PUBLIC AUDIT REFORM AND CAPACITY BUILDING OF OAGN Objectives of the Grant.    The main objective of the Grant is to help the Office of the Auditor General of Nepal (OAGN) to further enhance the institutional capacity to deliver quality public audit through (a) revising the existing audit guidelines according to the International Organization of Supreme Audit Institutions (INTOSAI) standards, the International Standards on Auditing (ISA) issued by the IFAC,  and the changes in Government rules and requirements, in the following public audit areas  Revenue Audit, Procurement/ Public Works Audit, Project Audit and  General Public Audit, (b)  revising and consolidating the audit standards and guidelines, (c)  improving the Auditor Generals reporting methodology commensurate with best international practices, and  (d) developing the Human Resource Development Plan including the strengthening of its Training Division to create a strong and fully equipped training unit capable of providing quality training to its staff.    To meet this objective, the grant will help review the existing guidelines and develop new guidelines in the areas mentioned above, and update audit standards and guidelines.  In addition, it will help establish institutionalized training arrangements to implement the guidelines within OAGN, and conduct training programs.  The grant will also help to provide exposure to senior officers through carefully planned, monitored, and evaluated programs of short term training secondment and training exchanges with well-developed Supreme Audit Institutes (SAIs) in South or East Asia or Pacific countries, and  Â“twinningÂ” with another successful SAI.   These senior officers will be developed as Â“TrainersÂ” who will then impart training to auditors responsible for the management of public audit. Background.    The Nepal Country Assistance Strategy (CAS dated November 17, 1998) identified governance, management of public expenditures and institutional constraints as serious impediments preventing Nepal from achieving its full economic potential and reducing poverty. In its Executive Summary, it specifies two new prongs:  (a) bringing resources closer to the beneficiaries,  where they are most likely to be productively used, and (b) fostering the strong governance needed to reduce waste and mismanagement.    Good governance, public accountability and corruption control are stated to be high priorities of the Government.  The Auditor General promotes and upholds the public accountability, credibility and discipline in financial operations.  Quality audit helps to identify measures to eliminate or reduce waste and inefficiency in the mobilisation of public resources, to create public awareness on good governance, to recommend the improvement of policies and procedures, and to  sharpen the process of public accountability. Emerging changes in technology and growing demands from the public and donors for public accountability and good governance are putting pressure on the OAGN to be more proactive, quality conscious and oriented to serving the public interest.  The technical assistance provided to date through the Banks past IDF grants  has greatly contributed  to the institutional development of OAGN. The first IDF grant helped to set up a stage for  institutionalising the audit procedures and practices.  The project contributed the five manuals which was immediately put in use, although they were implemented without field testing.   A few policy decisions were made during the tenure of the project making departure from conservative approach to a more demand approach.   The first IDF was rated Â“unsatisfactoryÂ” during exit.    The second IDF grant was a follow on project which was deemed essential to carry on with the activities initiated during the first IDF, to continue to build the momentum, and to appreciate the Banks support to whatever marginal achievements were attempted.  The project continued to focus in improving auditing of development projects and public enterprises , and provide training to staff.  Performance improved as compared to the first IDF.  Outcomes achieved during the second IDF are becoming sustainable.  It was rated Â“Partially SatisfactoryÂ” at exit.   The third IDF which was provided to help OAG build a performance auditing capability as its contribution to improving the financial management of public sector projects was rated Â“Highly SatisfactoryÂ”.  A strong commitment demonstrated by the Auditor General and ownership taken by him enabled to fully achieve the development objectives.   Performance Audit Manual was developed, staff were trained, twinning arrangement with Mala ysian OAG was arranged, and performance auditing capacity has been internalised.     In recognition of the fact that capacity building is an ongoing effort, it is important for the Bank to continue to be the development partner of OAGN to support its institutional development efforts.   An added advantage is that the same Auditor General who implemented the third IDF is committed to continue reforms in auditing and improving the capability of his office. The recently completed Country Financial Accountability Assessment (CFAA dated July 5, 2002) jointly carried out by His Majestys Government of Nepal (HMGN) and the World Bank confirmed that HMGN is serious and committed to improving public and private sector financial management.  It has concluded that reforms in financial management are critical and should be approached in an integrated way covering planning, budgeting, accounting, internal control, internal audit, external audit and oversight.  