the Accountant General, his office is currently preparing such guidelines and the appropriate charts of accounts". 3.4 Recommendations 3.4.1 The Bank should review the status of execution of the accounting component of the Integrated Financial Information System Project (SIIF). financed by the Bank, and --if possible-- allocate resources to the National Accounting Office to help it carry out the actions needed to: 4 The draft guidelines are currently being circulated among the government entities and international donors for comments. 10  (i) complete the implementation of a national accounting system, including the development and dissemination of appropriate guidelines for proper accounting in governmental units --centralized and decentralized- for normal operations and for projects; and (ii) increase monitoring in order to ensure the adequacy and propriety of the financial information reported. Accounting in the Private Sector 3.S Structure 3.5.1 The Code of Commerce defines the basic principles which regulate accounting in the private sector. The Code is complemented by specific laws for each sector such as banking, securities, health and others. The accounting standards generally accepted in Colombia were established by Decree 2649 of 1993, and are compatible with the international accounting standards promulgated by the International Accounting Standards Committee (lASC). According to the law, if there are topics not included in the local standards, the IASC standards apply. 3.5.2 Financial Management in the private sector is monitored and conWJ~leCl'" n Superintendencies, each attached to a Ministry. Each economic sector has its ,;W'i, ,led chart of accounts (PUC), approved by the corresponding superintendency. The ubJectlve of the PUC is to standardize the accounting records and the comparability of the accounting information of sole proprietors, corporations and not-for-profit organizations. The structure of the charts of accounts is similar in the public and the private sectors. Entities in either sector can use additional codes for subsidiary or detailed accounts, as needed. 3.6 Financial Statements 3.6.1 A basic set of financial statements consists of a balance sheet, statement of income, statement of changes in net worth, statement of changes in financial position and statement of cash flow. The elements ofa financial statement are assets, liabilities, net worth, revenues, costs, expenses, monetary correction and memorandum accounts. There are two types of financial statements: certified and audited. Certified financial statements are those signed by the company's legal representative and the public accountant who prepared them and the statutory auditor, if required. The certification assures that the information was faithfully taken from the accounting books and the assertions of completeness, accuracy, valuation and presentation are reasonably reflected in the financial statements (Art. 57, Decree 2649, 1993). Audited financial statements must have a professional opinion either by the "revisor fisca1"s or by an independent external auditor who has examined the statement in compliance with generally accepted auditing standards. -'" S As indicated in Chapter 4. "Revisor Fiscal" is a Public Accountant that performs a multi-disciplinary audit and is accountable for hislher professional opinion, which must cover the review offmancial statements. legal compliance. internal control and management. A draft law on "revisorfa fiscal" was prepared in February 1998. and 11 3.6.2 The determination of the type of financial statement is based on the company's annual income or its net worth. A company with an annual income of more than 5,000 minimum salaries or a net worth equivalent to or more than 3,000 minimum salaries is required by law to have its financial statements audited by a "revisor fiscal" (Art. 13, Law 43 of 1990). 3.6.3 Chapter VI of Law 222 enumerates the companies' obligations concerning financial statements. The companies must prepare and publish their certified financial statements after the end of their fiscal year, or at least once a year with a cut-off date of December 31, accompanied by a Public Accountant's opinion if required. These statements must be submitted to the Chamber of Commerce within the following three months. False or fraudulent financial statements can result in up to six years in prison for managers and public accountants. 3.7 Issues 3.7.1 Since generally accepted accounting standards for the public and private sectors, as well as the requirements for preparation and issuance of financial statements, are governed by law, compliance is mandatory. Large and mid-size enterprises do not appear to have major problems in the application of accounting standards, since they need to have public . accountants on staff and usually also have an independent public accountant to oversee financial operations. Overall, Colombia does not have a problem for lack of laws and regulations concerning accounting or the practice of the accounting profession. The problems lie instead in whether those activities are performed as intended by the legislator, or whether activities that should be performed are in fact not performed because they are not established by law. contains 87 articles which, if approved by Congress, will modify the existing legislation 9n reviews by individuals, "revisoria fiscal" the Central Board ofAccountancy and the Technical Council for Public Accounting (see Chapter 4 for information on these institutions), financial statements and other related issues. 12  CHAPTER 4. THE ACCOUNTING AND AUDITING PROFESSION 4.1 Stnucture 4.1.1 The practice of the Public Accounting profession in Colombia is currently regulated by law. The law establishes the minimum academic and experience requirements for entering the profession, and stipulates that all activities related to accounting, auditing, attestations, fiscal reviews6 and consulting in accounting must be performed by Public Accountants (PAs) or under their responsibility. 4.1.2 The law also establishes generally accepted auditing standards and the code of professional ethics to be followed by individual PAs in private or public practice. It further creates certain institutions responsible for complementing and updating the accounting and auditing standards, and guiding and monitoring the practice of the profession. 4.1.3 In order to practice the profession, the candidates must meet requirements concerning citizenship, formal education in public accounting, and experience in accounting and auditing. They should also register with the Central Board of Accountancy (Junta Central de Contadores, CBA) which is part of the Ministry of Education. Once the PA has been licensed by the CBA, there are no requirements to maintain professional status. 4.1.4 A small percentage of licensed PAs joins one of the over 40 associations of public accountants. These associations may be at the city, department or national level. There are two national associations which represent Colombia in the Inter-American Association of Accountants. None of the associations is very active in promoting its members' professional skills; however, the National Institute of Accountants (INC) in Bogota seems to be leading some of the efforts to make continued professional education courses available to PAs. 4.2 Practice 4.2.1 The public accountant and the legal representative of an entity are responsible for assuring that accounting records are maintained in accordance with applicable accounting standards and legal requirements, and for the existence of internal controls for the preparation of reliable, useful and timely financial information. An independent PA, designated in Colombia as "Revisor Fiscal", performs a comprehensive audit (financial, internal control, .operational and compliance) and issues the corresponding audit opinions. Fiscal Reviewers, who can be a person or a partnership of accountants, report to the highest levels of the entity and have total independence to perform their functions. 4.2.2 The figure of the "Revisor Fiscal" has almost obscured that of the traditional external auditor, who provides only an opinion on the reasonability of the financial statements. Although both the "Revisi6n Fiscal" and external auditing are professional practices accepted in Colombia, traditional external audits are mostly required by international 6 "Revisi6n Fiscal" is a control function stated in the law, which includes activities that pertain to internal and external auditing, and is particular to Colombia. 13  organizations or by local financial institutions when the entity does not have a "Revisor Fiscal". 4.3 Legal Framework 4.3.1 The practice of the Public Accounting Profession in Colombia is currently regulated by Law No. 43 of December 13, 1990 (the Law) which, among other things, requires that public accountants be university graduates with a degree in Public Accounting. The Law states that all activities related to accounting, auditing, attestations, fiscal reviews and consulting in accounting should be performed by Public Accountants (PAs) or under their responsibility. . . 4.3.2 In order to practice the profession, the PA must first register with the appropriate governmental body, the "Junta Central de Contadores" (Central Board of Accountancy, CBA), which is a dependency of the Ministry of Education. The basic· requirements for registration (licensing) are: (a) to be a Colombian citizen or an alien residing in Colombia for three or more years before the date of application; (b) to hold a university degree in public accounting; and (c) to have one or more years of experience in accounting-related activities. PAs with equivalent degrees granted by universities in countries with which Colombia has reciprocity agreements are considered has having fulfilled the academic requirement. 4.3.3 Chapter One of the Law regulates the professional practice of sole practitiotleJ's as well as of public accounting partnerships, and states that the CBA is in charge of monitoring their practice. The law also defines the meaning of the term "Generally Accepted Accounting Principles" in Colombia, and establishes the Auditing Standards to be followed by PAs. It creates and gives the responsibility of complementing and updating the auditing standards to the "Consejo T6cnico de la Contaduria Publica" (Technical Council for Public Accounting). 4.3.4 Chapter Two of the Law deals with the standards that must be followed by PAs in their professional practice. It establishes the PAs' responsibilities to comply with standards on ethics and auditing, and with other applicable laws and regulations, and to ensure that accounting records and information are based on the accounting principles generally accepted in Colombia. It also clearly assigns the ownership of the auditor's working papers to the auditor, and discusses retention periods and access to them. This chapter also covers the presumptions implicit in the accountant's assertions when providing professional attestation on financial statements and other financial information (e.g., that financial information faithfully reflects accounting records that have been maintained in accordance with legal standards, or that the action complies with applicable laws and regulations). It also equates the PA to a public official for the application of sanctions for unlawful acts in the practice of the profession. This would normally mean that the sanctions would be more strict than for a private citizen. 