II. Public Sector Accounting

A. Institutional Framework for Public Sector Accounting

8. The institutional framework should include adherence to international accounting standards and use o f qualified accounting staff to provide timely, relevant, and reliable financial information that i s needed to support all fiscal and budget management, decision-making, and reporting processes. The diagnostic questionnaires that were used in this assessment have collected information on the current arrangements and the apparent gaps in Afghanistan for accounting laws and regulations; education and training o f public sector accountants; application o f a code o f conduct; and numbers and characteristics o f public sector accountants.

1. Accounting Laws and Regulations

9. Afghanistan accounting laws and regulations should endorse the specific use o f international accounting standards. Satisfactory legislative arrangements are in place with respect to accounting and the use o f international accounting standards. Implementation o f a new finance law i s underway. The 2005 Public Finance and Expenditure Management (PFEM) Law i s based on Art icle 75, paragraph 4, o f the Constitution. The PFEM Law covers the management o f financial affairs; protection o f public assets; preparation o f budget; and the management of, and reporting on, public expenditure o f the state administrations inside and outside Afghanistan. Under the Law, transactions are to be recorded according to budget classification and accounting rules compliant with internationally accepted standards and principles. The regulations should do more to identify the specific standards.

10. The integrated financial management system should be run by the Ministry of Finance with the assistance of consultancies. Computerization i s proceeding under the broad Public Administration and Capacity Building Program; the advising consulting firm i s doing most o f the reporting work within the Treasury located in the Ministry o f Finance. The accounting package and systems in place are to be enhanced to provide the functionality and geographic spread required to meet the needs o f the PFEM Law. There needs to be a concurrent program to strengthen the capacity o f the Ministry o f Finance staff to run the system and prepare the accounts and reports.

11. Afghanistan should adopt the Cash Basis IPSAS. The IFAC Public Sector Committee recognizes the right o f governments and national standard-setters to establish guidelines and accounting standards for financial reporting. The Public Sector Committee considers the Cash Basis IPSAS to be an important step forward in improving the consistency and comparability o f financial reporting and encourages i t s adoption. The PFEM Law i s not explicit about the application o f IPSAS but i s explicit about the use o f international accounting standards. Various articles o f the

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PFEM L a w refer to revenue and expenditure, and assets and liabilities items that should be accounted. The Treasury staff and consulting advisors, Bearing Point, consider that presentation o f accounts in accordance with Cash Basis IPSAS could be achieved with current systems. I t i s recommended that this be done. To enhance this, notes should be used for those accrual requirements o f the PFEM Law where accounting information i s available. As the functionality o f the accounting system i s rolled out, elements o f accrual basis o f reporting can be considered.

Requirements

Financial statements presented in the IPSAS

Statement o f cash receipts and payments

Accounting policies and explanatory notes

General considerations

12. Table 1 identifies the current position and the steps required if the Cash Basis IPSAS are to be adopted.

Current Activity required to adopt position Cash Basis IPSAS

No Format can be followed

Yes

N o Can be supplied

N o Can be supplied

Correction o f errors disclosed No

Reporting period Adequacy o f information about the entity

Can be supplied

l l

Comparative information restated

Consolidated financial statements

Treatment o f foreign currency cash receipts, payments, and balances in compliance with IPSAS

I Presentation o f comparative information I I I

N o

N o

Not practical in the short-term

Not practical in the short-term

0 Nature o f error 0 Amount o f correction I I

13. T o enhance the reliability of annual accounts within the government, accounting, reporting systems, and staffing need to be improved. For the last two years, the Control and Audit Office conducted audits o f annual government accounts. The audit opinions have been disclaimed because the auditors were dissatisfied with the degree o f consistency o f the annual accounts with other records. Ministries do not have the capacity to accept responsibility and enforce accountability on accounting matters. This capacity is important for budget execution and for general accountability arrangements. The accountability chain must be clear; designated individuals must hold positions o f responsibility for the internal control system. The PFEM L a w provides for this action to become effective if enforced by Ministry o f Finance.

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14. In the longer term, the Government o f Afghanistan can be assisted in the transition from Cash Basis IPSAS to the Accrual-based IPSAS by utilizing IFAC g~idance.~ The guide has four main parts:

0 Introduction. Chapters 1-3 address general planning and project management issues. General Financial Reporting Issues. Chapters 4 and 5 deal with the selection, development, and approval o f accounting policies and issues associated with the definition and identification o f reporting entities. Financial Elements. Chapters 6-8 outline the broad steps required for the identification, recognition, measurement, and disclosure o f assets, liabilities, revenues, and expenses. The broad approaches discussed could be adapted and applied to particular items.

0 Specific Topics. Chapters 9- 15 highlight implementation issues associated with four specific accrual IPSAS, and provide guidance in relation to a selection o f topics not addressed, or only partially addressed, by existing IPSAS.

