Professional Documents
Culture Documents
Bangladesh
FinancialAccozmtability f o r Good Governance
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ISBN: 0-8213-5137-0
ISSN: 0253-2123
Abstract V
Preface vi
Acknowledgment vii
Abbreviations viii
Executive Summary 1
1. Introduction 9
Context 11
Purpose and Scope 12
Structure o f the Report 13
4. Local Government 41
General 43
L o c a l Government Budgeting 44
L o c a l Government Accounting 44
L o c a l Government I n t e m a l Control 45
L o c a l Government Reporting 46
L o c a l Government Internal and External Audlt 46
5. Public Enterprises 49
Nonfinancial Public Enterprises 51
Public Enterprise Planning a n d Budgeting 52
Public Enterprise Accounting 53
Public Enterprise Procurement 53
Public Enterprise Internal Control a n d I n t e r n a l Audlt 53
...
l
il
Public Enterprise External Reporting 53
Public Enterprise External Audlt 54
Nationalized Commercial Banks 54
Departmental Enterprises 56
10. N e x t Steps 97
References 101
1v
stract
V
eface
This Country Financial Accountability Assessment was conducted by the World Bank's
South Asia R e g o n a n d the UNDP Program for Accountability and Transparency, with participation
from officers in the M i n i s t r y o f Finance, Comptroller & Auditor General's Office, M i n i s t r y of L o c a l
Government, Institute of Chartered Accountants o f Bangladesh, Parliamentary Financial a n d
Mmisterial Oversight Committees and other national stakeholders.
N a t i o n a l authorities discussed leading issues in workshops for each o f the f i r s t four areas
a n d responded to the structured questionnaires o f the CFAA (World Bank, 1999c - the revised
CFAA P a r t Iprocedure) a n d UNDP 2000 (the revised CONTACT). T h e questionnaires are not sub-
divided by level o f govemment a n d were answered mainly in terms of the central government
ministries/divisions. This i n f o r m a t i o n was supplemented from local consultants' studes, interviews
with officers in representative units, and other sources.
vi
knowledgments
This assessment has been prepared by a task team l e d by M. M o z a m m a l H o q u e a n d P.K.
Subramanian from the W o r l d B a n k a n d F r e d Schenkelaars and Zahurul A l a m from UNDP. I<apil
K a p o o r was the overall T e a m Leader for the task. Anthony Bennett w o r k e d as the principal
consultant. T h e other members of the team were Shamsuddin Ahmad, Suraiya Zannath, Z a f r u l
Islam, M o h a m m e d Sayeed and O s m a n G h a n i who made useful contributions. T h e assessment i s
based on five sectoral studes carried out on Parliamentary Control o f Public Expenditure, Public
Sector Audting, Accountancy Profession a n d Education, Public Sector Budgeting, A c c o u n t i n g and
Internal Control, and Financial Accountability in L o c a l Government Institutions. These were carried
out by five local consultants and a n international consultant.
John Hegarty, Peter Dean, D a v i d Shand a n d Piyush Desai acted as peer reviewers for the
study. In addtion, useful comments were received from John Fitzsimon, Joe Pernia, Vinod Sahgal,
M a r c Heitner, Rajesh Dayal and M a g d y S o h a n .
Funds for the assessment was p r o v i d e d by the World B a n k a n d UNDP. Sincere words o f
thanks go to the German G o v e r n m e n t a n d Government o f the Netherlands who made t h i s C F h h
possible by generously providmg funds to UNDP’s Programme for Xccountabdlty and Transparency,
a partner with the World B a n k in this endeavor. UNDP p r o v i d e d the funds for the Intemational
Conference through the STAG Project. Pauline Tamesis, Shahadat Hossain Russell, Tanjina Rahman,
Hasib Ehsan Chowdhury, Joyce M o r m i t a D a s a n d M e h a r A k h t e r IShan p r o v i d e d very useful
assistance.
breviations
ADB Asian Development B a n k
ADP A n n u a l Development Program
ASIRP Agricultural Services I n n o v a t i o n a n d R e f o r m Project
BAS Bangladesh Accounting Standard
BCS Bangladesh Civil Service
BIM Bangladesh Institute o f Management
BSA Bangladesh Standards o f Auditing
BTTB Bangladesh Telegraph a n d Telephone B o a r d
C&AG Comptroller a n d Auditor General
CA Chartered Accountant
CAO C h i e f A c c o u n t i n g Officer
cc City Corporation
CEO C h e f Executive O f f i c e r
CFAA C o u n t r y Financial Accountabdity Assessment
CGA Controller General o f Accounts
CONTACT Country Assessment o f Accountabdity And Transparency
DAO D i s t r i c t Accounts Officer
DESA D h a k a Electricity Supply Authority
DfID D e p a r t m e n t for International Development (UK)
DG Director-General
DMFAS D e b t Management a n d Financial Analysis System
ERD E c o n o m i c Relations Division, Ministry of Finance
ESTEEM Effective Schools Through Enhanced Education Management (project)
FIMA Financial Management Academy (formerly Aucht and Accounts Training Academy)
FM Financial Management
FY Financial Year. T h e Government of Bangladesh (central a n d local) has a Financial
year July 1to June 30. F Y O O means the year July 1,1999 -June 30,2000. Banks use
the calendar year, January 1 - December 3 1
GDP Gross D o m e s t i c Product
GFR General Financial Rules
GFS G o v e r n m e n t Finance Statistics (IMF system)
GOB G o v e r n m e n t o f Bangladesh
IAS Intemational Accounting Standards
ICAB Institute o f Chartered Accountants of Bangladesh
ICMAB Institute o f Management Accountants o f Bangladesh
IFAC Intemational Federation o f Accountants
IMED Implementation, Monitoringand Evaluation Division, Minktry o f Planning
IMF International Monetary Fund
INTOSAI Intemational Organization o f Supreme Audit Institutions
IPSAS International Public Sector Accounting Standards (issued by IFAC)
IRD I n t e m a l Revenue Division, M n i s t r y of Finance
ISA Intemational Standards of Auditing
LGI L o c a l G o v e r n m e n t Institution
MAAB Management Accounting, Auditing and Budgeting (FIMA course)
MBA Master’s Degree in Business Admirustration
MIS Management I n f o r m a t i o n System
MLGRDC M n i s t r y o f L o c a l Government, Rural Development a n d Cooperatives
Viii
MOE Ministry of Education
NCB Nationalized Commercial B a n k
NFPE Non-Financial Public Enterprise
NGO N o n - G o v e r n m e n t Organization
NILG N a t i o n a l Institute o f L o c a l Government
0&M Operations and Maintenance
OECD Organisation for E c o n o m i c Co-operation a n d Development
PAC Standing Committee on Public Accounts
PA0 Principal Accounting O f f i c e r (secretary o f a m i n i s t r y or division)
PARC Public Administi-ation Reforms Commission
PATC Public Administration Training Centre
PC Parliamentary Committee
PCR Project Completion Report
PDB Power Development B o a r d
PEC Standing Committee on Estimates
PUC Standing Committee on Public Undertakings
PWD Public Works Department
RAO Regional Accounts Officer
RIBEC Reforms in Budgeting a n d Expenditure Control (DfID-assisted project)
RIGA Reforms in Government Auditing @ffD-assisted project)
SAS Subordmate Accounts Service
SCM Standing Committees on the Ministries (Parliament)
SCE Securities a n d Exchange Commission
SD Statistics Division, Ministry o f Planning
SUPLA Strengthening H e a l t h a n d Population for the Less Advantaged (DffD-assisted
project)
STAG Strengthening the Auditor General’s O f f i c e (UNDP-assisted project)
T&T Telegraph a n d Telephone
TI Transparency International
Tk Taka
UAO Upazila Accounts Officer
UNCTAD U n i t e d Nations Commission on Trade a n d Development
UNDP U n i t e d Nations Development Programme
WASA Water a n d Sewerage Authority
Notes
1x
T h i s document assesses the quality of financial accountabdtty and transparency in
Bangladesh a n d makes recommendations for improvement. With respect to pzlblic funds, i t
compares the financial management standards and practices of agencies using such funds against
a n international or ‘best practice’ standard, and also the standards a n d practices o f the external
‘oversight’ agencies - nine Audt Directorates of the Comptroller a n d Audtor General’s O f f i c e
(CBAG), parliamentary committees concemed with public expenditure, donor agencies, a n d the
media. I t assesses w h a t i t would take to qualify the country for programmatic or sector lending in
replacement o f all individual project lenclmg. With respect to private funds in the hands o f
companies, commercial banks, insurance companies a n d non-govemment organizations, i t
examines the regulatory activities o f the Registrar of Joint Stock Companies, the Securities a n d
Exchange Commission, the two Stock Exchanges, Bangladesh Bank, NGO Affairs Bureau and
the accounting a n d a u d t i n g profession that serves both public and private sectors.
In recent years, there have been significant improvements in some aspects o f fiduciary
risk management in the public sector of Bangladesh. Public accounts a n d audit reports are being
sent to Parliament each year and the delay has been substantially reduced. A n e w budgetary
classification system was introduced in 1998: h s i s m a k i n g budgets a n d accounts m o r e useful,
particularly for economic analysis. Monthly and annual accounts have been brought m u c h m o r e
up to date, a n d a p r o g r a m i s under way to complete the computerization of accounts down to
the district level. This will enable public officers to check the integrity o f their accounts against
the statements of Bangladesh Bank. These are encouraging achievements. Nevertheless, these
gains have been offset by a deteriorating control climate.
Currently, fiduciary risk in public spending i s assessed as high and would require
significant i m p r o v e m e n t in the public sector financial management before programmatic lending
i s considered by the donors in the relevant sectors. This i s based on answers to standard World
B a n k a n d UNDP questionnaires covering: the control environment; planning, budgeting a n d
legitimization o f public expendture; procurement; payroll; disbursements; accounting; external
reporting; internal audit; external audit and follow up; a n d the accounting infrastructure.
Interviews, five local consultancy studies and four one-day workshops supplemented the
questionnaires. For each m a j o r identified risk, recommendations were developed for
consideration by the responsible agency. Recommendations were also developed on local
government, public enterprises and parliamentary oversight. T h e y are highlighted at the e n d o f
each section. Some recommendations have been endorsed at workshops and at a n Intemational
Conference on Improving Oversight Functions: Challenges in the N e w M d l e n n i u m (Dhaka,
September 10-12, 2000) organized by the C&AG’s Office. Several recommendations are
p r e h i n a r y a n d directional only, a n d need m o r e specific development. W h i l e i t i s up to the
national authorities to examine the b r o a d spectrum o f recommendations, weigh benefits against
costs, a n d develop a financial management improvement program, our analysis suggests that the
most serious areas o f weakness a n d the corresponding recommendations are as listed a n d
roughly prioritized below.
A public sector e t h c s code a n d disclosure of assets rules exist, but are not enforced.
Allegations against politicians are rarely if ever independently investigated. Public servants can
enrich themselves at public expense with impunity. Pay levels are very low a n d p r o v i d e a
convenient justification. Public servants a n d Members o f Parliament should adopt a rigid code o f
conduct, make public statements of assets and liabilities on t a h n g up office, a n d b e given
orientation in the framework o f public accountability. N o one should b e above the law.
T h e Country Procurement Assessment Report' has highlighted the lack o f any legal
framework, general procurement standards or central authority for public procurement. T h e
result has been widespread misprocurement. Public procurement regulations should b e
introduced as a f i r s t step, and a Department for Public Procurement or Procurement Policy Unit
established to take responsibhty for procurement standards throughout the public sector.
Procurement personnel a n d evaluation committee members need training a n d institutional
development.