4.3.5 The final part of Chapter Two states that PAs are the only ones who can attest or ... issue opinions on financial statements, or be appointed for accounting-related positions (such 14  as accountant, internal or external auditor, "Revisor Fiscal," or dean of the Accounting School at a university). 4.3.6 Chapter Three deals with the organization and activities of the two regulating and directing bodies: the Central Board of Accountancy (CBA) and the Technical Council for Public Accounting. The CBA is an association that reports to the Ministry of Education, and is made up of representatives of eight governmental and private institutions as well as the professional organizations. Except for the representative of the Ministry of Education, all other members must be PAs. The CBA is in charge of licensing PAs, of monitoring the practice ofthe profession in order to ensure that practitioners are duly licensed, of seeing that they follow applicable standards and ethical and legal requirements, and that only licensed PAs practice the profession. The CBA also has the authority to admonish or fine PAs and to suspend or revoke PA licenses. The Technical Council also reports to the Ministry of Education, but is dependent on financial resources from CBA. It is constituted by members from the same eight organizations represented in the CBA7 • Its purpose is to provide guidance to the profession and to perform research on the accounting and auditing standards accepted in Colombia. 4.3.7 Chapter Four establishes the code of professional ethics to be followed by individual PAs in private or public practice. This chapter also regulates the relations between PAs and their clients; relations among PAs; relations between PAs and the State and with society in general; and professional confidentiality. 4.4 Professional Pronouncements and Statements of Doctrine by the Technical Council 4.4.1 The Technical Council for Public Accounting has the responsibility of complementing and updating the accounting and auditing standards. This responsibility is fulfilled through the issuance of Technical Pronouncements, which expand on -and have the same legal force as-- the Standards. From 1994 through 1997 the Technical Council issued nine pronouncements which expanded upon the details of the accounting, auditing and professional ethics standards, clarified the role of the Revisor Fiscal, and provided guidance for the preparation and presentation of certain financial statements. The nine pronouncements published up to May 1998 deal with the following topics: 1. Opinion ofthe Revisor Fiscal on financial statements adjusted for inflation 2. Introduction to the pronouncements on auditing and ethics standards 3. Code of Ethics 4. Generally Accepted Auditing Standards 5. The Public Accountant's working papers 6. Standards on reports on financial statements 7. Revisoria Fiscal 8. Cash Flow Statement; and 9. Statement of Changes in the Financial Situation. 7 These individuals are nonnally different from those in the CBA, but there is no legal impediment to serving in both the CBA and the Technical Council at the same time. IS 4.5 Auditing Standards Generally Accepted in Colombia 4.5.1 As mentioned earlier, chapter Two of Law No. 43 deals with the standards that must be followed by PAs in their professional··practice of activities related to auditing and "Revisoria Fiscal." These auditing standards are compatible with those issued by the International Federation of Accountants (IFAC), and are: , • Personal standards, which require that: (i) the examination be performed by persons with adequate training and legally able to practice public accounting in Colombia; (ii) the PAs maintain independence in order to ensure impartial and objective opinions; and (iii) the PAs perform the examination and prepare the report With due professional care. • Standards for work performance (field work standards), which require that: (i) work be properly planned and assistants properly supervised; (ii) the internal cOntrol system be adequately evaluated in order to determine the degree of reliance to place on it; and (iii) evidence obtained through analysis, inspection, observation, inquiry, confirmation and other sources that audit procedures are valid and sufficient to properly support the opinion on the financial statements. • Reporting standards, which provide guidance for the preparation and issuance of audit reports, and require that: (i) the PA associated with financial statements clearly and unequivocally disclose any relationship with them --if the PA examined the statements, he/she must clearly express the type and the scope of the examination, and an opinion on the reasonability of the information contained in the financial statements; (ii) the report clearly state whether the financial statements are presented in accordance with the accounting principles generally accepted in Colombia; (iii) the report clearly state whether those accounting principles were consistent with the ones applied in the prior period; (iv) when the PA issues a qualified opinion on the fmancial statements, the qualifications, as well as the reasons for them and their materiality in relation to the financial statements taken as a whole, must be clearly and unequivocally disclosed; and (v) when the PA is unable to issue an opinion on the financial statements, that should be stated explicitly. 4.6 Revisoria Fiscal 4.6.1 The Revisoria Fiscal (Fiscal Review) is a control figure particular to Colombia, and has existed since the second half of the 19th century. It was first regulated by law in 1935 (Law 73), and was assigned to the exclusive realm of the Public Accountants' practice in 1956. Currently it is regulated by the Code of Commerce and other applicable laws. The purpose of the Fiscal Review is basically the same as the one for the external, independent, audit, to have an opinion from a third party independent of the entity's operations as to the representations made by the entity's management in regard to such rnatters as the financial condition of the entity and its operations. However, the role of the Revisor Fiscal (Fiscal Reviewer) is more extensive than the External Auditor's beCause the former, in addition to reporting on whether the financial statements reflect the financial condition of the entity and 16  the results of operations, must also inform on the management of the entity, the internal controls, and management's compliance with applicable legal and statutory obligations. 4.6.2 In addition to the difference in the roles, there are differences in the scope of work performed for the review of internal controls. While the External Auditor reviews internal controls for planning purposes (such as determining the degree of reliance to place on them and the type of tests to perform), the Fiscal Reviewer must review them with the objective of issuing an opinion on whether the internal control system is adequate, especially for the safeguarding of assets. Thus, External Auditing and Fiscal Review are separate and distinct activities performed by PAs. Furthermore, a Fiscal Reviewer cannot be the external auditor for the same entity (nor can the Fiscal Reviewer sign a report for external audit purposes based on his work as a Fiscal Reviewer). 4.6.3 The Fiscal Reviewer is legally instituted in the Code of Commerce, which states that all commercial entities with a net worth or an annual income in excess of a ·certain minimum· must have a Fiscal Reviewer who is appointed by and reports to the assembly of stockholders or such body other than the entity's management9 • In addition, the Fiscal Reviewer must be a P A --either an individual or a partnership in which 80% or more of the partners are PAs. 4.6.4 . Pronouncement No.7, published by the Technical Council on September 15, 1995, deals specifically with the activities concerning Fiscal Reviews. It defmes and provides the objective of the Fiscal Review, and states that the Fiscal Reviewer must perform a comprehensive audit with thefollowing four objectives: • To determine whether the fmancial statements of the entity are presented in accordance with accounting principles generally accepted in Colombia (financial audit). • To determine whether the entity has complied with applicable laws and regulations in the performance of its operations (compliance audit). • To evaluate the efficiency and effectiveness in the achievement of the objectives set for the entity, and the efficiency and effectiveness in managing the resources available (operational audit). • To evaluate the internal control system in order to issue an opinion as to its adequacy (audit of internal controls). 4.6.5 The importance of the Fiscal Review is also evident because the law requires that any tax filings and financial statements submitted to the authorities by entities for which a Fiscal Reviewer is obligatory are only considered accepted if they include the attestation or opinion, respectively, of the Fiscal Reviewer. Moreover, if an entity has its financial • Currently 5,000 minimum salaries. 9 For governmental entities for which a Fiscal Reviewer is required, the appointment must be made by the President of the Republic or other public official who does not participate in the management of the entity. 17  statements audited by both the Fiscal Reviewer and an external auditor, the only report which is legally valid is the one prepared by the Fiscal Reviewer. 4.6.6 In February 1998 the Executive Branch of government prepared the draft of a new law regulating Fiscal Reviews. If approved,· this new law will supersede any other legal dispositions regarding this area, and will have primacy over the dispositions concerning the professional practice currently regulated by Law No. 43. 4.6.7 One of the salient points of the draft law is that, given the scope of work and the importance of the activity, it establishes that the Fiscal Reviewer must dedicate a minimum of 1,000 hoUrs per year to the performance of activities related to each individual engagement. It also sets at 2,000 the legal number of work hours available to a natural person. The purpose of these limits is to reduce the number of instances in which practitioners (individual or collectively) enter into engagements that they are not able to perform at a reasonable level. 