WORLD BANK PROJECT FINANCIAL MANAGEMENT AND DISBURSEMENT 15 October 2002 KEC Project Launch Workshop
WORLD BANK PROJECT FINANCIAL MANAGEMENT ART.III,SEC.5(B), OF THE WORLD BANK S ARTICLES OF AGREEMENT The Bank should make arrangements to ensure that borrowers use loan proceeds only for the purposes intended with due attention to economy and efficiency
WORLD BANK PROJECT FINANCIAL MANAGEMENT GUIDELINES Some policies and guidelines to facilitate compliance with Art.III.Sec.5(B): OP/BP 10.02 FARAH Financial Monitoring Reports for World Bank Financed Projects
WORLD BANK PFM GUIDELINES (cont d) OP 10.02 The definitive Bank guideline on project financial management Describes the minimum FM requirements for every Bank financed project Requires projects to: maintain adequate financial management systems provide annual audited financial statements have the financial statements audited describes the remedies available to the Bank in the event of non-compliance
WORLD BANK PFM GUIDELINES (cont d) Financial Accounting, Reporting and Auditing Handbook (FARAH) most useful guide available on PFM contents: - 40 pages of text - more than 100 pages of annexes-examples, terms of reference, sample letters and illustrations
FINANCIAL MONITORING REPORTS (FMRs) PMR vs.fmr Underlying principles funds are used for intended purposes project implementation is on track budgeted costs will not be exceeded reports aligned with borrower systems as far as possible Report-based disbursement is no longer a key objective of the reports
CONTENTS OF FMRs Introductory narrative discussion of developments and progress Financial Reports (FMS primary responsibility) sources and uses of funds (period and cumulative) uses of funds by project components (budgeted and actual period and cumulative)
CONTENTS OF FMRs (cont d) Physical Progress Reports (TL primary responsibility) output indicators or contract status for key activities outcome indicators not required in FMRs narrative information may be the most appropriate in some projects
CONTENTS OF FMRs (cont d) Procurement Reports (PS primary responsibility) generally for contracts not subject to prior review but above a certain threshold
FMRs AND PROJECT PREPARATION Ability to produce FMRs should be in place by loan effectiveness Loan agreements will not have an action plan for producing FMRs in Article IV FMRs requirement applicable from January 1, 2002 NO compulsory standardized formats for FMRsflexibility
SCOPE AND FREQUENCY Scope Encompasses total project and not just Bank financed portion Currency of FMRs normally in the currency used for maintaining books of accounts Frequency flexible, normally quarterly, at least semi-annually Submission within 45 days
DISBURSEMENT AND AUDIT ISSUES Disbursement-borrower choice, for report-based disbursement need to meet Bank requirements Disbursement information only included if disbursements are report-based Not the same as audited annual financial statements (I.e. FMRs are NOT audited) financial reports in FMRs should have similar format and content to annual audited financial statements
FMRs FOR SMALL OPERATIONS Small operations not exceeding US$ 5 million simplified formats- less detailed, but still need financial, physical, and procurement reports
MULTIPLE IMPLEMENTING AGENCIES Ideally single FMR In some situations separate FMRs may be acceptable example: Rijeka Gateway Project three entities three FMR required
TASK TEAM RESPONSIBILITIES Project Appraisal determine format and contents of FMRs Negotiations agree the formats and contents of FMRs Review of FMRs TL primary responsibility TL to consult FMS TL to follow up
TRANSITIONAL ARRANGEMENTS Project appraised to July 1998 not affected Project appraised Pre-December 31, 2001 borrowers may request conversion from PMR to FMRs Project currently utilizing PMR-based disbursement borrower may continue PMRs or switch over to FMR + additional reporting requirements for continuing the report based disbursement
FINANCIAL MANAGEMENT SUPERVISION IN BANK OPERATIONS
FIDUCIARY RESPONSIBILITY Borrower has ultimate responsibility for project and project assets Bank has responsibility to act responsibility for its shareholders, and as a development institution
KEY MECHANISMS OF FM SUPERVISION Bank continues to assess FM Arrangements follow-up to assessment during appraisal PSR rating Bank reviews: periodic reporting: FMRs disbursement applications in Bank offices (LOA) and SOEs at project offices (Region) Annual Audit Reports Checks on Supervision: QAG, OED, etc
FINANCIAL MANAGEMENT IN BANK FINANCED PROJECTS Project FM Environment Financial Strategies, Policies, Systems and Procedures Financial Planning/Budgeting Flow of Funds Internal Controls Accounting and Financial Monitoring Financial Reporting Auditing
ASSISTING WHILE ASSESSING Assistance goes hand in hand with Supervison Assistance includes: helping to train new client FM staff responding to questions, queries provision of guides, other tools providing links to good practice approaches, or high-performing staff, in other projects/programs