Internal Audit
In Bangladesh government agencies, internal audit i s at a n early stage. Units exist only in
large ministries a n d m a j o r autonomous bodies a n d do mainly a pre-audit o f transactions. Staff
are d r a w n from line accounting functions, so they are not independent. Performance audits are
unknown. There i s no central direction or oversight of internal audit standards. T h e executive
management have no technical advice on risk management a n d control. There i s little
cooperation between internal a n d external audit. Both are less effective as a result. T h e upgradmg
of internal audit needs to b e planned in conjunction with the strengthening o f internal c o n t r o l
(see above).
Parliamentary Oversight
External Audit
H i s audit staff are d r a w n from the same cadre as the accountants. There i s a perception
o f lack o f audit independence. Trained auditors can b e transferred back into accounting posts.
d!'XfWPtP'& c 3 k I l n z q "
T h e above are the most fundamental recommendations in this report. I t i s based on the
n e w role o f the Auditor General in a democracy, that is, as a servant o f Parliament rather t h a n o f
a military regime. Moving his audlt functions out o f the Executive to a n e w agency, dtrectly
responsible to Parliament, would have a profound impact on the evolution o f democracy in
Bangladesh.
T h e C&AG's own accounts are not independently audited. This opens the C&AG to
allegations, w h i c h reduce public confidence. An independent a n d expert body should audit the
C&AG's accounts.
M a j o r areas of public activity are not audited for lack o f staff or expertise. Public audit
covers only 16-25'/0 o f the C&AG mandate each year. Public revenues are not audlted at all. T h e
C&AG has 22,000 auditable units. To complete the audlt of t h i s huge portfolio with 3,500 audit
staff, most o f who are junior staff, i s a monumental task. T h e C&AG a n d the G o v e r n m e n t m a y
consider using the private auditors on a n experimental basis. Initially, t h i s work m a y b e started
with the audit of local Government institutions (City Corporations a n d Municipalities) a n d
foreign-aided projects. However, the C & A G should b e allowed adequate resources to cover the
cost o f such audits from LGI a n d project resources. I f this i s agreed in principle, this should b e
done by very carefully selected short-listed private audit f i r m s . This approach would facibtate
m o r e interaction between private and public sector audltors a n d accountants a n d allow t h e m to
learn from each other. I t would also help to allocate the manpower resources o f C&AG to other
priority areas o f audit a n d increase the annual coverage o f audit.
Public audit standards based on international standards have recently been published but
massive training i s needed to apply them. T h e Audit D e p a r t m e n t needs a strategic p l a n that
addresses these issues of coverage s o as to m i n i m i z e fiduciary risk with the available resources.
Training, personnel a n d transfer policies c o u l d then b e based on the plan.
Public Enterprises
p u b l i c enterprises are responsible for about 40 per cent o f all public spending. T h e i r
performance has been unsatisfactory at least since 1982. Though their financial performance i s
considerably dictated by political pricing and output decisions, b e h i n d these there i s widespread
mismanagement, politicized labor relations and corruption. Wages a n d salaries have been
increasing faster than productivity in public enterprises in all sectors. A p a r t from privatization,
w h i c h has been dragging slowly, performance can b e i m p r o v e d by injecting top-level business
experience into the boards. All top appointments should b e made on criteria o f business
experience a n d track record.
ti
as a n annex to the Finance Accounts, and included in the scope o f C&AG audit a n d
parliamentary review, in accordance with international standards.
External Reporting
T h e r e should b e political will for major reforms in public sector financial management.
To bring significant improvements, steps need to b e taken to increase the professional s k d s o f
the h u m a n infrastructure in the ministries in respect o f budgeting, accounting a n d reporting. In
addtion, steps are to b e taken to increase the use of technology and change the mind-set o f the
staff through change management training and workshops to use financial management as a tool.
(For m o r e d e t d s please see the World B a n k r e p o r t 'National Institutional Review', Chapter 2).
T h e constitution requires that all bills for the expenditure o f public m o n e y b e introduced
in Parliament by the President. N o tax can b e levied and no expenditure of public m o n e y made
except by A c t o f Parliament. All revenues, proceeds o f loans a n d l o a n repayments to the
G o v e r n m e n t go into a Consolidated Fund. All other monies received by the G o v e r n m e n t go into
a collection o f funds called the Public Account. There i s not at present any A c t regulating the use
o f public money. T h e Constitution says that until there i s such a n Act, rules made by the
President shall apply. T h e rules put internal financial control under the supervision o f the
M i n i s t r y o f Finance. External c o n t r o l i s under a constitutionally independent Comptroller a n d
Audtor General (C&AG) who audits all public sector accounts and submits annual a n d special
reports to the President for transmission to the Public Accounts Committee o f Parliament.
However, the C&AG a n d his department are adrmnistratively subject to the M i n i s t r y o f Finance
a n d M i n i s t r y o f Establishment.
1 TI a n d ICRG websites. Bangladesh does not appear in the latest (2000) c o r r u p t i o n perception table.
2 UNDP's 1996 R e p o r t on I l u m a n D e v e l o p m e n t in Bangladesh: A Pro-Poor Agenda, provides examples o f this with
reference to education, health services a n d relief and food aid.
Among donors there i s a s h i f t in thinking about the way that aid should b e provided. I t
i s no longer considered sufficient to have tightly managed projects, because donor funds are
fungible - assistance to these projects permits an increase in government spending elsewhere.
T h e m o v e to a sector a n d programmatic approach and away from ‘ring-fenced’ projects has
g v e n a n e w impetus to the call for transparent and accountable governance. Steps towards ‘good
governance’, with a strong emphasis on accountabhty a n d transparency, are becoming pre-
conditions for aid from the m a j o r donors, multilateral a n d bilateral.
e How m u c h relevant infamation the c o n t r o l agencies can obtain about the use of funds.
0 How w e l l they can anabxe the i n f o r m a t i o n a n d develop action-oriented conclusions.
0 W h a t hnd o f response they are able to elicit from the users o f funds. Responses are
deterrent (strengthening o f system, punishment o f delinquent officers) a n d corrective
(recovery o f losses, correction o f accounts).
3 Public Administration for 21st Century: Report o f the Public Administration Reform Commission, 3 volumes, June
2000.
~ ~ ~ ~
T h e central government financial statements (Finance Accounts) are in two parts - the
Consolidated Fzrnd, w h i c h shows receipts and payments o f government m o n e y as authorized by the
Constitution a n d each year’s Appropriation Act, a n d the Pzrblic Accotmt, a group o f funds that
receive a n d pay ‘other money’. These are published annually together with a supporting
statement o f actual expenditures compared with budget authorizations, variances and
explanations of variances (the Appropriation Accounts).
T h e budget a n d accounts for the Consolidated Fund are divided between ‘development’
a n d ‘revenue’. Broadly, the Development Budget contains all those expenditures that are
supported, wholly or partially, by foreign aid/loans. These include capital construction,
incremental operating and maintenance expenditures, a n d technical assistance. T h e Revenue
Budget contains government revenues from taxes, aid a n d loans, recurrent expenditures insofar
as they are not in the Development Budget (typically the staff costs), interest on development
loans a n d some ‘non-developmental’ capital expenditures such as admmistrative buildings.
1 Rules o f Business (1996) Ch.1, section 4 (vi) says that the Secretary i s Principal Accounting Officer, but does not say
to whom he i s accountable. There i s no m e n t i o n o f Parliament.
T h e oversight agencies are the C&AG (nine Audit Directorates), the parliamentary
committees concerned with public expenditure (three financial committees a n d 35 standing
committees on ministries), a n d the Anti-Corruption Bureau. T h e Constitution provides for a n
Ombudsman, a n d the current government made a n election pledge to appoint one, but no one
has ever been appointed to t h i s office. T h e C&AG i s the f i r s t line oversight agency, examining all
p u b l i c accounts (though in practice h e examines only 17-25 percent o f all auditable u n i t s each
year - see section 7.1), while the others are selective investigatory agencies.
Dev't Budget
L I
A. A.
...........................
Proje Completion Reports
Parliament
................................................. ,.................................................................................................
Comms.
Reven+= Budget Estimates up
Project I Approved Budgets down
Pro formas j
:Line Ministry
.......................................................
-- Comm.*
Accounts and
* Being introduced Audit Reports
'Presidency j
Accounts' i
...................................
Finance Accounts
3. Central
Government
Ministries and
Divisions
The Control Environment
F o r some time the C&AG has been saying that there i s practically no internal control
system in the ministries, a n d that t h i s i s one of the main reasons for the staggering n u m b e r o f
audit observations. H e observes that if structured internal control systems were set up, the audlt
personnel c o u l d do less compliance auditing and m o r e performance auditing.1
General Finand Regulations, Treasury Regulations, Account Code and Audit Code were
reissued recently (RIBEC 1996, M m i s t r y o f Finance 1998a, 199813) but not revised or rationalized. All
these, together with the Fundamental and Supplementary Rules, the PWD Account Code, the T&T
Manual, the Postal Manual, and Forest Manual are outdated and need to be overhauled. Particular
procedures need to b e rewritten, such as dlsbursement of pensions.
Accountability depends on adequate and accessible records. Good management also depends on
orderly records: in fact, files go 'missing' and decisions are made on 'part' files. Records
management needs to b e recognized as a special responsibility in each agency, and officers
trained a n d motivated to upgrade records management practices.
Transparency implies that records are open a n d accessible to citiTens, since government
activities are undertaken on their behalf. Currently, records are classified into Top Secret, Secret,
Conjdential a n d Restrr;cted, and the O f f i c i a l Secrets A c t makes unauthorized disclosure a criminal
offence. T h e w h o l e culture o f government in Bangladesh, as in m a n y other countries, i s one o f
secrecy.4 A 180-degree cultural s h i f t i s required! Freedom-of-information legislation i s b e i n g
introduced in m a n y countries, including India, a n d i s r e d e f h g the interface between
government a n d civil society. Instead of defining w h a t can b e disclosed, or authorizing release o f
i n f o r m a t i o n on a case-by-case basis, all information becomes publicly available on demand,
without question, except for carefully defined exceptions. T h e technological revolution i s
facilitating t h ~ sreform; as a f i r s t step, government agencies are putting key documents onto
tailor-made websites. 'E-government' i s gathering pace. T h e m a j o r constraint i s the fear o f m a n y
civil servants a n d politicians o f loss o f dlscretionary power enjoyed b e h i n d the screen o f secrecy.
T h e requirements for dlsmissal o f civil servants are very cumbersome. Sometimes the
process ends with reinstatement o f dismissed officials. T h e y apply equally to employees o f public
enterprises.6 Nevertheless, a f e w public enterprises (Power Development Board, D h a k a
Electricity Supply Authority a n d Petrobangla) have been brought within a Reward a n d
Punishment Scheme sponsored by the M i n i s t r y o f Finance that has given bonus for a c h e v i n g
pre-agreed targets, a n d either suspended or r e m o v e d personnel for culpable failure (see section
5.1 below).
T h e Prime Minister has required incoming Ministers to make declarations of their assets.
These declarations are not made public, but could b e used as an internalcontrol. At the Conference on
Oversight Functions, it was emphasized that control o f public expendlture starts with controls by
Parliament on itself. A remuneration, institution of a rigid code o f conduct and public
statements of assets and s by all M P s on election to office were recommended, together with
orientation in the framework of public accountability, particularly on the opening of a new Parliament.
T h e weaknesses in the control environment are serious deficiencies. Unless public officials'
conduct rules and anti-corruption laws are seriously enforced, hnancial accountabhty assessment for
Bangladesh will remain unfavorable.
Accountability i s more effective where the concerned agencies work together. A forum i s
needed where oversight agencies, together with NGOs and civil society, could regularly review efforts
to enhance accountability, transparency and the rule of law, propose new strategies, share information
and jointly promote action.