4.6.8 The draft law also defines the types of reports that can be issued by the Fiscal Reviewer (Opinions, Attestations, Reports on activities, and Observations -reports on errors, fraud, illegal acts and significant deficiencies), as well as their frequency. It also sets the limits (in minimum salaries or number of employees) required to have a Fiscal Reviewer. It further states that those entities which, although not reaching the limit, exceed at least one third of the amount must have their financial statements and tax returns audited by an independent PA. 4.7 Academic, Training and Professional Associations 4.7.1 The Law requires that individuals wishing to register as Public Accountants (PAs) must have a university degree in Public Accounting (there are no secondary school programs for accountants or bookkeepers). Currently there are about 45 Colombian universities which offer a total of approximately 90 programs in Public Accounting, but there is a lack of control over the accounting programs, including their contents and a mandatory basic curriculum. 4.7.2 Up to 1992, the programs of study for college careers, such as accounting, were approved by the Colombian Institute for the Development of Higher Education, (lnstituto Colombiano para el Fomento de la Educaci6n Superior, ICFES). However, in 1992 the Colombian Congress approved a law (Law 30) giving autonomy to all universities, thus freeing them from ICFES' control. This resulted in an increase in the number of universities and an explosion in the number of academic programs, which in the case of accounting­ related studies jumped from approximately 45 in 1992 to about 90 today. 4.7.3 Also in 1992, a group often universities, concerned about the foreseeable decline in the quality of education, decided to establish. an accreditation council (Consejo Nacional of Acreditaci6n, CNA), which accredits specific programs. This is a voluntary program and each participating university must undergo a self-assessment before its programs are assessed by CNA. The accreditation of programs began in 1996. 18 4.7.4 Not considering the quality of the individual programs or the individual university, a typical accounting program would last ten or eleven semesters, with 25 to 27 hours of class per week, and would cover a core program of accounting, auditing (including Fiscal Review), taxation, law, budgeting, financial analysis and management, as well as mathematics, economics and other general subjects. Normally the programs are very structured, and may not have elective subjects. 4.7.5 Unlike countries such as the United States or Great Britain where bodies that regulate the accounting profession can institute generalized examinations for those wishing to enter it, CBA does not have the legal right to make an independent assessment of potential PA professionals. It is therefore unable to prevent technically unqualified individuals from becoming PAs. However, according to the head of CBA, it might start evaluating the applicants' qualifications through a stringent assessment of their work experience (the law requires experience of at least one year before being registered as a PA). This approach, although laudable, might be too subjective and could result in an unfair barrier to entry to the profession, or might simply prove to be inapplicable and/or unacceptable. 4.7.6 There are over 40 associations of public accountants in Colombia These associations may be at the city, department or national level. There are two national associations which represent Colombia in the Inter-American Association of Accountants. None of the associations is very active in promoting its members' professional upkeep; however, the National Institute of Accountants in Bogota seems to be leading some of the efforts to make continued professional education courses available to PAs. 4.8 Quality Control 4.8.1 The law does not provide for the performance of quality control activities over the work of individual PAs and registered partnerships. Nor is there any requirement for permanence in the practice of the profession of over 67,000 PAs, such as continued professional education. As a result, there is no assurance as to whether practitioners consistently follow the professional standards, including the code of ethics. Although the Central Board of Accountancy is also a monitoring and disciplinary body, it normally does not act unless there is a complaint. 4.9 Professional Ethics 4.9.1 As with the accounting and auditing standards, the Code of Professional Ethics for Public Accountants is established by law. Chapter Four (Articles 35 through 40) of Law 43 of 1990 lays out the basic principles, while Technical Pronouncement No.3 provides more details and the Technical Council's interpretations. Overall, the basic principles that should be followed by PAs in the performance of their professional duties are: • Integrity • Objectivity • Independence 19  • Responsibility • Confidentiality • Compliance with professional standards and other guidelines • Competence and updating ofprofessional skills • Dissemination of technical information and participation in professional activities • Respect among colleagues • Ethical conduct 4.9.2 It must be acknowledged, however, that neither the Junta de Contadores, nor the Technical Board or any of the professional associations have implemented any mechanisms to ensure compliance with these ethical principles. According to the Junta's principals, the institution does not normally supervise such activities, and acts only if there is a complaint against a registered PA. 4.10 Public Accounting Firms 4.10.1 There is no reliable record of the number of public accounting firms operating in the country. For example, although the Junta has information about firms which are registered, it could not produce a listing of those firms. Furthermore, there are PAs who have a group of other PAs and accounting students under their direction, and in fact act as a firm., but are not registered as such. According to the Junta, there are approximately 200 registered accounting firms, some of which are affiliated with international firms such as the Big 5 and have large staffs, while others are very small. 4.11 Generally Accepted Auditing Standards in the Public Sector 4.11.1 Article 267 of the Constitution of 1991 states that fiscal control is a public function of the Office of the Comptroller General (CGR) and includes the assessment of financial performance and operational control, and the efficiency, economy, equity and valuation of environmental costs. The Office of the Comptroller General is an autonomous, technical entity which reports to Congress. Thus, in principle, the CGR is functionally independent from the activities and governmental entities it audits. The Comptroller General is elected by Congress for the same period as the President, and the candidate must be Colombian, over 35 years of age and have a college degree. 4.11.2 The functions of the Office of the Comptroller General are to: (a) establish reporting methods for the public sector; (b) audit the individual and consolidated financial statements of the public sector; (c) keep records of the public debt; (d) establish the responsibilities and impose monetary sanctions for lack of financial administration in the public sector; (e) give an opinion on the effectiveness of the internal controls established by the public entities; (t) submit his opinion on the national financial statements to Congress and the President, and # (g) establish internal control procedures for the public sector entities. See Annex 3 for information on the CGR. 4.11.3 The Comptrollers of the Departments, District of Bogota and Municipalities have the same functions, qualities and responsibilities, and report to their respective legislative 20  bodies. The technical aspects and internal organization of the National Office of the Comptroller General are regulated in Law 42 of 1992. A working team is currently drafting Generally Accepted Auditing Standards for the Public Sector. The working team is using the auditing guidelines of IFAC, INTOSAI, Colombia, the U.S. General Accounting Office (GAO) and other sources. The Office of the Comptroller General (CGR) is also considering the publication of guidelines for audits for projects financed by international organizations. Nevertheless, the five directors of the auditing areas consider that they do need technical assistance for auditing projects and understanding the projects' financial management requirements. 4.11.4 According to the Constitution, the Comptrollers' Offices have the responsibility for all audits in the public sector, including projects receiving funds from international organizations through the government. In some cases there is a duplication of functions when a public entity or project contracts independent auditors, and there have been cases in which the independent auditors' opinion was different from that of the Office of the Comptroller General. Currently the CGR is performing a review of the quality of the work. performed by international and national accounting firms. 4.12 Issues 4.12.1 Except for the verification of a candidate's compliance with the legal requirements concerning citizenship, education and experience, the CBA does not have the legal right to make an independent assessment of the candidate's qualifications, and is therefore unable to prevent technically unqualified individuals from becoming PAs. The solutions being considered by the CBA, which calls for a stringent assessment of the candidate's work experience could result in an unfair barrier to entry to the profession, or might simply prove to be inapplicable and/or unacceptable to the profession. 4.12.2 The law does not provide quality control requirements for registered PAs or public accounting firms. Nor is there any requirement for the permanence of the PAs in the practice of the profession (such as continued professional education). As a result, there is no assurance as to whether practitioners consistently follow the professional standards, including the code ofethics. 4.12.3 The coverage of the audit performed by Comptrollers' Offices, at national and territorial level, is limited. In addition, in some cases there is a duplication of work when a public entity or project contracts private auditors, and there were cases where the independent auditors' opinion was different from that of the Office of the Comptroller General. 4.13 Recommendations 4.13.1 The Bank should encourage Colombian institutionS involved in the professional practice of public accounting, in both the public and private sectors, to bring about the changes necessary to transform the professional environment from one incompletely 21 regulated by law to one in which the accounting profession regulates itself, including the requirements for the practitioners' permanence in the profession and their compliance with accounting, auditing and ethical standards. 