Executive Summary
This Report supports the improved effectiveness of public financial management and government spending in the Kingdom of Bhutan; 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 legal requirements for public sector practice; use of international cash basis accounting standards and new International Standards on Auditing; improvement of current computer systems; attention to reporting practices in public enterprises, and to outstanding accounting and auditing concerns; emphasis on a code of ethics; improvement of core competencies through further in-service training; rendering managers accountable for internal controls; and preparation of a monitoring survey based on the performance measurement framework. The methodology, relevant standards and legislation, and benefits of accrual accounting are summarized in the annexes.
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Chapter 1: Introduction
This assessment addresses the efficiency of public financial management and government spending; 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 incorporated international public sector accounting and auditing principles, and 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). Robust auditing and accounting reforms are currently under way in Bhutan, and a comprehensive public financial management upgrade will target financial human resource development and an integrated approach to financial accountability. The Royal University of Bhutan is revising its accounting curricula and medium-term training needs. Tables of Standards and Gaps identify desirable corrective measures, and supplementary information on relevant international standards, national legislation, and accrual accounting is provided in the annexes.
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Chapter 2: Public Sector Accounting
Chapter 2 reports on two broad areas of public sector accounting.
-The institutional framework: international standards must be applied including with regard to reporting by public enterprises, and the proposed Public Finance Act should be enacted. Better educational and training opportunities are needed, whether in the form of accounting courses, professional development, or training programs for public sector accountants and auditors. Accounting and financial professionalism must be fostered, and a code of ethics is needed. Finally, external and internal audits must ensure the soundness of internal financial controls.
-Current accounting standards: public and private sector accounting standards must be formalized, possibly with the assistance of an Accounting Standards Board. With regard to the presentation of financial reports, annual consolidated financial statements must accord with cash basis International Public Sector Accounting Standards; increased attention should also be given to the regulation of accounting standards for public enterprises.
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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 new National Audit Act (June 2006) serves as the framework for all forms of audit, empowers the Royal Audit Authority to establish auditing standards and a Code of Ethics, and provides independence to the Auditor General. The monitoring of public financial management using indicators should be continued, and accountability and reporting arrangements should be reviewed. The technical capacity of the Authority must be developed, notably through use of new Audit Methodology Manuals and further training arrangements for Authority staff.
-Current auditing standards will also benefit from the new Manuals, and from a stronger working paper and supervisory system. Procedures to review internal controls and compliance are needed, and the preparation of financial statements and audit opinions require attention. The processes for reporting on fraud and compliance must be improved.
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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 statutory framework, the assessment of education and training needs, the drafting of a Code of Ethics for Accountants, and the establishment of an advisory board for accounting standards. With regard to financial reporting, reports and statements must conform to international standards, and a government consolidated financial statement is desirable. Auditing issues to be addressed include the statutory framework and the implementation of the Audit Act of Bhutan; adherence to international standards; the setting of public sector auditing standards by the Auditor General; education, training, and technology needs of auditors; the planning and conduct of audits; and the analysis of financial statements and preparation of audit opinions.
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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 the Financial Regulations.
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Annex D1 and D2: Audit Legislation and Audit Act, 2006
Annex D1 provides extracts from the Finance and Accounting Manual and Annex D2 provides the detailed clauses in the recently enacted Audit Act, 2006.
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Annex E: Benefits of Accrual Accounting
Annex E provides an extract from an IFAC publication to summarize some of the important benefits of accrual accounting.
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Supplemental Table of Standards and Gaps
The table explains the detail of each of the substantial number of international standards that have been assessed in the Report, sets out the present position in Bhutan and proposes the options to move towards the international standard.
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