Executive Summary
This Report supports the improved effectiveness of public financial management and government spending in Pakistan; 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 adoption of International Public Sector Accounting Standards; attention to summary tables of outstanding public sector accounting and auditing issues; the implementation of the new Financial Audit Manual; clarification of the mandate and powers of the Auditor General of Pakistan; improvement of reporting and disclosure processes following audits; strengthening of the Commercial Audit Wing in its reviews of state-owned enterprises; continued emphasis on the public financial management reform agenda; and stronger, internationally referenced staff training programs in the Pakistan Accounts and Audit Service.
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Chapter 1: Introduction
This assessment addresses the efficiency of public financial management and government spending in Pakistan; it seeks to set local accounting and audit practices in international perspective, assess and reduce prevailing variances, and develop a basis for continuous assessment. As part of a Review of Public Sector Accounting and Auditing Practices, diagnostic questionnaires incorporating international public sector accounting and auditing principles (cf. Annexes A and B) 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. The maintenance of public accounts is a longstanding practice in Pakistan, and a two-phased World Bank Project for Improvement of Financial Reporting and Auditing is in progress since 1997. Efforts to improve public financial management naturally include the identification and adoption of relevant international accounting and auditing standards.
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Chapter 2: Public Sector Accounting
Chapter 2 reports on two broad areas of public sector accounting.
-The institutional framework is centered on the New Accounting Model; the multiplicity of recruitment and administration pathways must be addressed, even as the Audit and Accounts Training Institute incorporates international standards into its offerings. A committee must steer the adoption of accrual basis reporting, and Chief Finance and Accounts Officers will oversee internal controls and the preparation of accounts; a code of ethics must be adopted, and internal audit units are needed.
-Accounting standards as practiced: cash basis financial reporting is central to the New Accounting Model, yet significant departures from international standards remain; state-owned enterprises must adhere to international accounting and reporting standards, and submit audit working papers to the Auditor General; further training in the application of international standards is needed; and the Commercial Audit Wing should monitor state-owned enterprises for compliance with applicable international standards.
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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.
-The Auditor General’s Ordinance 2001 should prescribe the proper use of public funds, publication of audit reports, and noncompliance penalties; international Standards on Auditing should be adopted, including in the Financial Audit Manual; the Code of Ethics must be enforced; and the independence, terms of office, and accountability of the Auditor General should be restated. Follow-up of audit reports must be improved, particularly at the departmental level; the Audit Manual should be implemented; and stronger quality assurance processes are needed.
-Current auditing standards: audit planning practices should be strengthened, including through field supervision; new methodologies and documentation guidelines must be followed, and applicable frameworks and formats must be used when analyzing and reporting on financial statements; forensic audit training is needed; and audit reports must focus on the most critical issues.
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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 achievement of full adherence to cash basis and/or accrual basis International Public Sector Accounting Standards; full incorporation of the International Educational Standards by the Auditing and Accounts Institute; the need for statements of accounting policies, and of cash receipts and payments; and the preparation of government consolidated financial statements. Auditing-related issues to be addressed include adoption of the International Standards on Auditing; continued training, including forensic audit training of auditors; improved processes of quality assurance and internal control; the publication, and public availability of the Auditor General’s reports; better planning and supervision of audits; more rigorous audit testing and financial analysis; attention to the preparation of audit opinions; and improved follow-up of audit recommendations.
Relevant international standards, country legislation, the accrual basis of accounting, and staff selection and training information 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: (a) clause 169 in the Constitution of the Islamic republic of Pakistan; (b) certain sections of the Auditor General’s Ordinance, 2001; and (c) selected sections of the Controller general of Accounts Ordinance, 2001 that are relevant to the matters discussed in the Report.
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AAnnex D: National Audit Legislation
Annex D, an extract from an IFAC publication, summarizes some of the benefits of accrual accounting.
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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 Pakistan, and proposes steps to move towards the international standard.
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