P l a n n i n g And B u d g e t i n g
T h e Government produces Five-Year Plans a n d a n A n n u a l Development Program
(ADP). These are the forerunners o f an annual Development Budget. T h e annual Revenue
Budget i s prepared separately. A n n u a l budgeting i s a bottom-up procedure, starting with the
preparation o f Estimates by government agencies, mainly on a n incremental basis from the
previous year's approved budget, and culminating in the presentation o f &e Budget in
Parliament by the Finance Minister and i t s enactment (see RIBEC (1993) a n d the Country
Profile o f Financial Accountability (World B a n k 1998b). T h e budget cycle i s summarized in
Figure 1.
From a fiduciary point of view, the budget establishes the Legithag o f expenditures. I f
disbursements are within the authority provided by the approved budget a n d in c o n f o r m i t y with
relevant financial a n d procurement regulations, donors a n d citizens are assured that their funds
are going into legitimate publicly approved purposes. I f public funds can b e transferred a n d
spent outside the budget, then they are away from public scrutiny. Public funds m a y flow into
private pockets or b e used for purposes w h i c h stakeholders would not approve. I n Bangladesh,
there are a t least two significant extra-budgetary funds: (1) T h e P r i m e Minister’s Relief Fund
(PMRF), a n d (2) the Private Fund o f the Regiment (PFR). T h e accountability requirement on
each o f these funds i s that i t produces a certificate at the end o f the year as to the amount spent.
Managerial efficiency
7 These terms are misnomers a n d should b e retired: m a n y recurrent expenditures in the Revenue B u d g e t generate high
developmental returns. T h e r e is no qualitative difference between allocations for social sectors in Revenue and
D e v e l o p m e n t budgets (Kibria 2000). Thus, the revenue/development split has no economic relevance; i t i s necessary
to apply the same economic classification to each b u d g e t a n d consolidate t h e m for economic analyses.
8 T h i s issue was highlighted in the Public Expenditure Review: 1997 U p d a t e (World B a n k 1997a: para.10 a n d A n n e x
IV). Premature recruitment a n d unnecessarily continued employment o f project personnel (ibid. para. 95) complicate
it.
A related p r o b l e m i s the poor quality of planning a n d budgeting. Projects creep into the
ADP a n d budget without due scrutiny: the quality and relevance o f projects in the ADP need
improvement. Also there i s undue reliance on Revised Estimates prepared in the second h a l f o f
the financial year, w h i c h are used to legitimize excess expendtures a n d reallocate available funds
to preferred projects. Budgets are prepared mechanically from previous year data (incrementally)
for lack o f strategic planning in ministries and divisions, a n d do not provide any data on the
functions, objectives a n d activities o f organizational units, nor their planned progress, outputs
a n d outcomes. Budget scrutiny i s similarly incremental. T h e present procedure does not allow
agencies to re-orient their priorities from year to year. Personnel emoluments are usually
protected, so cuts apply disproportionately to operations a n d maintenance expenditures such as
travel a n d utilities, irrespective o f their particular impacts on growth, poverty, etc.
Aprerequisite would b e that the Ministry of Finance gives each m i n i s t r y a budget ceiltng
(envelope) early enough in the budget cycle that i t s use c o u l d b e properly planned, a n d a n
assurance that no cuts would b e made (except in great emergency). Without this, there i s no
incentive for a Secretary to undertake detailed planning - that i s why they leave i t to junior
officers. I t i s believed that earlier estimates o f resources are now possible as a result o f financial
statements b e i n g brought up to date. T h e Resource Committee Technical Secretariat a n d the
n e w Fiscal Analysis a n d Monitoring Unit could b e made responsible for h s . Donors couldpla3, an
important role b_v supPoding stable sectoral budget envelopes provided thy have assurance that the refom
momentum is maintained
0 M a k e all special public funds transparent and subject to external audit under
appropriate arrangements for confidentiality.
There i s no legal framework for procurement, nor any central agency laying down
procurement policy or supervising procurement standards. T h e Implementation, Monitoring a n d
Evaluation Division o f the M i n i s t r y o f Planning created a Procurement Monitoring C e l l in 1994
but this consists o f a single officer. T h e Ministry o f Finance issued General Financial Rules in
1998, w h i c h outline general principles applicable to the purchase o f stores a n d construction o f
public works, but leave detailed procedures to the individual agency. ERD has issued a set of
Donors to set time limits for award of contracts, after which time the funds lapse.
Prepare a standard set o f bidding and contract documents for all public bodies.
Asset survey and pilot study on setting up asset control in selected agencies.
Accounting
Monthly accounts have been brought m o r e or less up to date by the RIBEC project.
T h e y are sent to the Finance Division within 6-7 weeks of the month end.
I t i s claimed that the quality o f accounts has also improved, but this i s m o r e difficult to
measure. All transactions in the D h a k a area (accounted for by 20 CAOs a n d the D h a k a DAO)
are computerized, but transactions at the 64 D i s t r i c t Accounts Offices a n d 400 Thana Accounts
Offices on behalf o f all the ministries and d i v i s i o n s w h i c h operate country-wide are s t i l l recorded
manually. From these levels they are summarized manually by 20 Regional Accounts Offices
(RAOs) a n d f e d into the CGA's Central D a t a Processing Unit w h c h prepares consolidated
accounts. Six RAOs have been upgraded. N o t all offices are using the n e w classification, s o CAO
offices have to convert their statements before they can b e consolidated. T h e accounts o f
Defense, Railway Authority, Telegraph a n d Telephone Board, a n d Postal D e p a r t m e n t are also
handled manually a n d f e d into the CGA consolidated accounts. Defense accounts have now
been converted to the n e w classification.
A m a j o r p r o b l e m i s the omission o f considerable foreign-aided expenditure from the
consolidated monthly accounts. A c c o r d i n g to a RIBEC study (1999e), a large proportion o f
foreign a i d fails to b e recorded as development expenditure a n d simultaneously as a i d receipts.
This i s mainly due to (i) expenditure from special accounts (which are outside the government
accounting system) not being notified by Project Directors to CAOs a n d the CGA, a n d (ii) hect
project aid (payments made by donor agencies directly to contractors, consultants, etc) not being
brought to account, or only after a long delay. Donor statements do not always d i s t i n g u i s h loans
from grants, direct project aid from reimbursable project aid, or even the projects for w h i c h
disbursements have been made. I t i s expected that the Management Accounting U n i t s being set
up in the ministries wdl ensure m o r e complete reporting o f aid expenditures. Donors should
support this by providing regular a n d timely reports o f disbursements in accordance with the
G o v e r n m e n t classification.
12 Checks are valid for three months, so the float i s always large.
F e w public servants are paid by check. Most are p a i d in cash. Payrolls are controlled by
collective bargaining agents a n d there i s no physical identification (e.g. by supervisors) o f all
personnel on the payroll to prevent payment to fictitious persons (ghost workers). Verification o f
payees i s necessary.
T h e responsibhty for cash and debt management i s divided between Finance Division
(Budget Wing), E c o n o m i c Relations Division (with regard to external flows a n d debt), a n d
Bangladesh B a n k (with respect to domestic flows a n d debt). T h e C&AG keeps the accounts, but
has no r o l e in cash and debt projections.
Quarterly releases of funds to spending ministries are delayed. Final quarter releases are
sometimes received late in June, so they cannot b e used (legitimately) within the fmancial year.
These delays indicate poor cash management. Commonly, revenue projections a n d development
allocations are over-estimated a n d are reduced in the mid-year revisions. Deficits a n d borrowings
are correspondingly under-estimated.
There are no laws limiting borrowing or the government deficit, nor i s there any
m e d i u m - t e r m macroeconomic framework by w h i c h the Government undertakes to keep the
deficit/GDP ratio within a g v e n limit. Attempts to make better fiscal projections by means o f a
general equilibrium m o d e l have not so far been successful. T h e M i n i s t r y o f Finance uses simple
rules of thumb for i t s projections, but appears to b e over-ambitious in i t s growth a n d revenue
forecasts. A Fiscal Analysis a n d Monitoring Unit i s to b e set up in the Budget Wing o f Finance
Division, to r e p o r t to the Technical Secretariat o f the Resource Committee.
There are m a n y b a n k accounts holdmg public funds that are not brought within the
G o v e r n m e n t accounts. Most o f these accounts have been established at the request o f donors to
ensure that their disbursements are h e l d safely a n d are immediately available for the projects they
are aidmg. Examples are dollar special accounts (DOSA), convertible taka special accounts
(CONTASA) a n d imprest accounts.14 Some o f these are transferred to accounts h e l d by
commercial banks on behalf o f aided projects. In effect, the Government i s lending t h e m p u b l i c
funds interest-free, then borrowing back from t h e m on Treasury bills to cover i t s short-term
13 There i s one General account and separate accounts for Food, Railways and Foreign Aid.
14 At June 1999, there were 6 C O N T A S A accounts and 53 imprest accounts (RIBEC 1999e).
deficits. Secondly, accounting becomes dependent on reports by project h e c t o r s a n d some
foreign a i d i s o m i t t e d from the Government consolidated accounts. T h e Bangladesh B a n k a n d
C&AG O f f i c e should work out how these public funds can b e brought within the public
accounts a n d how balances can b e p o o l e d to minimize government borrowing without prejudice
to project autonomy a n d flexibility.
0 Bring special accounts for foreign aid within the Government accounting system.
0 Review the number and distribution o f bank accounts and check books and close
inessential accounts and withdraw checkbooks to reduce risk o f illegitimate
spending.
0 Include all public debt and contingent liabilities in the Finance Accounts, C&AG
audit and parliamentary review.
In the Controller General o f Accounts office, budget data are uploaded from the
Finance Division database a n d combined with revenue a n d expenditure data from the &strict
a n d thana offices and sent monthly to the respective C h i e f A c c o u n t i n g Officers. All Secretaries
get monthly management reports from their CAOs.
18There i s also internal (or administrative) borrowingby the ConsolidatedFund from deposits and other balances held
on Public Account. At 30 June 1998, for instance, the Consolidated Fund had borrowed the entire balance of Tk 128
billion held on Public Account (Office of the C&AG 1999, pp.25/6).
19 At 30 June 1998, external public debt was $14.0 billion. Debt service in FY98 was $578 million (ERD 1999).
20 We are informed that the Finance Accounts for FY99 include a statement of public debt.
T h e Finance Division receives monthly reports of expenditure from the Controller
General o f Accounts. A recently established Financial I n f o r m a t i o n Monitoring Unit analyses
these reports. Comparisons with budget are l e f t to the individual ministries a n d divisions until
mid-year, w h e n they are called on to put up their supplementary estimates.
Internal Audit
professional competence and training, scope of work, conduct o f work, involvement in risk
management, reporting or quality review. T h e y have contact with the external audit only on v i s i t s
from the latter; there i s no sharing o f work programs or reports, a n d the C&AG can place little
reliance on their fmdmgs.
External Reporting
On behalf o f the C&AG (who i s s t i l l constitutionally responsible for the form o f the
accounts), the Controller General o f Accounts (CGA) prepares a n A n n u a l Receipts a n d
Disbursements A c c o u n t for the central government as a whole.23 These are published annually
(the Finance Accounts) together with a supporting statement o f actual expenditures compared
with budget authorizations (the Appropriation Accounts).
T h e Finance Accounts a n d Appropriation Accounts are ready in draft wihn six months
o f the year end, i.e. the accounts for FY 2000-2001 should b e available by the e n d o f December
2001. NBEC aimed to include the audited accounts for 1998/99 in the budget document for
2000/01. Annual accounts take longer to prepare than monthly accounts as a n e f f o r t i s made
after the year ends to complete adjustments, close suspense accounts, a n d correct mistakes in
posting a n d classification.
23 I n c l u d i n g Postal, Defence and Railways after adjusting their accrual accounts onto a cash basis.
statutory public authorities, public enterprises a n d local authorities for the last preceding year
(article 7). This i s not done.