With regard to public sector audit, the CFAA has recognized the strong and dedicated leadership of the OAGN,  and has also concluded that the OAGN sets a good example of fearless reporting.  A strong partnership forged by OAGN with the Public Accounts Committee (PAC) to follow-up on irregularities and other accountability issues is an impressive example,  as confirmed by the CFAA.  While recognizing the OAGNs strong points, the CFAA has made several recommendations to further enhance its capacity.    HMGN has endorsed the recommendations of the CFAA and has committed to implement the Development Action Plan proposed  therein.  Recommendations related to public audit have been discussed and agreed with HMGN and OAGN.  The CFAA recommended  actions which include, inter alia, increasing OAGNs independence,  providing sufficient resources to OAGN to cope with the needs for more training, equipment, and expertise,  reviewing and revising audit standards and guidelines according to INTOSAI standards and to accommodate changes in HMGN rules, developing Human Resource Development Plan including the strengthening of its training division to create a strong and fully equipped training unit capable of providing quality training to its staff, and providing exposure to senior officials of OAGN through carefully planned, monitored, and evaluated programs of short-term training secondment and training exchanges with well-developed SAIs abroad. The Auditor General requested the Banks IDF grant about a year back to support OAGN with its institutional development efforts.  A draft proposal was submitted to the Bank, which was reviewed and discussed with OAGN.  The Bank suggested that the OAGN should postpone this request until the CFAA was completed, and indicated that the Bank would be interested in providing support to the OAGN in line with the CFAA recommendations.  The previous draft has been slightly modified along the lines of the CFAA recommendations, and this request is to support the specific action plans of CFAA to improve the quality of public audit.   A few actions related to OAGN are already in the process of implementation as a result of strong commitment of the Auditor General.  For example, the long standing issue of repealing the Auditors Act 1974 to stop the licensing of auditors by the OAGN, and to pass this responsibility to the Institute of Chartered Accountants of Nepal (ICAN),  has recently been resolved after the endorsement by the Cabinet of the Auditor Generals proposal.  The Auditor General has also agreed to arrange for an external peer review of, and report on, its work at least once every two years by a reputable private audit firm.  He has also agreed to have the OAGN accounts audited independently each year by a reputable private audit firm.  Of the six specific CFAA recommendations to be implemented by the OAGN, two have already been implemented, a third related to the decentralization of the audit function by establishing OAGN field offices is under discussion, and the remaining three related to capacity building are expected to be implemented through the proposed IDF grant. All INTOSAI members, including the OAG of Nepal, are expected to apply INTOSAI auditing standards.  International Standards on Auditing (ISAs) issued by IFAC are very similar to INTOSAI standards, and efforts have been going on for some years to harmonize them as much as possible.  The grant will be used to:  (i) ensure that all OAGN auditing standards and guidelines comply with INTOSAI standards; (ii) review ISAs to identify any aspects representing an improvement on INTOSAI standards; and (iii) introduce any such improvement into OAG standards and guidelines. The Activities to be Financed Under the Grant.    HMGN has requested the Bank (its letter of  August 14, 2002) to provide technical assistance to upgrade the quality of audit through a grant to assist OAGN to: wReview and revise audit guidelines according to INTOSAI standards; wReview the existing reporting procedure and format of the Auditor General Annual Report, and recommend improvements in the AGs reporting, aiming to downsize the reporting volume; and wPrepare a Human Resource Development Plan,  including the strengthening of OAGNs Training Division to create a strong and fully Based on the recommendations of the CFAA and the agreement reached with the OAGN, the following activities will be financed under the grant, and carried out by international and national consultants under the guidance of a steering committee to be formed in the OAGN: wPrepare a time-bound work plan to implement the activities of the grant.  Include in the plan arrangements for in-house discussion series and inter-departmental seminars and discussions meetings in all stages of preparation of audit guidelines. wReview existing functions, policies, strategies, procedures, audit methodology, audit guidelines for revenue, procurement/public works, project accounts, general public sector audit standards, and staffing of OAGN,  in accordance with international best practices such as the INTOSAI standards, the International Standards on Auditing (ISA) issued by the IFAC,  and establish benchmarks on all these matters, in order to introduce appropriate reforms within OAGN. wRevise the existing audit guidelines according to INTOSAI standards, or the ISA (and also taking into consideration the changes in Government rules and requirements), in the following public sector audit areas  Revenue Audit, Procurement/ Public Works Audit, Project Audit and  other Public Sector Audit Procedures. wPilot the revised guidelines in a few selected development projects before official adoption.  