Executive Summary
This Report supports the improved effectiveness of public financial management and government spending in Nepal; 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 a more comprehensive reform program. Report recommendations include the adoption of cash basis international accounting standards and eventually of accrual-based reporting; accounting degree requirements, improved training, and a code of conduct for government accountants; the designation of chief financial officers in government offices, and of audit review committees in state-owned enterprises; attention to summary tables of outstanding accounting and auditing issues; adoption of the Nepal Standards on auditing, revision of the Audit Act, and strengthening of the Public Accounts Committee; improved audit planning, working paper, and financial reporting processes; the addition of audit opinions to consolidated financial statements; and forensic audit training.
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Chapter 1: Introduction
This assessment addresses the efficiency of public financial management and government spending in Nepal; 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. Public accounts and audits have been undertaken in Nepal for over 140 years, and a recent series of capacity-building and institutional development initiatives was implemented starting in 1988. The most recent project, funded by a World Bank Grant and completed in 2006, focused on the audit guidelines, reporting methodology, and human resources of the Office of the Auditor General.
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Chapter 2: Public Sector Accounting
Chapter 2 reports on two broad areas of public sector accounting.
-The institutional framework should include the adoption of Cash Basis International Public Sector Accounting Standards, and in time of accrual-based reporting. State-owned enterprises should adopt Nepalese and international accounting standards, and audited annual accounts must be published on time. The selection criteria of government accountants must be raised, and training options improved through a professional education program. A code of conduct for accountants is also desirable. Chief Financial Officers in government offices could oversee internal controls and the preparation of accounts; and the Accounting Standards Board must set public sector standards based on international norms.
-Accounting standards as practiced: standards for the public sector must be formalized, and more effective audit committees would improve the corporate governance of state-owned enterprises. The Financial Review Committee should review financial statements to ensure compliance with applicable laws and standards.
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Chapter 3: Public Sector Auditing
Chapter 3 also reports on statutory frameworks and current standards, with respect to public sector auditing.
-The Audit Act should allow for effective independence and specialized audits, adopt international standards, and include an Offences clause. Consolidated financial statements require an audit opinion, and ethical compliance should be monitored; the Office of the Auditor General will benefit from further planning and peer reviews. Audit reports should be published and followed up; staff-related concerns include more selective recruitment and a focus on technical and professional competence; and better working paper systems will help with quality assurance.
-Current auditing standards: more comprehensive planning requirements, working paper systems, and internal controls are needed. The legal compliance of auditees should be established, and all audit evidence maintained. The preparation of audit opinions should be improved, and processes for reporting on fraud, financial statements, and 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 staff recruitment, and the establishment of a code of ethics for public sector accountants. The Accounting Standards Board should also set public sector standards, and all financial reporting practices must accord with relevant international norms. Auditing-related issues to be addressed include the amendment of the Audit Act, the prescription of public sector auditing standards by the Auditing Standards Board, and the adoption of the International Standards on Auditing; the improvement of recruitment and continuing education processes; and the application of computer-assisted audit technology. New audit planning methodologies require implementation, and the Office of the Auditor General should prepare an audit opinion on public sector financial statements; the implementation of audit recommendations also requires attention.
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 Nepalese accounting and auditing legislation 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 in establishing the Government of Nepal’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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Annex E: Benefits of Accrual Accounting
Annex E summarizes the selection and training pathways for public sector accountants and auditors in Nepal.
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Nepal 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 Nepal, and proposes steps to move towards the international standard.
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