T h e IFAC Public Sector Committee has issued a number of international public sector
accounting standards (IPSAS) and draft standards in recent years, covering both cash-based
accounting (as in most Government departments) and accrual-based accounting (as in the
p r o f o r m a accounts k e p t by departments running commercial operations).24 These IPSAS relate
mainly to dlsclosure through external statements. T h e C&AG should set up a team o f experts to
undertake a n in-depth review o f the form o f Government accounts with a v i e w to moving
towards compliance with IPSAS standards.
-
U n d e r cash accounting, the reporting m o d e l i s a Cash Flow Statement (distinguishing
cash flows from operating activities, investing activities a n d financing activities) a n d Notes,
includlng a statement of accounting policies, such as the definition of the reporting entity, the
point of recognition for receipts a n d payments, the treatment of reserves a n d the translation of
amounts denominated in foreign currency. Additional note dlsclosures should include:
Borrowings
Commitments
Forecast information.
Bangladesh does not yet report i t s government finance statistics annually to the IMF in
accordance with i t s G F S system, as about 120 other countries are doing. Ths requires a
reclassification o f central government revenue, expenditure a n d debt, economically a n d
(expendlture only) functionally, in accordance with the G F S standard. T h i s would a d d to the
international comparabhty of G o v e m m e n t data.
21 See IFAC Guideline for Government Financial Reporting (1998), and Financial Reporting under the Cash Basis of
Accounting, Exposure Draft 9 , issued May 2000, available on I F A C website: www.ifac.org
% ~ ~ ~i ~ r ~~ ~ ~f~ : ~ ~~ ~: n
~ d Xfic~t~iorrs~ ~' ~ r ~ ~j
0 Review the form o f Government accounts and add the disclosures required under
the international standard (or draft standard) for government accounting on a
cash basis.
There should b e political will for m a j o r reforms in public sector financial management.
To bring about sigruficant improvements, steps need to b e taken to increase the professional
s k i l l s o f the h u m a n infrastructure in the ministries in respect o f budgeting, accounting a n d
reporting. In addition, steps should b e taken to increase the use o f technology a n d change the
mind-set o f staff through change management training a n d workshops to use financial
management as a tool. (For m o r e d e t d s please see the national institutional review, World B a n k
2000h, Chapter 2).
forthwith remedy any defects or irregularities and re vernment the action taken by it”.
to expand the training programs o f the NILG for both the municipal personnel a n d the elected
leaders (World B a n k 1997b: 18,26). T h e need to expand training in financial management i s
evident in the low standards o f performance a n d the extent o f criticism in audit reports.
In general, government accounting rules are followed. Some city corporations have
accounts manuals. Most corporations a n d about h a l f the municipalities are doing monthly b a n k
reconciliation. Union councils do not do bank reconchation. Substantial delays are c o m m o n in
the recording a n d processing o f transactions, w h i c h breeds errors a n d frauds. City corporations
a n d some municipalities are using computers, but mainly for word processing, not accounting.
MIS and computerization programs have been recommended (World B a n k 2000e).
Only D h a k a City Corporation uses a n accrual basis o f accounting. This brings revenue
arrears, outstandmg uullty bdls a n d other assets a n d liabilities into the formal records a n d subject
to the arithmetical d i s c i p h e o f double entry. This increase in control, however, depends on a
higher level of accounting sophistication. D h a k a City Corporation i s the only LGI that has the
services o f a qualified accountant. Some others have part-qualified professionals a n d m a n y have
commerce graduates. MLGRDC (Pourashava Support Unit) has recommended a n accrual system
o f accounting for all municipalities, w h i c h was prepared as a n output o f the A D B - s u p p o r t e d
L r m t l Go ~ t ~ ~ ~ ~ ~ ~
Most LGIs own substantial fixed assets w h i c h are not properly maintained, nor recorded
in a F i x e d Assets Register, nor i s their condition and existence periodically checked. Estate
Sections o f LGIs need training in this.
Projects are implemented by inviting tenders in the prescribed form. T h e controls are
o f t e n flouted through negotiated arrangements (World B a n k 2000e). Union Councils are not
allowed to undertake m o r e than 8 projects a year, a n d n o n e over Tk 25,000. Engineers monitor
work done a n d give contractors certificates on w h i c h they prepare their bills. Bills are checked by
Accounts, a n d recommended for payment by the respective W a r d Commissioner, then approved
by the Chairman a n d paid by Accounts.
There are no Operations Manuals setting out procedures to b e followed a n d the internal
checks that should operate, such as the separation of authorization, recording a n d custody
responsibihties. Together with the absence of job descriptions, this means that responsibility for
any action i s not formally assigned, thus maktng i t difficult to establish who i s accountable. As
such, u n d e r the present internal c o n t r o l arrangement, there i s a risk o f misuse o f scarce LGI
resources. There i s a public perception that the misuse o f resources in LGIs i s m o r e widespread
compared to other Government departments.
Only D h a k a City Corporation has a n internal audit section. I t i s mainly occupied with the
queries a n d observations raised by the C&AG. O t h e r LGIs have no internal audit, not even on
paper. T h e M I n i s t q of L o c a l G o v e r n m e n t does not appraise internal controls in the LGIs.
Internal audit units should b e established in the other city corporations a n d the larger
municipalities, e.g. where annual expenditure i s running at m o r e than Tk.10 million. In addition,
Audit Committees c o u l d b e established in city corporations and the larger municipalities,
comprising non-executive W a r d Commissioners and other designated officials.
T h e C&AG undertakes external audit o f all LGIs a n d has all the necessary legal powers.
Aults are rules-based compliance audits (no performance audits or system-based audits). Audits
are conducted by audit teams, w h i c h v i s i t a n d work full time for a period, e.g. 3 weeks for a
L/>r=.4/
municipality (grade A) a n d the year round for D h a k a City Corporation. Audlts are confined to
LGI offices a n d do not generally cover development projects in the field. Audit queries that are
not resolved on the spot are compiled into a prelunrtlary report, w h i c h i s sent for comments,
then a final report, called ‘Broad Sheet report’. T h e LGI i s given 6 weeks to reply. I f a
satisfactory reply i s not forthcoming, the MLG arranges a tripartite meeting (officers from the
M i n i s t r y , LGI a n d C&AG) to resolve outstanding issues. Unresolved issues (audit objections)
t h e n go into the C&AG’s r e p o r t for transmission to the President and PAC.
T h e C&AG has 22,000 audttable units to b e audlted by 3,500 o f h i s staff most o f whom
are at junior levels. This i s no doubt a monumental task to p e r f o r m effectively. I t i s believed
that with h i s current level o f staffing and skills, i t would b e difficult for the C&AG to provide
quality audit services to LGIs. In m a n y countries, such as the U.K., private sector auditors
conduct LGI audlts.
Quality i s a n i m p o r t a n t issue in private sector audits also. But there are certain private
sector audlt firms who can provide high quality audit services p r o v i d e d appropriate terms o f
reference are d r a w n up a n d appropriate fees are paid. I f i t i s decided in principle by the C&AG
that private sector auditors would b e engaged to conduct LGI audits, they should b e done by
carefully short-listed private firms who are capable of providing quality audit services. All private
audit firms for LGI audlts m a y b e contracted by the C&AG.The spirit should b e to m o v e t o w a r d
the regulation a n d quality c o n t r o l o f audits a n d away from audlts by the C&AG staff themselves.
This approach would help in proper use o f already over-stretched C & A G resources a n d extend
C&AG audits in other priority areas.
For these audits, the fees may b e p a i d by the LGIs themselves based on fees approved by
C&AG. This arrangement would p r o m o t e the exchange o f knowledge a n d ideas between private
a n d public sector accountants and audltors. In time, the C&AG m a y consider contracting out all
LGI annual financial audits to the private sector and to make these a basis for performance
audits in the LGIs by the C&AG staff.
Audit reports are not published, nor circulated to all Council members. A low-cost
recommendation i s that MLGRDC should enforce the existing laws a n d check that annual
statements a n d audit reports are publicly displayed, and take action against delinquent councils.
Without this, there i s little or no local accountability.
0 Publish annual performance reports including financial statements and audit reports
o f LGIs.
P r o m o t e progressive c o m p u t e r i z a t i o n o f b u d g e t i n g a n d accounting, a n d t h e
i n t r o d u c t i o n o f M I S U n i t s to p r o v i d e d a t a for m o n i t o r i n g a n d e v a l u a t i n g
performance.
M a i n t a i n a n d u p d a t e asset registers in L G I s .
H a r m o n i z a t i o n of f i n a n c i a l r e p o r t i n g practices in L G I s through m a n d a t o r y
a p p l i c a t i o n o f standard formats.
T h e r e are some 200 nonfinancial public enterprises (NFPEs), grouped under 40 public
corporations. Together, their spending o f public funds i s o f the order o f Tk 200 biulon a year
(compared with Tk 300 bilhon by central government). T h e i r value added accounts for 1.8% o f
GDP, down from 4.5% in 1985. T h e y are involved in all sectors - manufacturing, utilities,
transport a n d communications, trade, agriculture a n d fisheries, construction a n d services. At the
e n d o f FY99, they h a d book assets valued at Tk 761.8 bdhon, financed 32% from equity a n d
68% from debt. On operating revenue that year o f Tk 201.9 bdlion, value added was Tk 39.1
bdhon, divided between employee compensation Tk 16.0 billion, depreciation Tk 19.5 bdlion a n d
operating s u r p l u s o f Tk 3.6 bdhon. Their r e t u r n on total assets, as a measure o f economic
efficiency in free markets, was only 0.8%. A f t e r chargmg interest and tax, their n e t financial result
was a loss o f Tk 4.7 billion.'
NFPEs are governed according to their respective statutes, not by company law. Legally
they are autonomous bodies, but the respective ministries appoint their boards of directors a n d
in practice NFPEs are highly regulated by their ministries. All personnel, investment, borrowing,
Box 2
About 20 autonomous b o d e s have been The Reward and
signing annual ‘performance contracts’ with the Punishment Scheme
G o v e r n m e n t since the 1980s. These are
effectively extracts from the agreed budgets that
highlight key operational a n d financial targets.
Informally, they m a y have added to the operating
a u t o n o m y of the better-managed corporations,
but overall they h a d no discernible effect on pay as bonus, o n a graduated scale. I f targets are n o t
performance. However, in the last four or five achieved, there i s a scale o f punishments including
years, contracts have been reinforced by a warning letters, suspension for a period (loss o f 50
separate R e w a r d a n d Punishment Scheme that percent o f pay), and removal f r o m the job. A few
has added sanctions to the achievement or non- officers have actually been removed, and 20-30 have
achievement o f targets (see box). I t should b e pended, despite union objection
received bonus. Head office man
extended to all p u b l i c enterprises that will
also in the scheme: t h e i r performance i s rated on the
continue u n d e r g o v e m m e n t ownership (mainly
average performance o f their subordinate u n i t s . The
the p u b l i c uulities a n d regulatory bodies) a n d
scheme appears to have been successful.
l i n k e d with performance contracts.
6ADP funding m a y b e allowed to i m p o r t a n t NFPEs even if they cannot meet their d e b t service liabilities. T h e p r o j e c t
screening does not remove unsound projects, such as the coal-frred p o w e r p l a n t a t Barakapuria.
Public Enterprise Accounting
All NFPEs keep their accounts on a n accrual basis. NFPEs have started computerizing
their accounts (about 25 percent done) a n d payrolls (30-45 percent). Though there are labor
fears, slow progress i s b e i n g made. B a n k reconcdiation are done manually. There are some
failures to complete reconciliations. Auditors report these.
Corporations are graded by size a n d each grade has l i m i t e d authority to place contracts.
T h e b o a r d o f a large corporation, for instance, m a y s i g n a contract up to Tk 100 d o n . A b o v e
that h u t , proposed contracts have to b e approved by i t s ministry. A b o v e Tk 200 million,
contracts go to the Cabinet Committee on Purchase. T h e great majority o f contracts are w i t h
corporation authority. E a c h corporation has i t s own procurement guidelines, approved by i t s
Board. Corporations follow the PWD Guidelines for works contracts, the gwdelines o f the
D e p a r t m e n t o f Supply a n d Inspection for local purchases, a n d the guidelmes of the relevant
donor for purchases of equipment from aid. Despite the f o r m a l appearance o f competitive
tendering, guidelines are o f t e n breached by collusion a m o n g bidders, manipulation o f tender
specifications, etc.