22  . CHAPTER S. APPLICATION TO DEVELOPMENT PROJECTS: THE WORLD BANK PORTFOLIO 5.1 Structure 5.1.1 The Financial Management System of Bank-financed projects consists of the same elements as financial management in the public and private sectors, such as planning, budgeting, accounting, reporting and auditing. In general, the national accounting and auditing standards are applicable to the projects executed by public and private sector entities. The legal structure of projects follows the same laws and regulations of national fmancial management for the public sector and the Bank's requirement are compatible with the legal requirements of the country. S.l Practice 5.2.1 The basic national accounting chart of accounts is applicable to the projects' accounting system. Executing Agencies and Projects' Executing Units can use additiorutl digits for components and category details, as needed. However, some aspects tn he considered in the implementation ofa project financial management system are: • application of total or modified accrual vs. total or modified cash accounting method • adjustments for inflation • rate of exchange to be used to record local currency for receipt of funds and payments in U.S. dollars and/or other currencies • translation of financial statement to U.S. dollars • special fonnats for the fmancial statements • special approach and scope of audit. 5.3 Issues 5.3.1 According to the assessment perfonned for the four projects selected (Agricultural Technology Transfer (pRONATTA), Secondary Education (PASES), Municipal Health Services (PSMS) and Urban Environmental Technical Assistance), financial management of these projects has been affected by the problems mentioned in Chapter 2, such as control of the public expenditure, lack of integration with the national accounting system and lack of monitoring of decentralized projects. 5.3.2 Control of public expenditure is seen by certain project and Bank staff as a very important problem. Frequent budget cuts, along with inefficiencies in the flow of funds to the projects, specially when done at the central level, negatively affect project implementation. A related problem seems to be that, in the name of control the Ministry of Finance may be imposing unnecessary steps for PCUs to access project funds. Those steps . -.. may be adding value neither to the control proce$S nor to the portfolio management. 5.3.3 Decentralization is presently a hybrid. Ten years ago most, if not all, projects were centralized. The current trend is that in the near to medium term, most lending will likely be 23  directed to the local level. Colombia is now in the middle, with a sharp growth of projects whose loans are still made to the central government --for which a central ministry is still accountable for results-- but which are carried out locally. The result is a marginalization of the central project units, which often have difficulty finding out what is going on at the local level. 5.3.4 One benefit of decentralization, though, may be an increase in efficiency since PCUs located at the Departmental, Municipal or quasi governmental (e.g. utilities) levels are considered by some Bank officials to have better financial management. Since our assessment was limited to centralized PCUs, we cannot provide any assurance in this respect at this time. The following paragraphs summarize the results of our assessments at the centralized PCUs. 5.3.5 The PACES project does not have a consolidated accounting system integrating the activities ofFISlFlNDETER and UNDP and the ministry. Due to the decentralization of the operation and records, it is necessary to contract three different auditors, with a consequent tripling of cost. 5.3.6 PRONATIA's Central Coordinating Unit exercises control of operations at the national level throughout five Regional Coordinating Units. The accounting and budget control is cairied out with a sophisticated linkage of electronic work sheets, but the financial reports and the annual audit reports are not in accordance with the Bank's requirements. 5.3.7 PSMS. There are problems at the organizational level of the project between the Ministry of Health and other entities. Also, both the project financial statements and the auditor's report were unsatisfactory. One of the reasons may be the high turnover of staff in the financial administration section of the project. Finally, budgeted funds have not been made available to the project by the Ministry of Finance. 5.3.8 Urban Environmental Technical Assistance. This project needs to improve its record-keeping· and information system. Both the financial statements and the auditor's report were not satisfactory to the Bank. The project suffered cuts to the budget approved, which limited the resources available. 5.4 Recommendations 5.4.1 The Action Plans suggested by the review team or agreed with the Project Directors to strengthen fmancial management system in these projects, should be closely supervised. (See copy of assessments in Annex 4, Attachments 1 to 4). 5.4.2 For other projects in the Colombia portfolio, a financial management assessment should be performed using the information provided in this report and following similar evaluation criteria. The results of those assessments, as well as the ones listed in this document, should be used by the Resident Mission to identify problems which are common 24  to most projects, and which should be discussed and resolved as part of the ongoing country dialog; that is, such problems should be resolved at the country (or portfolio) level rather than using a project-by-project approach. 5.4.3 Notwithstanding the preceding· recommendation, we believe that the Resident Mission should consider taking concerted action on some of the problems already identified and which are common knowledge to both Bank and project staff, such as the budget cuts and delays in the flow of funds. 5.4.4 For projects with decentralized management but central accountability, such as the Secondary Education Project, financial and physical monitoring still needs to be carried out by the central government. FINDETER and other intermediaries should therefore transmit information on physical progress and fmancial flows regularly to the central units for this purpose. ... 2S  CHAPTER 6. SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS 6.1 Planning and Budgeting 6.1.1 It is proposed that these issues be discussed in an integrated seminar or workshop to be held as soon as possible. This seminar should involve representatives of the financial and planning entities, the National Accounting and Comptroller General's Offices, financial management professionals, as well as project staff. 6.2 Accounting in the Public Sector 6.2.1 The status of execution of the accounting component of the Integrated Financial Information System Project (SIIF), financed by the Bank, should be reviewed. If possible, resources should be allocated to the National Accounting Office to help it carry out the actions needed to: (i) complete the implementation of a national accounting system, including the development and dissemination of appropriate guidelines for proper accounting in governmental units -centralized and decentralized- both for normal operations and for projects; and (ii) increase monitoring in order to ensure the adequacy and propriety of the financial information reported. 6.3 Public Accounting Practice 6.3.1 The Bank should encourage C~lombian institutions involved in the professional practice of public accounting, both in the public and private sectors, to bring about the changes necessary to transform the professional environment from one incompletely regulated by law to one in which the accounting profession regulates itself, including the requirements for the practitioners' permanence in the profession and their compliance with accounting, auditing and ethical standards. 6.4 Financial Management in Bank-fmanced Projects 6.4.1 The Action Plans agreed with the Project Directors to strengthening financial management system in these projects, should be more closely supervised. (See copy of assessments at Annex 3, Attachments 1 to 4). 6.4.2 For other projects in the Colombia portfolio, a financial management assessment should be performed using the information provided in this report and following similar evaluation criteria. 26 \  ANNEX 1 THE PLANNING AND BUDGETING CONTEXT OF FINANCIAL MANAGEMENT Summary of the Legal Framework 1. Financial Management in the public and private sectors is regulated by law. The following chart summarizes the functions perfonned by different authorities or entities of the Colombian government. :~" ~ ".:t,,;;:~;;,:;;;,)j'v~<~i; >, :{,:':i~. ~CJlDNQ1O~~r S.,tr'~.;,?kCc;£~" ": l·7Z'tJ!:5'. ~~i.,:-:;' I NATIONAL CONGRESS - issues the laws for the financial administration in the public an sectors PRESIDENCY OF THE REPUBLIC - controls the financial administration in the public and private sectors - submits reports to Congress NATIONAL DEPARTMENT OF PLANNING - prepares strategic plans for social and economic development of the countly MINISTRY OF FINANCE - prepares the national budget (income and expenditure) to be approved by Congress NATIONAL ACCOUNTING OFFICE - consolidates financial information submitted by the public entities. - prepares reports to evaluate their financial performance - dictates the Government Accounting Standards GENERAL COMPTROLLER OFFICES - control the financial administration (National, Departmental, and Municipal levels) - cany out performance audits ofthe public sector PUBLIC ACCOUNTANTS - prepares the financial reports of public and private entities in compliance with the laws and generally accepted accounting standards INDEPENDENT PUBLIC ACCOUNTANTS - assess the information provided OR FISCAL REVIEWERS - issue professional opinions on financial statements, legal compliance, internal control and management Planning 2. The Constitution of 1991 states that government development plans must be approved by law. Therefore, the Executive must subniit to Congress its plans for the four-year presidential period. The government plans should be reviewed and analyzed by Congress and the National Planning Council. The citizens participate in the preparation of the plans through the communities and economic representatives in the National Planning Council. 3. The national planning activities are perfonned by the National Council ofEcon(Wll~ ~·flU Social Policy (CONPES) and the National Department of Planning (DNP), which wa::: \-':3,t~" by Decree 2996 of December 10,1968 (based on Law 65 of December 10, 1965). Law 152 of 1994 established the procedures and mechanisms to prepare, approve, execute, monitor, evaluate and control the national development plans. This law is applicable to the central government units, territorial entities and public entities Jo. A database of programs was established to facilitate the preparation of the national and regional plans. The investment plan (expenditures) ... 10 Territorial entities are the entities that depend from Departmental (political territorial divisions similar to the coun~es in the United States) or Municipal authorities. Public entities are decentralized entities. 27  , includes the funds available for its execution, the description of programs and sub-programs, the pluriannual budgets of the costs of programs. 4. The President is required to present the national plan to Congress and the National Planning Council for review no later than November 15. CONPES should review the plan and present its recommendations for modifications, no later than January 10 of the following year. The final plan should be presented by the President to Congress before February 7. Congress has three months to approve the national plan, otherwise the Government can approve it by decree. 