Executive Summary
This Report supports the improved effectiveness of public financial management and government spending in Sri Lanka; it situates local practice internationally, seeks to assess and reduce any observed variance, and supports the ongoing measurement of progress. The application of international standards will strengthen decision-making, management and accountability, and ultimately development reforms. Report recommendations include the progressive adoption of accrual based reporting; attention to summary tables of outstanding public sector accounting and auditing issues; the adoption of International Standards on Auditing in auditing procedures as well as manuals; the improvement of public financial management through a comprehensive reform program, including attention to compliance issues regarding Financial Regulations and corporate governance; the strengthening of post-graduate level accounting and auditing skills; and the preparation of an indicators-based public financial management survey to monitor progress.
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Chapter 1: Introduction
This assessment addresses the efficiency of public financial management and government spending in Sri Lanka; it seeks to set local accounting and audit practices in international perspective, assess and reduce prevailing variances, and develop a basis for continuous assessment. Diagnostic questionnaires incorporating international public sector accounting and auditing principles were used to collect data from the government budget and state-owned enterprise sectors; a Bank team and national authorities then reviewed the findings further (cf. Annex A). The present analysis was undertaken concurrently with a donor-funded fiscal reform program, and detailed studies and plans regarding public sector accounting and auditing were also conducted recently. Financial Regulations do not have the force of law and are not always complied with, and oversight of government expenditure outcomes is lacking. The reliability and timeliness of financial reports is improving, and a proposed Public Finance Bill will address performance and financial accountability concerns.
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Chapter 2: Public Sector Accounting
Chapter 2 reports on two broad areas of public sector accounting.
-The institutional framework: existing laws should prescribe the adoption of International Accounting Standards; the proposed Public Finance Bill provides a modern framework of financial reporting and accountability. Further training of public sector accounting and auditing staff is needed, with emphasis on the Financial Regulations and on accounting standards; plans have been made for an internationally referenced Sri Lankan training institution. A code of ethics for public sector accountants is needed. Chief financial officers in public sector bodies will help to oversee internal controls and the preparation of accounts.
-Accounting standards as practiced: accounting standards for the public sector must be formalized, and consolidated financial statements must adhere to International Public Sector Accounting Standards. Compliance with the Financial Regulations is lacking, and applicable corporate governance requirements must be followed by public corporations and their directors.
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Chapter 3: Public Sector Auditing
Chapter 3 also reports on institutional frameworks and current standards, with respect to public sector auditing.
-A new National Audit Act should specify the appointment, powers, and independence of the Auditor General, adopt international standards, and include an offences clause. The implementation of the Institutional Development Plan must proceed, with attention to peer review, audit competence, and quality assurance. A review of public financial management performance indicators and a code of ethics for auditors are also needed. The proposed training institution, as well as existing skills analysis programs, must adhere to international norms.
-Current auditing standards: a new Audit Methodology Manual will address planning requirements and audit procedures, working paper systems, and the analysis of financial statements. All audit reports should include recommendations, and the preparation of audit opinions should be improved. Processes for reporting on fraud, and on compliance in corporate governance, must be further developed.
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Chapter 4: Action Plans
Chapter 4 lists outstanding accounting and auditing standards issues, their current status, and the corrective action required. Accounting issues include the adoption into law of international standards, the improvement of accountancy training institutions, and the establishment of a code of ethics for public sector accountants. A public sector standards committee should also be established, and financial statements must accord with international standards; a consolidated financial statement is desirable. Auditing-related issues to be addressed include the approval of a new National Audit Act, covering independence and powers; the prescription of public sector auditing standards; the adoption of a relevant code of ethics; improvement of education and training offerings for auditors; the need for an audit management system in the Auditor General Department, and for a quality assurance program; attention to working paper systems and the evaluation of internal controls; and the implementation of audit recommendations.
Relevant international standards, country legislation, and the accrual basis of accounting are summarized in Annexes B, C and D, and E respectively; a Table of Standards and Gaps highlights desirable improvements.
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Annex A: Methodology of the Assessment
Annex A explains that the assessment uses a set of questionnaires that compare country standards and practices in accounting and auditing with those recommended by the International Federation of Accountants (IFAC) and the International Organization of Supreme Audit Institutions (INTOSAI).
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Annex B: Accounting and Auditing Standards
Annex B provides lists of the accounting and auditing standards set by the IFAC and summarizes the Code of Ethics and the Auditing Standards published by the INTOSAI.
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Annex C: Accounting Legislation
Annex C provides extracts from Sri Lankan accounting legislation that are relevant to the matters discussed in the Report.
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Annex D: National Audit Legislation
Annex D provides extracts from Sri Lankan audit legislation that are relevant to the matters discussed in the Report.
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Annex E: Benefits of Accrual Basis of Accounting
Annex E, an extract from an IFAC publication, summarizes some of the benefits of accrual accounting in establishing the Government of Sri Lanka’s financial position and current stock of assets and liabilities, and in improving decision-making and accountability for public services and resources.
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Sri Lanka Public Sector Accounting and Auditing: Supplemental Table of Standards and Gaps
This table explains the detail of each of the substantial number of international standards that have been assessed in the Report, sets out the present status of Sri Lanka, and proposes steps to move towards the international standard.
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