There are no procedure manuals. In their place, there i s a mass o f circulars on various
matters such as financial delegation of power, administrative delegation, submission o f budgets,
investment a n d the processing o f projects. F e w corporations have job descriptions. Payrolls t e n d
to b e controlled by the collective bargaining agents for labor. O n e estimate i s that payrolls are
inflated 10% by ghost workers a n d days paid but not worked.
Most NFPEs submit quarterly MIS reports to their admmistrative ministries a n d the
Monitoring Cell, comparing their actual revenues a n d expenditures with the approved budget. A
f e w can only manage half-yearly reports, coinciding with the preparation o f revised estimates.
Petrobangla a n d a f e w others r e p o r t monthly, with variance analysis. N o virement o f budget
provisions from one i t e m to another i s allowed. However, NFPEs cover excesses by delaying
paying their suppliers into the following year. Though they keep their books on a n accrual basis,
this i s not always picked up by audit.
Apart from internal audit, NFPEs are subject to so-called ‘commercial audit’, i.e. audit by
the C&AG (Commercial Audit Directorate). T h e statutes o f about 30 out o f the 40 corporations
p r o v i d e that there should also b e audit by two chartered accountants (CA audit). This should b e
mandatory in all revenue-earning corporations. T h e C&AG audit i s a compliance audit, as for
G o v e r n m e n t ministries. T h e CA audit i s usually the same as for a private fEm, i.e. a compliance
audit, based on a n appraisal o f the internal c o n t r o l system, a n d a financial statements audit.
Recently, CAShave been applying international audit standards in these audits.
Extend the reward and punishment scheme to all PESwhich will continue in GOB
ownership and link i t to performance contracts.
0 M a k e chartered accountant audit mandatory in all revenue-earning corporations and
make it more effective.
There are four NCBs. Together they are responsible for about h a l f o f the deposits a n d
loans o f the banking system. T h e y have their own Acts and fall within the responsibhty o f the
M i n i s t r y o f Finance. Unfortunately, they are exempt from the m a i n provisions o f the B a n k i n g
Companies A c t a n d hence do not fall under the full jurisdiction o f the Bangladesh Bank.
T h e problems faced by the NCBs stem from poor governance. T h e y are criticized for
insider lendmg, fraud and mismanagement. Moreover, gross interference in management by the
G o v e r n m e n t a n d labor unions c o m p o u n d the problems. For instance, the three-year
computerization p r o g r a m i s moving slowly because o f opposition from union leaders.
Recent studtes have shown that these banks are not complying with Bangladesh Bank‘s
requirements for provision against l o s s on their classified loans, nor the capital adequacy
requirements (World B a n k 1998a). A study made in 1997 showed that about 45% o f their l o a n
portfolio was classified as non-performing against w h i c h the provision shortfall amounted to
Tk.38 bllhon in €9’99. Applying the provision shortfall against the n e t worth o f the NCBs would
increase the already negative n e t worth to a massive negative Tk.71 billion. T h i s i s a potential
l i a b h t y o f the Govemment.7 Only the steady rise in deposits - mainly due to the b u m p e r
harvests a n d substantial remittances from abroad - has prevented a solvency crisis becoming a
liquidtty crisis. So far, the G o v e r n m e n t has paid for bank losses by issuing bonds worth about
Tk.50 bilhon. A further Tk.18 bilhon bonds are to b e issued by the G o v e r n m e n t in F Y O 1 . 8
Effectively, these are gifts to loan defaulters.
B a n k financial statements give a misleadtng picture,” and audit standards are low. B a n k
branches m a y not b e audited at all. This i s partly due to b a d choice o f auditors (the Bangladesh
B a n k l i s t of competent auditors includes 68 furms m a n y o f w h i c h do not have the special s k i l l s or
capacity) a n d partly to inadequate terms of reference o f audit. For instance, the TOR should
require at least 20 percent o f branches to b e audited, as in India. B a n k audit reports, even where
the statement qualifies t h e m that b a d loans are under-provided, do not always spell out the effect
o f this on the reported profit.10 Yet, no legal case has ever been brought against a n auditor by a
depositor or shareholder. Nor has the Bangladesh B a n k ever disqualified a n auditor.
Recently, the ICAB issued U S 30 as the standard for b a n k financial statements. This
requires disclosure o f movements in the provision for b a d debts. I t has now been issued as a
Bangladesh B a n k circular a n d Gazetted. I t applies to all banks with effect from their statements
for calendar year 2000. T h e B a n k m g Companies A c t needs to b e amended for this disclosure
standard.
Bring all banks fully under the supervision o f the Bangladesh Bank.
7 Indeed, the same applies to the private domestic banks, w h i c h would equally have to b e rescued, requiring a further
Tk.26 billion for 7 private domestic banks alone. In the Budget speech for 2000-01, i t was announced that the
Government will reduce the percentage o f classified loans in the NCBs b y taking over the liabilities o f the public
enterprises (IQbria 2000).
8 K i b r i a (2000). Bonds are issued and serviced b y the Government, but are assigned to NCBs against specific b a d
loans a n d projects. They are included in b a n k balance sheets as investments and, p e r contra, as subordinated debt. As
such, they are counted as p a r t of the bank’s capital a n d increase the capital adequacy ratio.
9 Specifically, (a) income accrual i s too liberal on non-performing loans, @) loan classification a n d disclosure i s too lax,
provisioning too low, a n d investments are not valued at their market prices, thus overstating assets a n d capital, (c)
pension liabilities are not calculated actuarially, (d) tax refunds a n d other receivables from the G o v e r n m e n t are kept in
the balance sheet, even if there is no chance of collection, a n d (e) inadequate disclosure o f lending to directors, staff
a n d their affiliates.
10 World B a n k (2000~).
Departmental Enterprises
BTTB, for instance, introduced a commercial accounting system that operates alongside the
traditional government cash accounting system. T h e budget for BTTB i s not published a n d
budgetary c o n t r o l i s largely ineffective. BTIB accounts are 4-5 years in arrears. A c c o u n t i n g
responsibhties are divided between the C A O , BTTB a n d the CAO, T&T. T h e i r respective
accounts do not agree. Financial and management reporting i s severely hampered. Financial
management in these departments needs to b e reviewed a n d computerized.
T h e budget o f the Railway Authority has been p a r t o f the G o v e r n m e n t budget since 1985.
I t has been m a k i n g large losses. Since 1998/99 the budget has been prepared under the n e w
classification. Procedures are supposed to comply with the Railway Code a n d State Railway
General Code, but these are out o f print as w e l l as out of date.
Recommendation i s as follows:
I n some other Commonwealth countries, the Auditor General prepares his budget a n d
submits i t to the Speaker o f Parliament, where i t i s examined by the Public Accounts Committee,
the C&AG’s main client. T h e Auditor General then has sole executive authority over the use o f
his budget. In Bangladesh, t h i s would b e advantageous. I t would secure the resources needed by
the C&AG, visibly increase his independence, and add to Parliament’s ‘ownership’ of h i s office.
There i s no Constitutional bar to this change (Soliman 2000). However, this should b e
considered only after accounts a n d audit are separated.
T h e separation of the audit function implies that the accounts a n d audtt personnel, who
form one interchangeable cadre above the level o f Superintendent, should b e separated into two
cadres. How can a n auditor b e independent a n d impartial w h e n auditing the work o f h i s cadre
colleagues, or even h i s own earlier work in a n accounts post? E v e r y donor i s w o r r i e d by this
‘promiscuity7 a n d has pressed for separation. In practice there i s some defacto separation o f the
10,000 accounts personnel, who all come under the Controller General o f Accounts, from the
3,000 audit personnel, who fall under the nine directorates of audit. Only the C&AG himself
1 World Bank (20009. There are a few special funds that are not normally open to the C&iG, such as the
extrabudgctary funds mentioned in section 3.2.
2 There i s a strong case for building up the audit directorates because of the high workload. Some 40,000 units spend
public funds, comprising 22,718 units within the public sector a n d some 18,000 NGOs receiving public grants. There
are o n l y about 3,000 auditors, and they can cover only about 16% of the total each year. T h e shortage i s most serious
at the management level, where there are only 50 cadre officers.
heads both hierarchies. T h e selection o f auditors for audit assignments i s said to exclude any
officer who h a d any involvement in the accounts. T h e responsible D i r e c t o r o f A u l t prevents
any possible conflict o f interest. However, this does not reassure those outside the Government:
there i s no perception o f independence.
Separation was legislated as long ago as 1983.3 I t was never implemented. T h e resistance
to separation i s due partly to the time and trouble o f doing it, involving amendments to the
Constitution a n d the C&AG (Additional Functions) Act, but mainly to opposition from
accounts personnel who fear loss of opportunities of transfer into coveted audit posts, w h i c h
have m o r e travel a n d promotion prospects as w e l l as the p o w e r and privileges that come with
b e i n g a n auditor. Nevertheless, i t i s widely agreed that separation i s necessary, a n d that the only
questions are w h e n a n d h0w.4 Separation has been made in almost every other country in South
Asia in w h i c h accounts and audit were formerly combined (see box). I t i s recommended that
authority b e vested in a n independent person to study this material, to undertake a local
stakeholder analysis: to formulate a plan in negotiation with all the interested parties that would
b e in the overall national interest, a n d to supervise i t s implementation. T h e output o f this
appointment should not b e another report. I t should b e total separation o f audit from accounts,
actual a n d perceived. I t will b e necessary for all parties to look for the national interest.
T h e C&AG i s appointed by
the President o f the Republic on Box 3
the advice o f the P r i m e Minister
Separation of Accounting and Audit
without consultation with
in South Asia
Parliament. There is no
Constitutional bar to the Prime
In S r i Lanka, there has been separation o f accounts and
Minister tendering advice after audit for 70 years. The Donoughmore Constitution o f 1931
consultation with the Public changed the designation o f the Colonial Auditor to Auditor
Accounts Committee and their General and made that office directly responsible to the
consideration o f the nominee. I f legislature. In 1976-80, India also completely split i t s accounts
(say) a two-thirds majority o f the and audit services at the union level.
PAC failed to approve the nominee, Accounts and audit are also separate in Nepal, Bhutan and t h e
the Prime Minister could Maldives.
reconsider. This c o u l d b e written
into the Parliamentary Rules of In Pakistan, after receiving t h e inputs o f a High L e v e l
Procedure. The Oversight Committee which examined t h e financial, legal and administrative
implications, the Government has drafted legislation to complete
Conference recommended that the
the separation o f accounting and auditing and t h i s i s expected to
Auditor General b e appointed on
be enacted shortly
the recommendation o f both the
P r i m e Minister a n d PAC.
3 Ordinance XXVIII of 1983, which was an amendment to the C&AG (Additional Functions) Act, 1974, allowed the
Government, by administrative direction, to assign the accounting function to ministries and departments (called
‘departmentalization’).
4 A Committee looked at this in 1995 and made detailed proposals for separation, which were abandoned. Participants
at a Workshop on Public Sector Auditing on June 15, 2000 agreed that a program for separation i s in the national
interest and should be planned. ‘The Public Administration Reform Commission (2000) has recommended separation,
and that the C&AG be left with audit functions only, Vol.1, para.2.12.
5 Stakeholder analysis i s a definition of who would gain, who would lose, and what adjustments could be made so that
everyone gains. Where there i s a net national gain, a win-win solution i s possible.