Supervise the OAGN auditors in conducting the pilot audit to apply the revised guidelines.  Finalize the audit guidelines both in English and in Nepali and officially adopt these guidelines. reporting, aiming to downsize the reporting volume. wPrepare a Human Resource Development Plan including the strengthening of OAGNs Training Division to create a strong and fully equipped training unit capable of providing quality training to its staff and capable of maintaining a good Training database. Provide exposure  The purpose of the study tours is to provide exposure to senior officials to a well-developed SAI on how the audit guidelines are prepared , how the training is conducted to staff, and how to present a succinct audit report; it will also provide exposure and skills on developing them as the Trainers who will take the responsibility to train other staff in OAG; the consulting firm will take responsibility to arrange the study tour program. to a selected group of  senior officials Officials will include both senior and junior level officials having a combination of first class, second class and third class gazetted officials; a few of them will be developed as a trainer of OAGN (about 135 staff  Number of officials proposed is 13, but this figure may decrease or increase depending on the country which will be identified for the study tour as per the proposal of the consulting firm, within the limitation of the total budget allocated in the proposal.) through carefully planned, monitored, and evaluated programs of short-term training secondment and training exchanges in the above mentioned areas with well-developed SAIs in South or East Pacific countries and Â“twinningÂ” with a successful SAI  The bidder will be asked to indicate in the proposal the name of the SAI with which twinning arrangement will be made. (also, assist the Steering Committee to develop transparent selection criteria to select candidates for exposure visit). These officials will be developed as Â“TrainersÂ” who will be experts in developing annual training plan and imparting training to other audit staff. wDevelop a training toolkit (which should include audit methodology, reporting, quality control aspects etc.) in each audit area and train OAGN staff through formal class-room training and through on-the-job training in pilot audits, aiming to develop a network of expertise in each audit area. wUpgrade the computer skills of OAGN staff by providing training in Microsoft application programs (which include Word, Excel and Access). wPrepare a project completion report providing details of work performed during the assignment correlating with each of the benchmarks, problems encountered and resolved and recommendations/proposals for ongoing efforts of OAGN in sustainable institutional development.   Also, include a supplementary feedback of the Steering Committee on the report on behalf of OAGN. In order to ensure the quality of audit guidelines and training toolkit and overall assessment of the work delivery under the program, the Supreme Audit Institution with which a twinning arrangement will be made will also be requested to send a senior official from the SAI to visit  OAG Nepal towards the end of the program as part of the twinning, to review all the works carried out and provide a formal peer review as part of independent assessment on the quality of OAG work.  Costs of the visit of the SAI official is built in as part of the international consultants visit; this requirement will be spelled out in the Request for Proposal. Likely Outcome of the Grant. The proposed activities to be financed under the grant will create the enabling environment to produce internationally recognized public sector auditing standards, and a better quality staff through a self-sustained staff training capacity within OAGN.  All these are expected to result in a better quality audit by enhancing the oversight capacity of OAGN.  This should also help to contain corruption and improve the efficiency with which public expenditures are managed.    ,,,,,,,,,,,,,,,,,,,,,,,,,,,, Relationship of Grant Proposal with Country Economic and Sector Work (or Business Plan)    As stated above,  the Nepal Country Assistance Strategy (CAS dated November 17, 1998) identified governance, public expenditure management, corruption  and overall institutional constraints as serious impediments preventing Nepal from achieving its full economic potential and reducing poverty.  Actions identified in the CAS to move to a base case lending scenario, inter alia, included reducing delays in decision-making, improving program implementation and adopting remedial measures to control misuse of funds and corruption.  Upgrading the audit quality by revising the audit guidelines according to INTOSAI standards or the ISA and international best practices, preparing and implementing a Human Resource Development Plan in OAGN, and improving the skills of audit staff,  would contribute to the realization of the above-mentioned CAS objectives.    Also, as explained in the last two paragraphs of the Background section above, the activities proposed in this document for IDF grant financing are part of the CFAA Development Action Plan. Government Agency Responsible for Execution    Office of the Auditor General of Nepal (OAGN) Government Contribution (Cash or In-Kind)    US$ 58,000 in Kind in form of staff costs and office space and in cash to cover required operating costs. Other Comments If Applicable    None. Experience with the Implementation of Previous IDF Grants.    