5. Based on the approved plan, each of the public entities will prepare individual action plans. The National Department of Planning will design and organize the performance evaluation system and delegate the responsibility for this evaluation. DNP submits to CONPES a performance report in April of each year. The President presents to Congress, at the beginning of the fiscal year, the budget for the following year, together with its report on the execution plan. Budgeting 6. The national budget is approved every year by Congress. The general procedures are as follows: • In February DNP informs the public sector entities about the quotas or appropriation of national funds for expenditures. • The executing entities inform DNP of the additional internal or external financing needed. • DNP verifies the eligibility of the action programs, its input into the national program database and the sources offunds. • The Public Investments Unit consolidates all programs and budgets and prepares, together with the Ministry of Finance and Public Credit, the National Annual Operational Investment Plan and sends it to the Ministry's General Budget Division. • The Ministry presents the national budget to Congress for approval, no later than July 30. • Before October 20, Congress approves the budget law, otherwise the Government can approve it by decree. Similar procedures apply for the approval of regional budgets. 28  ANNEX 2 ACCOUNTING STRUCTURE AND STANDARDS Public Sector Legal Framework 1. Article 354 of the 1991 Constitution, establishes that "there will be a general Accountant, employee of the Executive, who will consolidate the general accounting of the nation with the territorial and decentralized entities". The Accountant General is responsible for the unification, centralization and consolidation of the national accounting, the preparation of consolidated fmancial statements, and the promulgation of generally accepted national accounting standards. 2. Six months after the conclusion of the fiscal year, the President will send to Congress, for acknowledgment an4 analysis, the consolidated financial statements, audited by the General Comptroller Office. 3. Law 1298 of July 23, 1996 fulfills the constitutional mandate as follows: • Creates the National Accounting Office, headed by the Accountant General of the Nation. The National Accounting Office is technically, administratively and financially independent (Art. 1). • Designates the functions of the National Accounting Office, which are to: (a) unify, centralize and consolidate the public accounting system; (b) establish the accounting standards for the public sector; (c) keep the consolidated accounting records; (d) prepare consolidated financial statements, including the central and territorial government, the decentralized entities and the industrial and commercial entities owned by the government; (e) publish government accounting guidelines and resolve consultations related to the applicability of the general accounting standards; and (0 supervise compliance of the public entities with the accounting standards (Art. 4). 4. To become the Accountant General of the Nation, the candidate must: (a) be a Colombian citizen, (b) be a Public Accountant with valid license to practice, (c) demonstrate professional experience of not less than ten years, and (d) have no criminal record (Art. 2). Organization 5. This is the basic structure of the organization of the National Accounting Office: Accountant General of the Nation Sub-Accountants National Level Territorial Level Consolidation and Research Administration 29 6. In the National General Accounting Office there are more than 111 employees, of which 65 (60%) are Public Accountants. National Accounting Standards 7. The national accounting standards were established by Decree 85 of January 10, 1995. The standards include the policies, principles, rules and accounting procedures to record the operations, prepare the financial information of each of the public entities, and consolidate the financial information of the public entities at the national and territorial levels, decentralized entities and government commercial and industrial entities. 8. The basic objective of the national accounting standards is to prepare useful, reliable, complete and timely information of assets, liabilities, patrimony, income and expenses in order to be accountable to the people through Congress of the source and use of public funds, and to evaluate the efficiency, effectiveness and economy of the administration of the public sector entities. 9. The structure ofthe national accounting standards is based on: (1) basic assumptions; (2) users of the financial information; (3) accounting principles; (4) generally accepted accounting standards; and (5) the uniform chart of accounts. 10. The uniform chart of accounts (PUC) is applicable to all of the entities in the public sector, is grouped into five levels and used a code of accounts of six digits. Any project entity can use additional codes or digits to identify specific accounts, as needed. There is a special group and codes to identify and control execution of the budget. 11. As of December 31, 1997, the application and compliance of the public entities with the accounting standards was as follows: Sector Accounting Units Information to CGN Coverage National Central 70 70 100% National Decentralized 259 256 98.8% National Total 329 326 99.1% Territorial Central 1,179 825 7()ofo Territorial Decentralized 1,308 940 72% Territorial Total 2,487 1,765 71% Total Public Sector 2,816 1914 68% Comparison with the Private Sector Accounting 12. The Constitution of 1991 defines the basic principles that regulate the accounting of commercial entities, followed by specific laws f9r each sector. In order to allow for a better control of the country's economic activities, the law has grouped them into sectors, such as banking, securities, health and others. Each sector has its own PUC compatible with the international accounting standards promulgated by the International Accounting Standards . Committee (lASC). The structure of the chart of accounts for the public sector is similar to the "plan Unico de cuentas" ofthe private sector. 30 13. The law governing the largest part of the private sector's accounting is the Commercial Code of 1971, amended by Decree 2649 of 1993 and law 222, of 1995. Law 43 of 1990 governs the accounting profession and auditing standards. The financial management in the private sector is monitored and controlled by a superintendency attached to a Ministry (see chart below). Superintendenties Ministry PUC (Plan Unito de Cuental) Notary and Registry Justice and Law no PUC available • financial sector Banking Treasury and Public Credit • insurance sector • central bank • exchan'ge currency businesses • pension funds (2) Securities Treasury and Public Credit - entities controlled by the Securities Superintendency Private Control and Safety Defense • no PUC available Family Subsidy Labor and Social Security • funds for family compensation National Health Health - service institutions of private health Industry &, Commerce Economic Development • businesses Association Economic Development - pension and unemployment fund associations • pension fund associations Basic Services Development • public service entities (utility companies) Ports Transport - no PUC available 14. The objective of the PUC is to standardize the records of financial operations to assure transparency and comparability of the accounting information of the enterprises (individuals or corporations) and Not-for-Profit Organizations. The PUC permits the codification and classification of accounts and sub-accountS by sectors for the uniform preparation of financial statements. The PUCs for public and private sectors use a total of six digits. For example, in the PUC for businesses, the code for development projects is 150830, where: the first digit "1" is the class (assets) the first two digits "15" represent the group (plant and equipment) the first four digits "1508" are the account (construction) the six digits "150830" are the sub-account (development projects) Entities and projects can use additional digits for details, as needed. Application of Generally Accepted Accounting Standards 15. In Colombia, the accounting "principles" generally accepted became "standards" through Decree 2649 of 1993, and apply to all persons that the law requires to keep accounting records. According to this decree, generally accepted accounting standards are the basic set of rules that must be observed when recording transactions and providing financial information on activities of individuals, companies and Non Governmental Organizations. These rules support and encompass the accounting information with the objective of demonstrating the funds controlled by an economic entity, its obligations to transfer funds to other entities, changes of net worth and the results of the operations in a given period; project cash flows; support for management's plans in organizing and directing the company; evaluation of management; control of the company's operations; help in determining taxes, prices and tariffs; contributions to the national statistical information; and evaluation ofthe impact ofthe company in the community. 31 16. Since these standards are governed by law, compliance is mandatory. The "revisor fiscal" -when the entity is required to have one- checks for compliance with these standards. ]7. The basic principles for determining the accounting entity, accounting period, measurement unit, receipt and earnings are essentia1ly similar to the accounting standards of the private sector and the international standards of lAse. 32  ANNEX 3 OFFICE OF THE COMPTROLLER GENERAL Legal Framework and responsibilities 1. Article 267 of the Constitution states that fiscal control of public functions will be a responsibility of the Office of the Comptroller General (CGR). Fiscal control is to be performed through ex post reviews and includes the assessment of financial and operational performance based on the efficiency, economy, equity and environmental cost ofthe activities. 2. The CGR is an independent, technical and autonomous entity which reports ~very year to Congress and the President on the national consolidated financial statements preyared by t"~ National Accounting Office. The Comptroller General is elected by Congress, for a S('le terri. ot four years, from a list of three candidates proposed by the Constitutional Court, tr. <::... ;: Court ofJustice and the Office ofthe State Attorney. 