(1374 .rs(ghr ill" I hb' ~~~.~~~~~~~~~~
k"irf1tb
T h e C&AG's tenure i s protected in the same way as that o f a Judge of the Supreme
Court. H e cannot b e dismissed at political d.However, the Constitution requires the C&AG to
retire a t the age of 60. Since a C&AG i s usually appointed only at the age of 57, this leaves a
short 3 years for him to realize his vision. M o r e stability in t h i s office i s needed. I n other
countries, the Auditor General i s appointed for a f B e d t e r m (Thailand 5 years, I n d i a 6 years,
Canada 10 years). In Bangladesh t h i s would require a Constitutional amendment. T h e Oversight
Conference recommended that the Auditor General b e appointed for a fixed t e r m of five to ten
years. This would b e subject to termination on the same grounds for removal (such as incapacity)
as at present.
At present, the C&AG accounts are 'audited' by the C&AG's internal audit unit. There
i s no external independent audit. I t i s unfortunately true that there are allegations against auditors
that they fake subsistence allowance claims, etc. E v e n if there were no basis for these allegations,
i t i s imperative that the supreme audit institution o f the country, w h i c h i s a pillar o f
accountability, b e subjected to the same independent scrutiny as all other branches o f the state.
Participants a t the Oversight Conference agreed that the Auditor General should b e above
suspicion, so h e needs strong internal controls and an independent audit r e p o r t on his
department. Audit o f the audit agency should not b e carried out by a n auditee, as t h i s would
compromise the Auditor General's independence. In Canada a n d Bhutan, for instance, private
accounting firms are appointed to carry out the audit each year. I t was recommended that this
question b e answered in Bangladesh at a n early stage. Audit should b e conducted by professional
external auditors with good experience in government sector audit a n d having no confhct o f ,
interest that might influence their audit o f the C&AG Department. T h e P r i m e Minister c o u l d
select t h e m in consultation with the C&AG.
Audit Methodology
Since 1997, the C U G has maintained a 'Grievance Cell' in his office. This i s o p e n to
any p u b l i c official to bring his grievance without going through formal channels. G o v e r n m e n t
6 C&AG (1999).
suppliers can also lodge complaints. Most grievances are on pay a n d allowances. Some are o f a
w i d e r nature. In the f i r s t three years, 453 complaints were received a n d 252 were disposed of.
T h e C&AG i s required to see that expenditure has been incurred “with due regard to the
Table 1
Audit Obst
Ministries
7
Communication 5
Defense
Education
Energy & h h e r a l Resources 5
Environment Pr Forest
Establishment
Fisheries & Livestock
Finance 8
Food 24
3
1201 55 49
Ho~isingeL Public Works 102 125 1
Industries 36 16 14
Jute 30 17 2
9 I
1
Land
1
L o c a l Govement, Rural
Dcvelopmcnt & Cooperativc 750 22 8
Shipping 54 5 36
Post & ‘I‘elecomm 346 188 1
Textiles 3 5
Water Resources 320 2 1
1
representative a n d does not reflect the ovei
Impropriety: cases o f violation o f rules and regulations or budgetary stipulations.
Loss, Damage, Wastage: occurrences that are caused by the negligence o f duties or inefficiency o f management.
Theft, Embezzlement, Fraud, Misappropriation: cases o f loss due t o willful malpractice by public functionaries.
Source: Annual Report o f the O f f i c e o f the Comptroller & Auditor General, Bangladesh, 1999
~ ~ ~O !. k~k l l l t i s~
r { ?’k<, t >~! ” ~ ’ l’! f l ~ ~ ~ F ~ ~
Audit Management
Audit planning needs a n e w approach. At present, there are no permanent teams for
specific agencies or types o f audit. Audit planning mainly ensures that all auditors get a chance
for field visits. Some areas are entirely neglected, e.g. revenue audit. G i v e n the importance to the
G o v e r n m e n t o f improvingrevenue yields, this i s a serious gap.
W h i l e the choice o f u n i t s and special subjects to b e audited in any year must remain the
prerogative o f the CBAG, it would b e wise to invite the Parliamentary committees, particularly
the PAC, to suggest audits in areas in w h i c h they are especially interested. This would a d d to
parliamentary interest in the C&AG’s reports, a n d increase the likelihood o f debate a n d follow
UP.
There i s little understanding at the operational level of the auditing standards recently
adopted by the C&AG (1999). FIMA should provide courses in their practical application.
Training needs to b e integrated also with other personnel policies such as promotion. At
present promotion through the grades depends on seniority a n d absence o f adverse appraisal
reports. There i s only one promotion bar (written examination). Audit personnel are not
generally interested in being trained and have to b e p a i d a n inducement. This i s possible where
aid partners provide funds, but i s not sustainable. With autonomy from the Ministry o f
Establishment, i t would b e possible in a closed audit cadre to base promotion m o r e on going
through prescribed courses a n d a rotation o f practical experience, a n d not j u s t years o f service.
Entry-level qualifications should also b e re-examined; a t present, most audit personnel have no
financial background.
Audit Reports
Several reports are made by audit directorates each year, as follows:
~~
Hitherto, reports have been in a standard short form as follows: “My senior officers
have examined the Finance Accounts [or as appropriate] and to the best o f my knowledge they
are correct”. T h e C&AG i s now considering the form o f his r e p o r t to comply with the newly
issued G o v e r n m e n t Auditing Standards (C&AG 1999). A qtlal@ed opinion should b e given if h e
disagrees or i s uncertain about one or m o r e material items in the financial statements, or a n
adverse opinion where h e believes that the statements are not fairly stated. I f the C&AG i s unable
to g v e a n opinion on the financial statements due to uncertainty or to a restriction placed on the
scope o f audit, h e gives a disclaimer of
opinion, i.e. a statement that h e cannot give a n opinion,
together with reasons.
T h e PAC has said that i t does not w a n t audit merely to identify w h a t w e n t wrong but
also to suggest remedies. Some remedies are obvious. In other cases, this would require not only
competence in the systems approach to audit but also sufficient experience in systems analysis
a n d redesign to b e able to make good recommendations. Ths i s a long way from the current
reality. I t would b e better, for the present, that the emphasis b e placed on grouping a n d
prioritizing irregularities and audit observations according to their impact on government
objectives. I t i s up to Ministry/Division Secretaries to appraise their weaknesses a n d take
corrective action, including use o f the Efficiency Unit b e i n g set up in Finance Division where
necessary. Secretaries should remain solely accountable as Principal A c c o u n t i n g Officers.
Prioritization o f audit objections would increase their importance a n d add to pressure for
response from the executive, w h i c h i s s t i l l very disinterested.10
T h e C&AG’s reports are restricted until they have been cleared by Parliament (even
though their contents are o f t e n leaked to the media). T h e y have to b e sent to the President, who
places t h e m before Parliament, w h i c h refers t h e m to the PAC. I f PAC meetings were open to
the media, as proposed below, this would b e an appropriate point for the C&AG reports to b e
made available generally. T h e y c o u l d b e published promptly on the Internet, as in a growing
n u m b e r o f countries. Alternatively, they could, with parliamentary approval, b e published as
soon as they are tabled in the House.
9 All ministry audit reports for FY98 (ie. the year to 30 June 1998) and Appropriation and Finance Accounts reports
for FY98 and FY99 were ready for submission to the President in December 2000. The target i s to complete reports
on all ministries for FY99 and reports for FYOO on n i n e key ministries by June 2001.
10 The PAC reported the average delay in taking preliminary steps to meet audit objections, ranging from 19 months in
Ministry o f Local Government to 148 months in Ministry of Food (PAC Third Report, p.21).
Recommendations are as follows:
I n s t i t u t e revenue audit.
This section focuses on the functions, structure, powers and processes of Parliamentary
Committees (PCs) with regard to public expenditure control.11 T h e principal PCs for t h i s
purpose are the Public Accounts Committee (PAC), Public Estimates Committee (PEC), Public
Undertahngs Committee (PUC) a n d 35 standmg committees on individual ministries (SCMs).
Parliamentary review o f the budget before i t i s passed was discussed in page 27 Review
after legslation m a y b e before or after expendture i s incurred. As n o t e d in page 29 above, the
PEC has been active in investigating procurement transactions before commitments or
expenditures were made. Generally, however, review i s expostfacto. T h e PAC review i s not only
after the event, but after the C&AG has reported on it, w h i c h m a y b e years later. There i s a
backlog o f 400 audit reports a n d accounts. This delay reduces the deterrent a n d corrective
influence on the executive as, by the time particular transactions are examined, those responsible
have been transferred, or retired or died, and escape having to appear before the PAC.
Accountability delayed i s accountability eroded.
Composition of Committees
I n the present Parliament, the three financial committees a n d almost all the SCMs are
chaired from the ruling party, a n d membership i s usually divided 60% to the r u h g party a n d
40% to opposition parties. p h e P A C has15 members; other Committees have 10). T h e f o r m e r
practice of having Ministers chair Committees has been discontinued. This s t i l l leaves it open to
11 This excludes actions of individual MPs, such as raising questions in the House.
!$<if:$Ti<#( 4 4 h,. b 7 m s t r * d A&
I 4 I Id1 1 ~~~~~~~~~~ Iitr [ A j < ,j. GoI. f "tilfl<'f*
Ministers to s i t as members o f Committees other than the three financial committees from w h i c h
they have always been excluded by the Rules. hlinisters can s t i l l b e members of the SCMs a n d
this reduces the freedom o f backbenchers t o raise matters o f public interest. Consideration
should also b e given to appointing members of the opposition as chairmen o f committees.
Committees have considerable investigative powers. T h e y can send for persons, papers
a n d records12 a n d examine witnesses under oath. T h e y also have as m u c h access to the C&AG as
they need; though only the PAC so far has availed itself o f h i s services. T h e C&AG i s
Parliament's m a j o r informant. Neither the media nor civil society/private sector groups are a
source o f i n f o r m a t i o n for the PAC, unlike in western parliamentary systems, where employers,
trade unions, NGOs and professional associations increasingly interact with the parliamentary
watchdogs.
Committees vary widely in their level of activity - the current PAC h e l d 94 meetings
over a p e r i o d o f 37 months while the Post and Telecoms Committee h e l d only 15. T h e level o f
activity, a n d even m o r e the level o f effectiveness, depend largely on the character o f the
chairman a n d the research and secretarial support h e can beg or borrow. All PCs are grossly
handicapped by lack o f resources. This can b e contrasted with the public funds recovered
following investigations; the present (Seventh Parliament) PAC recovered over Tk 2 bilhon as a
result o f i t s f E s t 34 meetings.13 Following a needs assessment, suitable accommodation should b e
p r o v i d e d for the Institute o f Parliamentary Studes a n d at least the three financial standmg
committees. All members should have m o d e r n facilities for communication a n d research, such as
individual cubicles equipped with computers having Internet access a n d standard word
processing, email a n d spreadsheet applications, a n d adequate research assistance.'4 Chairmen
should have secretarial assistance so that proceedings can b e recorded a n d minutes promptly
d r a w n up a n d circulated. At a Workshop on Parliamentary Control of Public Expenditure (June
4, 2000) a n d the International Conference on Oversight Functions (September 10-12, 2000) the
highest importance was attached to the provision of technical staff a n d facilities for research a n d
follow up on Committee recommendations. T h e Public Administration R e f o r m Commission has
also emphasized this.15
Transparency
12 Some Committees impound large numbers o f ministry files for long periods of time; others require copies o f files.
13 Third R e p o r t o f the Standing C o m m i t t e e on Public Accounts (1998), p. 7.
14 Rccently, a C o m p u t e r User Center has been set up for MPs to have I n t e r n e t access a n d individualemail accounts.