OAGN has the experience of implementing three IDF Grants.   The third IDF Grant was highly successful in terms of meeting the development objectives and accomplishing all targeted activities, as a result of experience gained through the implementation of the first two IDF grants which were not so successful.   A high degree of ownership and commitment by OAGN in program implementation of the third IDF is a major factor leading to success.   Based on previous experience, and with a strong and dedicated leadership of the Auditor General, implementation of the proposed grant is expected to be fully owned and managed by OAGN in accordance with its institutional needs and with a determination to continue to improve the audit quality by means of revisions in guidelines and by upgrading the skills of staff through sustainable and institutionalised training programs.  In the context of the recent Nepal Development Forum and the CFAA discussions, the Government and OAGN reaffirmed their commitment to moving ahead for instituting good governance and improved financial accountability.  In view of the many strong points noted above, the risk of not attaining the set objectives is very low. Preliminary Timetable Project period 2 years from the date of effectiveness (expected effectiveness March 2003) Pre-Grant Implementation Activities wApproval of  Grant Request by IDF Committee   ,,October, 2002,, wInvite expression of interest from potential short-listed qualified accounting/auditing/ management consulting firm (with proposal for both international and national expertise for entire activities)   ,,,,,,,,November 2002,, wIssue Request for Proposals and collect Proposals   ,,,,,,,,,,,,December 2002,, wSelect the consulting firm   ,,,,,,,,March 2003,, wSign the Grant Agreement with the Bank   ,,,,February 2003,, wSign the contract with the consulting firm   ,,,,March 2003,, wConsultant submit the work plan and agree on Performance Benchmarks   ,,,,,,,,April 2003 Component 1  Preparation of Audit Guidelines wReview of existing practices and guidelines   ,,,,April 2003,, wPreparation of draft audit guidelines in specified areas   ,,August 2003 wField test the draft guidelines and training toolkits  and hold seminar with the selected auditees   ,,,,,,January 2004,, wAs part of twinning arrangement, invite senior Official (the Deputy Auditor General level) of the selected SAI as the Peer Reviewer to visit OAGN and give comments on the field test and draft guidelines   ,,February 2004,, wIncorporate the comments and hold high level Stakeholder policy workshop to present the findings  of the pilot audits and present the final guidelines for more Comments (also invite the Auditor General as the peer Reviewer from the Â“twinningÂ” SAI)   ,,,,,,April 2004,, wFinalize the guidelines and training toolkits for each guide   August 2004 wTranslate the guidelines in Nepali   ,,,,,,October 2004,, wOfficially adopt the guidelines   ,,,,,,November 2004 Component 2  Strengthening Training Division and Training wAssess training needs, human development needs and needs for modernizing Training Division   ,,,,May 2003,, wPrepare a Human Resource   Development Plan and    Training Plan,,,,,,,,,,,,July 2003,, wIdentify more advanced SAIs and arrange study tours,    exposure visits and twinning for 18 senior officials,,,,September 2003 wReview Procure necessary training equipment to modernize the Training Division  needs and create a training database   ,,January 2004 wProvide training to 50 OAGN staff based on draft Guidelines and toolkits   ,,,,,,,,December 2003,, wFollowing finalization of guidelines in August 2004, prepare and implement plan for providing training to all audit staff   ,,,,,,,,,,September - December 2004,, wProvide training on guidelines to about 250 staff; also, provide training in microsoft applications   ,,,,,,,,September  February 2005 Expected completion of grant program   ,,,,,,March 31, 2005    ,,    ,,,,,,,, Modality of Execution (indicate modality - Government Agency, UN Agency, NGO, international consultants, local consultants; financial management, procurement and  supervision arrangements) The Grant will be executed by the Office of the Auditor General of Nepal, with support from a qualified accounting/audit consulting firm, staffed by at least three international consultants, and about four national consultants for various purposes of the activities.  The team of consultants should include tax auditors, public audit expert, management consultant, information technology expert and training expert.  A high level Steering Committee will be formed under the chairpersonship of one of the Deputy Auditor Generals.  The Committee will also include, inter alia, representatives from professional bodies.  It will also invite selected donor representatives as observers.   The Committee will provide direction in the program implementation, and will also monitor the program implementation.  The Committee will monitor the performance of the consultants.  The Committee will periodically brief the Auditor General, and will obtain his overall guidance in program implementation.  The Auditor General will nominate the members of the Steering Committee which will include officials from OAGN, independent experts and professionals, and representatives from a few auditees.  The Auditor General will also appoint a Project Coordinator who will serve the SC as the Member Secretary.  The Project Coordinator will be responsible for overall project administration, reporting to the SC, and to the World Bank, and maintain all records and accounts of the grant.