3. In addition to the annual report on the national consolidated financial account, the CGR has the following responsibilities: (a) establish methods and formats to be used by public entities to report on the uses of public funds; (b) review the reports submitted by public entities and determine the efficiency, economy and effectiveness of the public entities' operation; (c) keep records of the public debt; (d) establish responsibilities and impose monetary sanctions for lack of fmancial management in the public sector; and (e) establish unified guidelines on internal control for the public sector. Organization 4. The basic structure of the organization of the Office of the Comptroller General is as follows: Comptroller's Office Advisory and Coordination Office General Secretariat Judiciary Unit Administration Unit Planning Internal Control Unit Information Center Training and Inter-institutional Relations Sectoral Directorates: Agriculture and Natural Resources, Energy and Mines, Infrastructure, Industry and Regional Development 33 .  Social Sector Economy and Public Finance Investigation of Fiscal Responsibilities 5. The CGR has Regional Offices in each of the territorial division of the country, and as of December 31, 1997, had a total of 4,973 employees, of which 1,593 were located in the central office and 3,380 in the territorial offices. Approximately 70% of the employees were professionals with university degrees and 47% have been working in the Office of the Comptroller General for more than 10 years. Investigation of fIScal responsibilities 6. According to the Office of the Comptroller General statistics (Contraloria General de la Republica en Cifras, 1997), during the year 1997 the CGR received 2,209 cases for investigation of fiscal responsibilities for an amount equivalent to approxllnately US$ 9.24 million. The cumulative total number of cases in process of investigation as of December 31, 1997 was 2,957, of which 1,006 were investigated by the Investigation Directorate in that year. Government Auditing Standards 7. Although the Constitution and the law provide rules and procedures and the Office of the Comptroller General has a long tradition as a fiscal control institution in Colombia, at present there are no auditing standards for the public sector. A work team is currently drafting generally accepted auditing standards for the public sector, based on guidelines and standards issued by IFAC, INTOSAI, the United States General Accounting Office and the private sector auditing standards adopted in the country. 8. The CGR is also considering the publication of guidelines for audits of projects financed by international agencies, but the directors of the auditing area considered that they need technical assistance in this field. 34  ANNEX 4 FINANCIAL MANAGEMENT IN THE BANK-FINANCED PORTFOLIO 1. In general, the national accounting standards are applicable to the projects executed by public sector entities. The accounting standards of the private sector are applicable to the projects .developed by the private sector. The aspects to be analyzed are: • accrual method • depreciation • inflation adjustments • conversion methods to local currency for payments made in U.S. dollars and/or other currencies • prepare reports is special formats for the Bank • budget control and cumulative performance during the life of the project. 2. The following is a summary of the project's financial management assessment. ELEMENTS OF h .,~ r~· . :i FINANCIAL PRONATIA . .: PASES " PSMS ENVIRONMENTAL I' MANAGEMENT S A D . S A D .'. S A D .S A D Objectives x :c X 1'" j X .. ... ~ x Planning x x h;'~> . x x Budgeting x .. ,: ~ X "i'. X i X Organization x :i;l x ~,:c';~': X ~~>~tj x Policies -Procedures X r~2~~ x x x ,~ fo' Staffing X ~),;ii1 X ~'''::, x ..' x Duties Responsibilities x ~;:;F~ x x i' ..:.J x Documentation x ~";;'c;; x .C;;, X x Accounting records X ~:!?," X ';::': . X ~........ x Information System X x x x Monitoring X x x x Auditing X x x X I S= Satisfactory; A= Adequate; D= DefiCient 3. The methodology used to achieve the objectives of this evaluation was based on the compilation of the laws and regulations of the financial administration; the verification of the applicability of the accounting standards in the public and private sectors through interviews; analysis of the impact of the laws and regulations of the financial administration in the projects financed by the Bank through a limited review of the internal controls of four projects; and recommendations to strengthen the financial management of the reviewed projects and for future projects. 3S  FINANCIAL MANAGEMENT REVIEW . ... . 36  Attachment 1 AGRICULTURAL TECHNOLOGY TRANSFER PROJECT (pRONATTA) (Loan 3871-CO) 1. A review· was undertaken of the financial management system of the Agricultural Technology Transfer Project ("PRONAITA", Ln. 3871-CO). The main purposes of this review were to determine whether the system: (i) complies with legal obligations concerning the management of funds, (ii) supplies pertinent information for the monitoring of project performance, and (iii) complies with ,Bank. requirements for satisfactory financial management. Financial Management Context and Procedures 2. These can be summarized as follows: • Fiduciaria de Occidente S. A. This entity is in charge of making payments to the Project Executing Units for Technology Development and Training upon presentation of invoices from the General Coordinator of PRONAITA. This practice falls under the Technology Development component of the project. • DCA is responsible for payment for operational costs, implementation of Regional and Central Project Coordinating Units (pCU), supervision, evaluation and other expenditures under the Institutional Strengthening component. • FONADE is responsible for payments to consultants contracted for special assignments as required by PRONAITA. Principal Conclusions 3. Based on the activities described below, it is concluded that PRONAITA has adequate internal controls to ensure the proper financial management of the Project. However, several areas should be strengthened. The following table presents a summary evaluation of the components established for the internal control of the Project Coordinating Unit. The areas which need to be strengthened are described more fully in the sections below, and constitute an Action Plan for strengthening project financial management. Intemal Control Components Evaluation Results I 1. Objectives Satisfactory X Adequate Deficient -i 2. Planning X 3. Budgeting X 4. Organizational Fonnat X S. Policies, Rules and Procedures X 6. Staffmg X 7. Functional Responsibilities X . 8. Documentation and X Record Keeping X 9. Management Infonnation Systems X 10. Supervision and Auditing X 37 Policies, Rules and Procedures 4. The policies, rules and procedures used by PRONAITA for dealing with Planning, Budgeting, Disbursements and Procurement are satisfactory. Its accounting practices are in accordance with standards recommended by the Board of National Accounting and suggestions made by members of previous Bank supervision missions. Hpwever, they do not necessarily satisfy the detail of the information required for internal purposes and the fInancial monitoring by the Bank. Record-Keeping 5. The system currently used for keeping the financial records and statistics used for monitoring the project consists ofan Excel database with supporting work sheets. This system can generate reports by linking worksheets and macros which allow the groupmg of information into formats standardized by the Board of National Accounting. This system satisfies the information needs of the user at the different administrative and operational levels, but has shortcomings: • Security. Users without proper authorization could gain access to the data, thus compromising its reliability. • Standardization of the Chart ofAccounts. The project accounts are not adequately grouped to allow the generation of reports in the formats suggested during the financial management review. The grouping of information to conform to the Bank's requirements cannot be made automatically. Information Systems 6. The financial reports automatically generated by the present accounting system are: a) Balance Sheet; b) Income Statement; c) Cumulative Sources and Use of Funds; d) Budgetary . Management (funds administration) detailing investments and projections for future periods; and e) Cash Flow Statement. All this information is published in local currency. The Cumulative Sources and Use of Funds is presented in US Dollars at the exchange rate provided by the National Department of Planning as of the last day ofthe fIscal year. 7. Those reports are prepared annually as of December 31. The requirement for monthly reports for internal use has not been established, even though they are needed on a regular basis. Supervision and Auditing 8. PRONAITA has implemented a computerized management information system based on the guidelines of the Sistema Nacional de Evaluaci6n de Resultados de Gesti6n PUblica . (SINERGIA). The guidelines of this system are derived from the demands imposed by the need to satisfy the responsibilities taken vis a vis the implementation, evaluation and decisions made to achieve planned objectives. 38  9. The annual auditing reports do not include: a) Cumulative Sources and Uses of Funds for Investments; b) Notes and Supplementary Information;.c) Auditor's Opinion on the Statement of Expenditures; d) the auditor's opinion on the entity's compliance with contractual agreements; e) Evaluation of Internal Controls; f) report on compliance with past recommendations; and g) audit procedures performed by the auditor. Action Plan 10. Based on the above analysis, an Action Plan of the project was defined. To carry out this Action Plan, the Project Coordination Unit should: a) Write a Financial Administration Manual which would contain policies, rules and procedures for planning, budgeting, accounting and preparation of fInancial statements. b) Prepare the Project's Computerized Financial Information System Handbook. c) Design and prepare reports for tracking Cumulative Sources and Uses of Investment Funds; Budgeting and Control of Contractual Agreements; and Performance Report, as agreed with the mission. These reports would be prepared by PRONAlTA to be distributed to users in the frequency and detail required. d) Hire a systems analyst for incorporating into the present system the necessary security controls to safeguard the confIdentiality and sensitivity of financial information, taking into account the convenience of converting available records into a database using the Access software program e) Redesign the presentation of Excel reports to ensure that they conform to the new formats suggested by the mission. f) Hire auditors well in advance, to ensure timely reporting of annual financial audits to the Bank. g) Review the Terms of Reference for the contracting of auditors so that the auditors are fully familiar with the Financial Accounting, Reporting, and Auditing Handbook (FARAH, January 1995) and its requirements. 11. There was broad agreement that the measures contained in the Action Plan should be carried out as rapidly as possible. In this case, it is suggested that the Director of the Project Coordination Unit formally launch the Action Plan, and ensure close monitoring, feedback, and supervision ofthe financial and administrative sections of the Project during its implementation. 