1.5 Public A d m i n i s t r a t i o n R e f o r m Commission (2000), para. 8.30.
House, such as a n annual performance r e p o r t covering i t s activities, findings, recommendations
a n d results. L a c k of resources i s one reason for this. A n o t h e r reason i s that some Chairmen
misunderstand their constitutional role a n d deal only with departmental officers to whom they
issue 'directives'. T h e Workshop on Parliamentary Control emphasized that PCs are not
executive agencies and their decisions are only recommendations. I f they are ignored, w h i c h has
frequently been the case, their recourse i s through the House, e.g. by asking the M i n i s t e r in
charge to take action. T h e y m a y ask for Secretaries to r e p o r t back to them, but if they fad to
c o m p l y PCs have no enforcement powers. I f they were given enforcement powers, i t would b e a
takeover o f the executive branch o f government. As Committee members gain experience, a n d
as Secretaries are called to explain each year's irregularities, the Committees can follow up on
their previous recommendations and ask w h a t progress has been made. However, they need to
have a simple system of monitoring a n d recording actions taken, recoveries a n d adjustments
made, etc. T h e Oversight Conference recommended that a n annual performance r e p o r t should
b e required from each PC chairman to the Speaker, and the reports o f the financial committees
should b e debated in the House. In addition, all PAC meetings should b e open to the me&a a n d
public (possibly without television cameras i f these would introduce undue political partisanship
into the meetings) and the Rules should b e amended accordingly.
16 Their disbursements in F Y O O amounted to $1,575 million. Most of this was aid to identified projects ($1,150
million), with IDA, XDB and Japan as the major donors (ERD data).
effectively.” This has to b e balanced against the need for recipients to develop their own project
management capacity a n d to take ownership and responsibdity for fiduciary outcomes. Most
bilateral donors, such as UI<-DFID, themselves purchase planned inputs such as consultants,
training a n d equipment, put their own contractors or consultants to manage the projects, a n d
require accounts, reports and audits to comply with their own rules. Most multilateral donors, on
the other hand, such as World Bank, Asian Development B a n k a n d UNDP, are moving toward
national execution. This puts formal responsibility for management in the hands o f the
i m p l e m e n t i n g agencies, w h i c h manage projects in accordance with their own legal a n d regulatory
frameworks. In practice, governments often prefer to delegate foreign procurement back to the
donor, both to save expense and to protect themselves against domestic pressures. Also, national
execution i s normally accompanied by capacity building efforts that increase fiduciary assurance
while leaving responsibdity with national project directors.
In most World B a n k projects, the auditor i s the C&AG’s Foreign A i d e d Project Audit
Directorate (FAPA). Where a project earns revenue or i s run by a revenue-earning agency,
however, a private audit firm i s required for entity audit. Almost all audit reports are received on
time. T h e p r o b l e m i s rather the low quality o f C&AG audits (see section 7.1 below), their late
start (only after the financial year ends), a n d their focus on compliance with G o v e r n m e n t
regulations, neglecting World B a n k concerns such as the eliglbhty o f expenditures according to
l o a n agreements. There i s little or no audlt o f statements o f expenditure. World B a n k financial
staff have p r o v i d e d training to FAPA auditors. O n e training target should b e that FAPA can
undertake a review o f internal controls and issue a management letter six months after a project
starts.
Auditors should b e required to submit copies o f their reports by the required dates, or
risk disqualification from re-appointment. All audit reports should b e reviewed by specialist staff
a n d task/team leaders in donor agencies a n d comments sent to the implementing agency w i t h
one month. T h e frequency o f m i s s i o n s a n d the level o f supervision should b e related to the level
o f fiduciary risk. At present the audit conducted by FAPAD staff i s compliance-based. FAPAD
17 Even though this allows the recipient to divert its own resources into uses that may be very unwelcome to the
donor.
was p r o v i d e d project assistance of about Taka 30 d o n by the World B a n k a n d UNDP for
capacity development under the Sixth Technical Assistance Project. U n d e r the project, a n audit
manual was prepared and some staff were trained. Most o f the trained staff were transferred a n d
the capacity i s almost lost. However, there i s considerable development in the quality o f audit
with regard to formats a n d presentation o f reports. FAPAD i s now submitting short-form a u l t
reports a n d management letters. T h e y also provide separate opinions on Project Financial
Statements, S O E s a n d Special Accounts. However, there i s a perception amongst the donors
that the quality o f most project audits i s low, with f e w exceptions. A discussion i s going on
amongst the donors to encourage the Government to use private sector auditors in project
audits. In some projects, there are provisions to conduct performance/operational audits using
private sector a u l t o r s . To reduce the pressure on C&AG's scarce resources a n d increase the
coverage o f audit o f 22,000 auditable units, C & A G and the Government m a y consider
appointing private sector auditors for project a u l t s . Initially, this m a y start with the audits of
projects w h i c h are implemented by parastatals, public corporations a n d enterprises.
T h e World Bank's Financial Management Initiative (launched in July 1998 under the
name LACI) has built up the numbers and professionalism o f financial and procurement staff
a n d has added to existing operational policies. E v e r y n e w project should have specialized staff
for financial management a n d procurement on the task team from preparation to completion.
T h e Financial Management Specialist assesses and reports on the project financial management
arrangements at the time o f project appraisal a n d certifies i t s adequacy (or develops with the
implementing agency a n action plan to remedy inadequacies), reviews a n d certifies the adequacy
o f financial reports, monitors compliance with financial covenants, a n d initiates necessary actions
on a u l t reports, with guidance and quality c o n t r o l from R e g o n a l Financial Management
Advisers. T h e Procurement Specialist has similar responsibilities with regard to project
procurement. Quarterly Project Management Reports ( P M R s ) are required, including
e x p e n l t u r e statements and projections, physical progress/output reports a n d d e t d e d
procurement data. I f these are certified as satisfactory by financial a n d procurement specialists
a n d by the team leader, disbursement i s made without the need to submit extensive
documentation. However, meeting the full PMR requirements has p r o v e d difficult: only three
projects (out o f 11 projects w h i c h were approved after July 1, 1998 for w h i c h PMR-based
disbursement was made effective) have PMR-based l s b u r s e m e n t s o far. T h e B a n k i s currently
reviewing PMR requirements with a v i e w to their simplification. M o r e specialist staff (or
leveragmg their efforts with consultants) a n d m o r e pro-activity c o u l d also increase this
proportion.
T h e OECD Development Assistance Committee has not, so far, been able to resolve
this problem. O n e response by m a j o r donors has been 'partnership' between donors a n d host
governments, such as the UN's Development Assistance F r a m e w o r k a n d the World Bank's
0 E a r l y w a r n i n g o f f i d u c i a r y p r o b l e m s through i n t e r i m audits o f i n t e r n a l c o n t r o l s
a n d i n t e r i m u n a u d i t e d accounts.
0 Donors to s u p p o r t p r a c t i c a l t r a i n i n g in t h e F o r e i g n A i d e d P r o j e c t Audit
D i r e c t o r a t e in r e l a t i o n to t h e agencies i m p l e m e n t i n g t h e projects t h e y support.
19 The CDF i s intended to put the World Bank‘s country assistance strategy and other donor country programs into a
medium-term framework that i s driven by the host country. The philosophy i s one of openness and partnership. I t i s
currently being piloted in a few countries.
*(IRavi Kanbur and Todd Sandler (1999) A Radical Approach to Development Assistance, in Development Outreach, Vol.
1, No. 2 (FaU), Washington DC: World Bank Institute. This i s being piloted, e.g. in Burkina Faso.
21 Bangladesh I-Iealth and Population Sector Program: Combined Mid-Term Review and Annual Program Review
(2000), paras. 4.27/9,4.36,4.40 and 6.25.
b
Recommendation:
1 Government accountants get typically Tk 15-1 6,00O/month against their private sector counterparts d r a w i n g Tk.60-
70,00O/month. Ths reflects not only the low pay throughout the civil service after years o f compression a n d erosion,
but also inter-cadre rivalries. Accountancy in the public corporation sector has higher status a n d attracts m o r e
accountants (ICAB 39, ICMAB 70, at June 1999).
be based o n relevant education, such as degrees in commerce or accounts.
Audit Directorates from among graduates (any discipline) a n d holders o f the figher
Secondary Certificate appoint auditors and Junior Audtors. AAOs and SAS Superintendents are
p r o m o t e d from Auditors a n d Junior Audtors who pass the SAS examination.
Training
T h e Financial Management Academy i s responsible for all training to the officers and
staff o f the C&AG’s department. I t i s providng fmancial management training to other cadres
and other departments also. T h e D F I D - s u p p o r t e d FIMA project (a sub-project o f RIBEC) has
proposed a n e w strategic plan a n d governance structure.
T h e project has designed and run various short full-time courses intended to build
particular skills such as IT a n d use o f PCs. Trainees who have the potential are sent to UI< for
further training in government financial management a n d change management. Links are being
established with the Chartered Institute for Public Finance a n d Accountancy There are no PI<).
active links with local training institutions, such as PATC, BIM, ICAB a n d ICMAB.
There i s no full-time national faculty for these courses. A 3-day course on training has
been given to about 180 officers. From these, 40 have been identified a n d are being used as part-
time trainers in FIMX and C&AG (RIGA project).
2 Tk 500 a day i s paid to trainees, and free lunches are provided. T h i s adds to the demand for the courses.
h18rfih. S c ~ t < t.It.r)t
r I Z U I ~ A ~ P Z, Ca~ d L t d i f t ~ 9
T h e crises in East Asia and elsewhere have pushed corporate governance to the top o f
the r e f o r m agenda in m a n y countries. A corporate governance framework includes inter alia the
laws a n d institutional arrangements for m a k i n g company directors a n d managers accountable to
shareholders w h i l e meeting the company's fmancial a n d legal obligations to other stakeholders.
T h e m a i n legislation for t h i s in Bangladesh i s the Companies A c t 1994. Public companies issuing
securities are subject also to the Securities and Exchange Ordinance of 1969 a n d amendments,
the Securities a n d Exchange A c t o f 1993, and rules issued under these laws.
This framework i s intended to protect shareholders and creditors from misuse o f their
funds by company directors and officers. T h e Companies A c t prescribes minimum
accountability a n d disclosure requirements similar to those in other Commonwealth countries.
All l u n i t e d companies are required to prepare annual accounts, have t h e m audited by chartered
accountants, a n d submit t h e m together with the auditors' r e p o r t to the Registrar o f Joint Stock
Companies. Companies listed on the D h a k a or Chittagong Stock Exchanges (presently
n u m b e r i n g 221) have to meet the additional requirements o f the respective Exchanges a n d o f the
Securities a n d Exchange Commission (SEC). Since 1997, a n amendment to S E C Rules has
required listed companies to comply with Bangladesh A c c o u n t i n g Standards (based on
International A c c o u n t i n g Standards') and their auditors to meet Bangladesh Standards o f
Auditing (based on International Standards of Auditing).
1 IASs and ISAs are adapted for local laws, institutions a n d terminology. BASs a n d BSAs m e e t I A S s a n d ISAs in all
material respects. Out o f 4 0 IASs, 2 4 have b e e n issued as BASs a n d the remainders are in process of b e i n g adopted.
Out of 36 ISAs, 22 have b e e n issued as BSAs (World Bank 2000~).T h e main outstanding IASs are those relating to
segment reporting, leases, employee benefits, business combinations, retirement benefits, investments in associates and
joint ventures, a n d contingent liabilities.
Registrar of Joint Stock Companies
T h e Registrar i s the official holder o f all statutory reports submitted by companies. Any
m e m b e r o f the public may apply to inspect any company’s f i e for a small fee. T h e r e are
approximately 42,000 companies. Most o f these are private companies that are exempted from
the obligation to file their financial statements. There are about 2,400 public companies, w h i c h
are obliged to file their financial statements annually in prescribed formats. T h e Registrar
cooperates with the SEC and has referred some defaulters to the High Court, but decisions can
b e reversed on appeal to the Government ( M m i s t r y o f Commerce). M o r e importantly, the
Registrar has neither the systems nor the personnel to monitor compliance across the board. T h e
S E C regulates the 221 listed public companies, but the unlisted public companies are a n
uncontrolled sector. T h e Registrar has statutory authority to penalize companies for f d u r e to f i e
their annual reports, but penalties are too small (eg. Tk.l p e r day o f default) a n d are p a i d only if a
company voluntarily makes a late fLling. E v e n if retums have been made, the files cannot always
b e readily located. ‘Speed’ m o n e y has to b e paid. T h e Reglstrar’s office urgently needs
computerization and strengthening. Corporate penalties should then b e increased to effective
levels.