FINANCIAL STRATEGIES, POLICIES, SYSTEMS AND PROCEDURES Financial supervision, segregation of functions, cost recovery and user fees, etc Procurement and Contract Management Systems Accounting, Internal Control, Financial Reporting and Auditing systems Disbursement Methods and funds flow arrangements
FINANCIAL PLANNING / BUDGETING Financial plans how much is needed for the project sources of project financing Financial indicators and ratios Budget preparation and approval
INTERNAL CONTROLS Control Environment: integrity and ethical values competence organizational methods Risk Assessment defining, identifying, analyzing and managing risks
INTERNAL CONTROLS (cont d) Control activities suitable authorization procedures segregation of duties safeguarding of assets independent verification reconciliation
INTERNAL CONTROLS (cont d) Information and Communication appropriate, timely and accurate information effective communication with donors, suppliers, etc Monitoring ongoing monitoring and evaluations prompt reporting of internal control deficiencies
ACCOUNTING AND FINANCIAL MONITORING Adequate accounting systems and supporting documentations Systems: financial, management and budgetary accounting Mechanics: chart of accounts, accounting software and accounting procedures Monitoring and Control of project costs Monitoring of cash flows (I.e. cash receipts and disbursements)
PROJECT DISBURSEMENTS
DISBURSEMENTS MECHANISMS Transaction based disbursements direct payment special commitment special account Report-based disbursements linked to FMR advances to the SA are based on forecast budgetary requirements may still utilize direct payments and special commitments
DISBURSEMENT REPORTS Status of disbursements Intranet access (http://ctr/ics) LOA reports Special Account issues SOE issues Closing date
THE SPECIAL ACCOUNT Choice of commercial bank Inactive Special Account Mingling of Bank and other funds Unauthorized Sub-Accounts Payment of Non-eligible Contracts Blocking to Cover Letters of Credit (L/Cs)
THE SPECIAL ACCOUNT (cont d) Ineligible expenditures or overdue SA audit Bank may withhold replenishment SA is inactive for six months Bank notifies borrower of its requirements for SA refund unless, within 90 days, there is evidence of expenditures paid via SA
STATEMENT OF EXPENDITURES (SOEs) Administrative and Accounting capabilities to prepare and maintain SOE records and make them readily available for inspection Adequate internal controls and arrangements for regular and independent audits of SOE records
CLOSING DATE Sources OP/BP/GP 13.30 Grace Period and question of eligibility Importance of notification in writing Retroactive extensions
PROJECT AND ENTITY AUDIT: ISSUES FOR SUPERVISION
SELECTION OF AUDITORS: THE PROCESS 1. Bank reviews audit TOR 2. Borrower creates short list, sends detail to the Bank 3. Bank reviews listed firms for acceptability 4. Borrower requests proposals from acceptable firms 5. Borrower selects the winner (least cost method)
EVALUATING AUDIT FIRMS The borrower, and task team should consider the following evidence of independence qualifications and experience of key personnel time and personnel reqs. of the audit experience with: - bank projects - operations similar to the projects Peer review, quality control, international affiliations, CPE requirements of the firm
APPOINTING THE AUDITOR The auditor should be contracted as soon as possible in the project s life well before the beginning of the fiscal year preferably with a multi-year contract
CONTRACT OR ENGAGEMENT LETTER All engagements with audit firms should be supported by a contract Contract should specifically incorporate the TORs Engagement letters are prepared by auditors and should not substitute either the TORs or the contract Audits by Government Auditors should at least be supported by acceptable TORs
PROJECT FINANCIAL STATEMENTS Source and Application of Funds current year cumulative Balance Sheet only required when accrual accounting is used Notes to Financial Statements Statement of Requests for Reimbursement listing of withdrawal applications integrated into the financial statements
PROJECT FINANCIAL STATEMENTS (cont d) Special Account Reconciliation source and application of funds for the SA Supplementary Information Examples: Annexes XIII & XIV in the FARAH
AUDIT OPINIONS REQIRED (PROJECT) Project Financial Statements (sources and applications of funds, accumulated investments, supplementary information) Statements of Expenditures for period audited Special Account Legal Compliance Internal Control Structure (or Management Letter) Also, the auditors should briefly discuss the audit procedures used
MANAGEMENT LETTER Is a report on the internal controls and operating procedures of the institution Must address: any subjects which the project managers and the auditor had previously agreed should be discussed all other matters that the auditor judges to be worthy of management s attention See Annex XXI of FARAH for a sample
REPORT SUBMISSION Legal agreements typically require audited financial statements to be submitted within a few months of the end of implementing institution s fiscal year (6 months) one month late: send warning letter other actions can be taken when report is 4 months delayed suspend disbursements if the delay is more then 9 months