39 •  Attachment 2 SECONDARY EDUCATION PROJECT (pASES) (LoaD 3683-CO) 1. An analysis was carried out of the financial management system in place in the Secondary Education project (UPASES"). The main objectives of this review were to: (i) determine if the system complies with legal obligations concerning the management of funds, (ii) determine if it supplies pertinent information for monitoring project performance, and (iii) assess the degree of compliance with Bank requirements for satisfactory financial management. 2. The PASES project has elements of both centralized and decentralized control systems. The Ministry of National Education, in which the Project Coordination Unit (UCP) is located, is accountable for project results. However, loans to municipalities for educational facilities, for example, are made by the financial intermediary FINDETER; the Ministry is not a contracting party. The management of the sources of funds and the making of payments to meet contractual obligations are strongly influenced by the changing pattern of institutional responsibility which has accompanied decentralization: a) The Financiera de Desarrollo Territorial (FINDETER) is responsible for granting credits to municipalities for financing up to 50% of the total construction value of new educational facilities. b) The Fondo de Inversi6n Social (Special Account FIS in FINDETER), is responsible for making payments for up to 30% of the construction value of new educational installations, the procurement of goods (furniture, equipment and educational materials) and the awarding of scholarships. c) The UNDP is responsible for making payments for technical assistance, studies and research, institutional strengthening and the management of the project (UCP MEN) 3. The practice of delegating functions to entities at several levels of government without a full understanding of who should accomplish which tasks makes it very difficult to manage the project's execution and the efficient use of resources. For instance: a) The funds allocated to the Civil Works component, which have been turned over to FINDETER for providing credits to the municipalities for financing 50% of the cost of works, have not been efficiently used because the works are very expensive, and many municipalities do not have the debt capacity to satisfy the strict demands placed by the third party administrator of the funds, to whom FINDETER gives the funds under a discount system. b) The PCU has no direct control over the funds of the project managed' by FINDETER and the Special Account FIS in FINDETER because during the 40  signing of the agreement with the Bank, those entities were given significant autonomy. c) The PCU only receives documentation to support the payments made by FIS­ FINDETER from the funds of the Bank loan to document the respective disbursements, but it does not report on the payments made through counterpart funds. 4. The PCU records in its accounting only the payments made by UNDP. FIS and FINDETER maintain their own accounting records, which are not an integral part of the general accounting of the project. By the same token, due to the manner in which the financial management of the project is carried out, they have. contracted separate auditing services for each one ofthe executing entities, thus duplicating efforts and increasing costs. Principal Conclusions S. Based on this review, the table below provides a synthesis of the strengths and the weaknesses ofthe project's financial management. Internal Control Components Evaluation Results Satisfactory Adequate Deficient I. Objectives X 2. Planning X 3. Budgeting X 4. Organizational Fonnat X S. Policies, Rules and Procedures X 6. Staffing X 7. Functional Responsibilities X 8. Documentation and X 9. Record Keeping X 10. Management Infonnation Systems X II. Monitoring X 12. Auditing X Action Plan 6. Based on the above assessment, an Action Plan to improve project financial management was identified. The measures to be taken under the Action Plan are summarized below. a) To maintain direct control of the sources and uses of funds of the project, the ­ ~ general accounting of the project should be carried out by the PCU. It will be integrated into the general accounting of the Nation by sources of financing and by . identification of the different components established in the loan agreement with the Bank. The necessary processes for the implementation of the system ought to 41  start as soon as possible, with the goal of beginning application as of January 1, 1999. b) The processes of integration should include the cooperation of FIS-FINDETER for sending copies of the payment orders as they are produced and in accordance with the terms ofthe Financial Management Technical Assistance mission of May 1997. The goal is to have these documents available for recording the transactions of the project in the general accounting. c) The financial statements for internal use should be published monthly. The type of information to include and who will use it must be determined. d) The Annual Reports are to be submitted for the review of the auditors and sent to the Bank. It would be in US Dollars and should follow the standards required by the Bank, as discussed in the seminar sponsored by the Bank which took place in Llano Grande, Antioquia in November 1997. e) For recording expenditures in local currency from the disbursements received in US Dollars from the Bank, the exchange rate used would be the one certified by the DirecciOn del Tesoro in the Statement of Funds as of the date of the transfer and availability ofthe funds for the project. f) For the conversion of financial statements from local currency to US Dollars, the following procedures are recommended: • The accounting values corresponding to loan proceeds will be converted to US Dollars at the exchange rate that was utilized for the respective disbursement as indicated in 6. e) above. • The accounting values corresponding to the resources from local counterpart funding will be converted into US Dollars at the exchange rate as of the date of the transfer of funds to the municipalities, schools and other contractors. • The payments for investments in the project will be converted into US Dollars at the exchange rate used for recording the income as of the date in which the funds were received for making such payments. 7. The general accounting will be used as a principal source of information for producing the financial reports required by the Bank and for monitoring the execution of the project. : 8. To promote compliance with the agreements and activities set forth in the Action Plan, it is suggested that the project's General Coordinator closely monitor the financial and ... administrative staff and provide regular feedback on results . 42  Attachment 3 MUNICIPAL HEALm SYSTEMS PROJECI' (Loan 3615-CO) 1. A review was undertaken of the financial management system of the Municipal Health System Project (Ln. 361S-CO). The main purposes of this review were to determine whether the system: (i) complies with legal obligations concerning the management of funds, (ii) supplies pertinent information for monitoring project performance, and (iii) complies with Bank requirements for satisfactory financial management. 2. Only a short time was available for the visit to the Project Coordinating Unit at the Ministry of Health (the Ministry). Therefore, it was not possible (or the mission to evaluate whether the structure of the financial administration implemented for the project was in accordance with the guidelines established in the FARAH Handbook or whether the basic structure of internal control is in accordance with the COSO Report Principal Conclusions 3. Based on the discussions with project officials and certain documents provided, the Bank mission left with the general impression that the Project Coordinating Unit has adequate internal controls to ensure the proper financial administration of the Project. However, there are various elements that must be strengthened. The table below presents a summary of the internal control system ofthe Project Coordinating Unit. Internal Control Components Discussion's Results Satisfactory Adequate Deficient I. Objectives X 2. Planning X 3. Budgeting X 4. Organizational Fonnat X S. Policies, Rules and Procedures X 6. Staffing X 7. Functional Responsibilities X 8. Documentation and X Record Keeping X 9. Management Infonnation Systems X 10. Supervision and Auditing X 43 The areas that need to be strengthened are the following: Organization 4. There are problems at the organizational level of the project between the Ministry and other entities. For example, one of the executing agencies is FIS and its responsibilities were transferred to FINDETER. However, FINDE1ER is a second-tier bank and it did not want to be responsible for the accounting and monitoring of project activities. Thus, these activities are now partially performed by the Ministry. Yet, neither FINDE1ER nor the Ministry has the resources to follow up on the execution ofthe projects. Staffmg 5. Despite the effort made to recruit the best personnel for the project, there is a high turnover in the financial administration section of the project. The average is about one to 1Y2 years. This means that the staffrequires constant training and close supervision. Supervision and Auditing 6. The review of the audit report for 1996 shows that it did not include the financial statements ofthe project as required by the Bank. Also those statements included did not satisfy the information requirements. Moreover, the auditors neither rendered an opinion regarding the Statements of Expenditures (SOEs) or the entity's compliance with agreed contractual clauses, nor did they disclose the audit procedures performed. The Ministry decided to change auditors; however, it still has not hired the new auditor to review the 1997 accounts, and its budget for this purpose is too low. Budgeting 7. The Project Coordinating Unit prepares its Annual Work Plan adequately and timely. This plan is used as the Annual Budget. Yet, the availability of the funds for the project is at the discretion of the Ministry of Finance and other entities outside the control of the Ministry of Health. Thus, many times the projects do not have the funds originally planned. Action Plan 8. Based on the above analysis, an Action Plan of the project was defined. The measures to be taken to under the Action Plan are summarized below: a) Request that the Bank join the Government in analyzing the adequate participation of FINDE1ER and that immediate measures be taken to define its role and solve the ::: situation b) The Ministry would study the causes for the high turn over ration of personnel in the Project Coordinating Unit and it will create incentives to decrease it 44  c) The Ministry would take the necessary actions to prepare the financial statements of the project in accordance to the Bank standards on financial statements pO d) The hiring of the auditors will take place well in advance so that several periodic auditing efforts are made during the fiscal year. This will also allow the project to tum over the reports required by the Bank within the time framework established e) Review the Terms of Reference for the audit, so that the auditors are fully familiar with the Financial Accounting, Reporting, and Auditing Handbook (FARAH, January 1995) and its requirements. 