Commercial Banks
I t has become increasingly clear in recent years that for corporate governance to b e
effective, banks a n d their regulators also need good governance. Commercial banks in
Bangladesh comprise four nationahzed commercial banks (NCBs), 29 private domestic banks
(PDBs) a n d 13 foreign banks. T h e y are regulated by the B a n k i n g Companies A c t 1991 a n d
circulars issued by Bangladesh B a n k from t i m e to time. Section 5.2 above covers the NCBs, a n d
the comments a n d recommendations there apply to a lesser degree to the private domestic
banks.
I n 1997, non-performing loans were about 45% o f the portfolio o f PDBs, the same as
for the NCBs, but have since been reduced. T h e main problems are now with the NCBs a n d the
two private banks (Rupali a n d Uttara) w h i c h were formerly NCBs. T h e soundness o f most banks
6 There are 221 listed companies, some 2,400 unlisted p u b l i c companies a n d a b o u t 42,000 private companies.
7 And perhaps private companies and NGOs over a certain size also.
PrL ' x t c Sctwr '4 ~
i na " ~
has been severely undermined by insider lending, fraud and neghgence. I f full provision were
made for their b a d loans, their capital would b e highly negative (World B a n k 1998a). This should
b e disclosed in their accounts for FY2000, the f i r s t year o f operation o f the n e w b a n k accounting
standard. In July 1999, the Basle Committee on B a n h g Supervision issued Sound Practicesjr
Loan Accounting and Disclosure. This provides gudance to banks a n d banking supervisors on
r e c o p t i o n a n d measurement of loans, establishment o f loan l o s s allowances, a n d credit risk
disclosures. Bangladesh B a n k should endeavor to bring i t s supervision/regulation system into
full compliance with the standards of the Basle Committee on B a n h n g Supervision.
Insurance Companies
T h e A c t a n d Rules are out of date and do not always meet current accounting and
insurance standards (see box). For instance, the A c t requires income from interest, dividends and
rents to b e shown n e t o f tax deducted at source. This i s contrary to accounting standards, and
results in the understatement o f income and expendtture (World B a n k 2000~).A draft bdl has
been prepared by the CCI.
0 Amend the Insurance Act and Rules in line with international accounting and
insurance standards.
Nongovernmental Organizations
NGOs receiving foreign fundtng are subject to the tight accountabdity requirements o f
the respective donors. T h e larger NGOs readily make available their audtted accounts and
reports a n d are said to have fairly good accountabhty a n d transparency toward their donors,
though there i s scope for improvement.9 ADAB should identify a n d p r o m o t e good governance
practices.
donors are sent directly to NGOs’ bank accounts, but they cannot lawfully b e d r a w n on until the
Bureau has approved the relevant project. NGOs are required to submit their project proposals
to the Bureau, w h i c h consults with the relevant government ministries a n d gives clearance to
NGOs’ banks holding donor funds to allow withdrawals. T h e Bureau i s subject to time h u t s -
applications for project approval have to b e answered within 21 days (relief projects within 24
hours).11 I f a b a n k pays out without Bureau approval, i t i s d i s c i p h e d through the Bangladesh
Bank. Recently, ADB has made a study on modalities of donor funding a n d t h i s i s u n d e r
&scussion by t h e Government.
T h e Rules lay down the books to b e kept. A n n u a l accounts are required a n d audit i s by
chartered accountants selected by the NGO from a n approved l i s t of 150. Audit reports are due
within two months of the end o f each financial year. T h e Ordinance empowers the G o v e r n m e n t
to inspect NGO books a n d to carry out i t s own audits if necessary. Annual reports must also b e
submitted to the Bureau, showing inter alia project outputs and expendture thana- a n d &strict-
wise, foreign travel, and emoluments o f all employees receiving m o r e than Tk 5,00O/month.
Most financial statements, au&t reports a n d annual reports are said to b e rendered on
time, though the larger a n d m o r e p o w e r f u l NGOs tend to act independently. 89% o f donor
funding goes to j u s t four very large NGOs.
T h e rules require only double entry accounting a n d NGO practices are very varied.
Some use cash accounting, some accrual accounting. Donors usually demand project-based
accounting that shows separately the use o f their funds. Donations in kmd such as equipment
m a y b e treated as i n c o m e in the year of receipt or prorated over the years of benefit. Some
NGOs observe the international standard on accounting for government grants, but most do
not, Microcre&t institutions should m o v e toward b a n k accounting practice.13 I t would b e better
for all NGOs to observe international accounting standards. I t i s therefore r e c o m m e n d e d
11 P r i m e Minister’s O f f i c e (1993) Working Pmcedure far Foreign ana’ Foreign Assisted Bangfadsbi Non-Govemment Vofuntary
Organisations,a n d interview with the D i r e c t o r General o f the Bureau.
12 World B a n k (ZOOOh), pp. 27-30.
13 CGAP (1998) ExtemafAudits OfMimjnance Institutions: A Handbook. Technical Tool Series 3, p.7.
9. Private Sector
Accountants and
Auditors
T h e Structure o f the Profession
T h e supply of accountants i s low, partly for lack of adequate training facihties a n d lack
o f support for trainees from poor f a d e s : but also because o f low demand for accountancy
services. T h e industrial a n d finance sectors, w h i c h are accountant-intensive, are s t d l relatively
small. Banks t e n d to use MBAs rather than professional accountants for financial analysis o f
projects (where t h i s i s done at all). M o r e significantly, there i s little appreciation o f the value
added by competent audit, a n d audit fees are correspondingly low. In the w h o l e history o f
Bangladesh there has never been legal action against a n auditor for professional negligence. This
reflects low expectations a n d a lack o f understanding o f the significance o f audit rather than high
technical a n d ethical standards o f auditors. T h e company l a w i s considerably in advance o f p u b l i c
unders tanding.
There i s no accounting manpower study for the country, projecting the future demand
a n d supply o f accountants for accounting, auditing (public practice), teaching a n d consultancy
functions. N e i t h e r the ICAB nor the ICMAB has a written strategic plan, but a f e w members o f
the respective Councils are seriously considering future needs in a globalized a n d Internet world,
such as r e g o n a l harmonization o f standards a n d mutual recognition, a n d how their i n s t i t u t i o n s
should b e preparing themselves. T h e ICAB i s working on a strategic p l a n for raising accounting
a n d auditing standards.
Both the ICAB a n d ICMAB emphasize the maintenance o f quality. E a c h institute has
graduate entry a n d has recently revised i t s examination syllabus to equip trainees with managerial
s k i u s as w e l l as technical competence. Post-qualification continuing education has become
mandatory. There i s a strong emphasis on i n f o r m a t i o n technology a n d English language training.
T h e institutes are proud o f the integrity of their examination a n d accreditation processes.
Admission to membership requires also minimum periods (3-4 years) o f practical training in a n
acceptable office.3.4 T h e n u m b e r o f registered trainees i s very high (ICAB 7,000; ICMAB 13,000
All education a n d training has so far been oriented to the full professional qualification.
T h e r e i s not yet any sub-professional qualification, such as Accounting Technician. Professional
accountants are very f e w and their productivity would b e h g h e r if they h a d lower-level
technicians to whom routine work c o u l d b e delegated. T h e introduction of a n A c c o u n t i n g
Technician qualification, as in UK, Sri Lanka, etc. would provide a recognized accreditation,
clearly dtstinct from the CA and CMA, w h i c h would appeal to those who have a n aptitude for
accounting a n d auditing work, but not necessarily the educational background or the
perseverance to go all the way. Also i t would reduce the dropout rate in the professional
examinations by streaming entrants to the profession. T h e experience o f Sri L a n k a m a y b e a
useful guide (see box).
4 For a CA to o f f e r services as an auditor, a n additional two years o f experience are required a n d a practising licence
from the ICAB.
5 T h e average o f the last three years has been 13 chartered accountants a n d 18 management accountants p e r annum.
Recent surveys of compliance o f listed companies with the requirements o f the
Companies Act, SEC Rules and BAS show general compliance with the minimum letter o f the
l a w (with some major exceptions in group accounts, foreign exchange effects, leasing a n d
earnings p e r share), but poor understanding o f the spirit o f disclosure. Two particular omissions
in directors’ reports are post-balance sheet events and future prospects (Imam 1999, World B a n k
2000~).On the a u l t side, there have been allegations o f corporate misreporting a n d f r a u d that
should have been l s c o v e r e d and reported by the auditors. A clean audit certificate does not
assure the N a t i o n a l B o a r d of Revenue that statements are a reliable basis for tax assessments.
T h e ICAB has a Code o f Ethics for i t s members a n d an Investigation a n d Disciplinary
Committee that can investigate allegations against them, but this self-regulation so far has been
inadequate a n d ineffective. T h e ICMAB i s planning to introduce a Code o f Ethics a n d i t s own
l s c i p l i n a r y machinery, a n d will need to change i t s bylaws. At present, however, there i s virtually
no monitoring of technical and ethical standards of members. T h e World B a n k - I D F grant to
ICAB covers a survey o f published accounts, preparation o f case studies a n d training in the
application o f IAS and ISA.
T h e assessment has found that the gap between international standards a n d national
standards i s not as serious as the gap between national standards a n d national practices. L a w s
a n d regulations exist, but are not enforced. At present there are f e w visible sanctions for
wrongdoing. As laws a n d regulations have not been enforced they have fallen into disuse and
o f t e n been forgotten. T h i s suggests that a program to raise accountability standards will need to
b e accompanied by widespread refresher training of public officers on the regulatory framework.
I t also suggests that the program will have to give priority to senior levels of public officer, since
their behavior sets unofficial standards for lower-level officers. T h e changes wdl involve a
phased, m e d i u m - t e r m program o f 5-10 years.
Some reforms have succeeded through consensus building a n d participation, such as the
RIBEC family o f projects. These reforms h a d to benefit all the stakeholders whose cooperation
was needed, s o their scope and impact have been l i m i t e d a n d constrained by the unwillingness to
change organizational structures w h i c h protect the interests o f p u b l i c sector officials (World
B a n k 2000h, p.85). There i s a h u t to how far purely 'technical' reforms can go without changing
who controls w h a t a n d stepping on toes and prejudicing perceived interests. T h e interests o f the
public are being sacrificed to the interests o f a relatively small n u m b e r o f public officials.
A key recommendation, therefore, i s to mobihze support for r e f o r m from all who would
benefit from it, both within the Government a n d without. T h e outside stakeholders include
citizen groups a n d advocacy organizations that represent t h e m (includtng the media, the local
chapter of Transparency Intemational, academia a n d the Public Administration R e f o r m
Commission), the business community and their associations, a n d the donor community. At
present there i s little or no continuing collaboration among these groups for the promotion of
accountabdtty and transparency. T h e demand for change i s fragmented a n d ineffective. N o r i s
there any n e t w o r k of public officers who have an interest in restoring the reputation o f their
government, but who are i n l v i d u a l l y powerless and unwdling to speak out against the current
ethos. Though there are some officials who have made progress in a n adverse environment, they
are f e w a n d scattered. T h e proposal i s to establish a continuing public forum o f oversight
agencies, c i v i l society organizations and individuals for the enhancement o f accountability,
transparency and the rule o f law. T h e initiative for t h i s should b e taken by the C&AG, whose
audtt dlrectorates provide the m a i n center of oversight o f public funds management. Donor
agencies should agree on joint support to the establishment and operations o f the forum.
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