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2. Education and Training

15. Current recruitment and training of government accountants does not provide satisfactory s k i l l s and the necessary professional accounting cadre. There i s an urgent need to develop a critical mass o f professional accountants in Afghanistan. The Government o f Afghanistan must take the lead with i t s own accounting service. I t i s important that accounting staff be adequately skilled at their work. The recruitment and training arrangements should provide for this in the most efficient and effective manner. Accounting and audit specialist recruitment should require more relevant academic training and practical experience. The Auditor General recognizes that training needs to be better coordinated to meet the needs o f government accountants. As part o f the Public Administration and Capacity Building Program, a training facility i s being created for accountants and auditors from the Ministry o f Finance and the Control and Audit Office. These accountants and auditors are expected to undergo dedicated full-time basic accounting and auditing training followed by examination and certification. This i s a realistic initiative and the Ministry o f Finance should establish educational and training standards for government accountants; similarly the Auditor General should do this for auditors.

16. A phased and progressive education and training program combined with practical experience i s needed. A sustainable and effective system o f public financial management and public audit can only be brought about by developing and promoting an accounting culture, which can receive impetus by the creation and promotion o f a critical mass o f accounting professionals in Afghanistan. As part o f the curricula for the training facility planned under the

Transition to the Accrual Basis o f Accounting: Guidance for Governments and Government Entities, International Federation o f Accountants, Public Sector Committee Study 14, December 2003.

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Public Administration and Capacity Building Program, the Ministry o f Finance and the Auditor General should establish training requirements and training programs for their respective accounting and auditing staff. The training facility also provides a recognized institution where existing accounting and auditing staff can come together for networking and continued professional development. New graduates can be inducted and provided formal accountancy education at both technical and professional levels. In due course, a body o f continuously well- trained professionals will provide service to various government agencies in al l facets o f accounting and auditing. For longer-term, high-level support for the proposed government accounting training, distance-learning programs could be used. Two distance-learning programs from the United Kingdom are offered by the Association o f Chartered Certified Accountants (ACCA) and the Chartered Institute o f Public Finance and Accountancy (CIPFA).

3. Code of Ethics

17. A code of ethics based on the IFAC Code of Ethics for Professional Accountants i s needed. A code o f ethics for accountants based on the fundamental principles o f the IFAC-issued Code o f Ethics for Professional Accounts should be implemented and observed. There should be arrangements to ensure that accountants confirm on a regular basis that they are operating in accordance with the code. The Control and Audit Office has already adopted such a code. The Treasury indicated that the requirement o f adherence to a professional code o f ethnics for public and private sector accountants should primarily be promulgated by a professional accounting and auditing organization whose principles are adopted or agreed to by the Ministry o f Finance.

4. Public Sector Accountant Arrangements

18. The Chief Financial Officer (CFO) function needs development. For each public sector body that prepares annual accounts, there should be a responsible CFO function for maintaining systems o f internal financial controls that manage risks and for preparing the accounts for signature by the chief accounting officer. Ar t ic le 7 o f the PFEM Law gives the Treasury o f the Ministry o f Finance broad treasury and accounting responsibilities and authority, but it does not provide for a CFO function.The Ministry o f Finance should establish regulations for CFO functions in the executive government departments. It i s important that proper segregation o f duties i s incorporated in the design and evolution o f the PFM systems. The Treasury agreed with the proposals in this report noting that implementation o f this program wi l l be a longer term objective given the present environment in Afghanistan.

B. Accounting Standards as Practiced

19. The diagnostic questionnaires collected information on the current arrangements and the apparent gaps in Afghanistan for setting public sector

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accounting standards and for presenting financial reports. Out o f this exercise came recommended activities that will help to bring local current standarddpractices in l ine with international standards.

20. Adequate implementation arrangements are needed for setting accounting standards for the public sector. The PFEM Law requires the use o f international standards and gives responsibility to the Ministry o f Finance. Under PFEM Law, Article 7, the Treasury o f the Ministry o f Finance maintains its general-ledger by recording transactions according to budget classifications and accounting rules which are compliant with internationally accepted standards and principles. The Ministry also publishes a final budget reconciliation report and a set o f audited financial statements covering revenue, expenditure, assets, and liabilities in accordance with international standards. There is a need to create a regulatory body for dealing with interpretation and monitoring o f the application o f accounting and auditing standards for the public and private sectors. This i s a longer-term prospect in Afghanistan, but the Ministry o f Finance should be the body responsible for making the arrangements when conditions allow and in the interim should undertake the function itself.

c. Assessment of Accounting and Auditing in State-Owned Enterprises

21. The State-Owned Enterprises (SOE) Law provides for audit by the Ministry of Finance and for annual balance reports. There are about 100 state-owned enterprises in existence in Afghanistan, but many are not functioning at all, or not functioning in the way intended. The Control and Audit Office carries out transaction checks on the budget expenditures o f the state-owned enterprises and also audits the annual accounts. Only a few state- owned enterprises produce annual income and expenditure accounts and balance sheets accounts for audit. A more rigorous review o f the desirable reporting and monitoring processes for the state-owned enterprises and an updating o f the SOE L a w i s needed so that state-owned enterprises report according to international reporting standards.

22. A Financial Reporting Council should be established to regulate commercial government authorities. Action is needed to require state- owned enterprises to amend their accounts in accordance with audit findings, so that true and fair accounts may be issued for general public scrutiny within a stipulated period, consistent with that o f listed enterprises. One approach would be to establish a Financial Reporting Council that would be responsible for adoption, monitoring, and enforcement o f international accounting and auditing standards with respect to financial reporting by the public interest entities.

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