9. Networking activities for the members of the project executing agencies should be implemented. Such initiative must originate at the Bank since it is the entity in the best position to do it, and must be coordinated by an appropriate agency of the government. 10. The Bank should discuss with the Government of Colombia the problems caused by the budget reductions to the projects, and should work out a plan to agree on the type of actions needed for minimizing interruptions in the execution ofthe projects. 11. To ensure compliance with the activities and the agreements set forth in the Action Plan, the General Coordinator of the project should closely monitor, provide feedback and supervise the members ofthe financial and administrative sectors ofthe Project Coordinating Unit. ... 4S '.  Attachment 4 URBAN ENVIRONMENT TECHNICAL ASSISTANCE PROJECT (Loan 3973-CO) 1. A review was undertaken of the financial management system of the Urban Environment Technical Assistance Project. The main purposes of this review were to determine whether the system: (i) complies with legal obligations concerning the. management of funds, (ii) supplies pertinent infonnation for monitoring project perfonnance, and (iii) complies with Bank requirements for satisfactory financial management. Financial Management Context and Procedures 2. These can be summarized as follows: • The Ministry of Environment (the Ministry) is in charge of making payments to the various Project Executing Units and to the component under the Ministry upon presentation of invoices by the Director of the Project Coordinating Unit (pCU). These practices fall within the components of the Loan Agreement. • The UNDP is in charge of the administration of funds for two project executing entities, DAMA and DAOMA, including payments due for operations and implementation of the project. • Two entities, DADlMA and the Area Metropolitana, are directly in charge of the administration of the activities under the Project, including all payments. • The Ministry is in charge of payments for consultants, goods and training as required for the execution of the Component 1 of the Project. • The Ministry is responsible for the management of the entire loan and is in charge of providing technical and financial assistance to the other executing entities as well as review and consolidation of financial infonnation. Principal Conclusions 3. Based on this review, the table below provides a synthesis of the strengths and the • weaknesses of the financial management for the project. ... 46  Internal Control Components Evaluation Results Satisfadory Adequate Deficient 1. Objectives X '. 2. Planning X 3. Budgeting X . 4. Organizational Format X 5. Policies, Rules an" Procedures X 6. Staffing X 7. Functional Responsibilities X 8. Documentation and X Record Keeping X 9. Management Information Systems X 10. Supervision and Auditing X The areas that need to be strengthened are the following: Record-Keeping 4. The system currently used for record keeping of financial transactions is a commercial accounting system that allows the grouping of the information in formats standardized by the National Accounting Office. Also, non-relational Excel Worksheets are used for generating reports required by the Bank. The first system satisfies the information needs of the user at the different administrative and operational levels, however, the second is not satisfactory as it simply empties the information taken from the accounting sheets and does not contain all the information required by the Bank. For example: • A comparison of the Actual Expenses with the Projected Expenses as indicated in the SAR for a reporting or cumulative period is not presented. What is shown is a comparison of the budget for the entire life of the Project (USS40 million), which does not allow to know if the project is progressing as agreed. • The format of the financial statements is different from what the Bank requires, and there is no relation between the different amounts reported. According to the peu, this is due in part to the lack of guidance and adequate advice from the Bank's Resident Mission, especially in regard to acceptable reporting formats. Bank project management disagreed with the peu's comments, and stated that the peu has made no specific requests on this area. Bank Project Management also suggested that the peu has failed to seek guidance and advice from another unit in the Ministry which is implementing a Bank-financed project. 5. According to the Task Manager, the cities and the Ministry do provide to the Bank • comparisons of actual vs. projected expenses for any given period. However, such comparisons are not what is required since the projected expenses are based on the annual budget approved by the government rather than on the amounts programmed in the SAR. Given that, as stated in 47  paragraph 10 below, annual budgets are subject to frequent changes, the comparison yields infonnation about the budgetary perfonnance, not the progress of the project in relation to the projections and estimates made at project inception (or as modified at any other point in time). • As a result, a project which may already be behind schedule may comply completely with the government's budget for a particular year, and still remain behind schedule. Information Systems 6. The financial reports automatically generated by the current accounting system are: (i) Balance Sheet; (ii) Income Statement; (iii) Cumulative Sources and Uses of Funds; (iv) Third Party Payments; and (v) Cash Flow Statement. The Excel worksheets are prepared to reflect the Statement of Sources and Uses of Funds and the Statement of Cumulative Investments, which are presented both in US Dollars and local currency. 7. The reports described above are prepared annually as of December 31. The practice of monthly reporting for internal administrative use has been established. Supervision and Auditing 8. The Project Coordinating Unit is just completing the design of a Computerized Management Infonnation System that will allow the monitoring of the execution of the project both in the financial as well as in the physical aspects. 9. The review of the Audit Report for 1996 shows that it included financial statements of the project which, although acceptable to the Bank, were not fully satisfactory because they lacked some of the infonnation required, the auditors did not render an opinion regarding the compliance with agreed contractual clauses, and did not detail the audit procedures perfonned. The audit report for 1997 did not show improvement. Budgeting 10. Despite the fact that the Project Coordinating Unit prepares its Annual W):-l; Pl~~ adequately and timely --which it uses as the annual budget- the availability of the funds ~ ~:~ u'f· project is at the discretion of the Ministry of Finance and other entities outside the control 01 u..:' Ministry of the Environment. Therefore, many times the projects do not have the funds originally planned. For example, in 1998 there was a reduction of 28% in the budget approved and the Ministry of Finance has already decreed several reductions in certain budget items up to II 75% of the amount approved. These reductions seriously limit the execution of the project, as . stated by the auditors in the report for 1997. , . 48 Training '. 11. It was indicated that one ofthe problems affecting the execution of the project is the lack of staff training. Reportedly staff' has not received any training since December 1996 when they attended a seminar in procurement, disbursement, preparation of Statement of Expenditures and other topics of interest to the Bank. One project official indicated that he had asked the Resident Mission for training in the financial area, but he still had not received an answer. Certain Resident Mission staff took exception with the statements concerning lack of training in the financial area and stated that during the mid-term review considerable time was dedicated to project administration issues, and it was agreed that a refresher project administration course would be provided in October, 1998, mostly because the cities' teams had changed in January. However, this training has been cancelled or postponed at the request of the Ministry. Relation to Other Projects 12. It was also indicated that there are no formal or informal means to establish contact among the staff that work in other projects financed by the Bank, and therefore it is practically impossible to learn about their experiences with their projects and how to take advantage of it. The project Task Manager stated this is a problem the Bank can have limited influence on, specially in a case like this in which the Ministry is implementing two Bank-financed projects, but the Project Executing Units do not talk to each other -as happens for other units of the Ministry. 13. The review team shares the Task Manager's concerns that the lack of communication between projects is a problem even among units in the same Ministry. However, since the Bank is financing projects throughout the country, this is a problem that cannot be dealt with at a project-by-project level, but at the country level; thus, as part of its country strategy, the Bank should aim at establishing a network through which information and experiences can be shared among project executing entities. Action Plan 14. Based on the above assessment, an Action Plan to improve project fmancial management was identified. The measures to be taken under the Action Plan are summarized below. . a) Prepare the Project's ComputeriZed Financial Information System Handbook. • b) Redesign the presentation of Excel reports to ensure they conform to the formats ." suggested by the Bank in the model financial statements or in the FARAH Handbook. 49  c) Hire auditors well in advance to ensure that they perfonn interim audit work during the fiscal year, thus guaranteeing a timely reporting of annual financial audits to the Bank. d) Enforce the use of the Tenns of Reference for contracting the auditors so that they are • .< fully familiar with the Financial Accounting, Reporting, and Auditing Handbook (F ARAB, January 1995) and its stipulations. • 15. Networking activities for the members of the project executing agencies should be implemented. Such initiative must originate at the Bank since it is the entity in the best position to do it, and must be coordinated by an appropriate agency of the government. 16. The Bank should discuss with the Government of Colombia the problems caused by the budget reductions to the projects, and should work out a plan to agree on the type of actions needed for minimizing interruptions in the execution of the projects. 17. To ensure compliance with the activities and the agreements set forth in the Action Plan, the General Coordinator of the project should closely monitor, provide feedback and supervise the members of the financial and administrative sectors of the Project Coordinating Unit. . , so  • • • •  I '. • • I