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Annex 1

:

Description of the Action and its Context
AN INSTITUTIONNAL ASSESSMENT OF COUNTRY SYSTEMS CONCERNING PROVINCIAL AND DISTRICT ADMINISTRATIONS IN PNG Milne Bay provincial administration and administrations of all its districts: Alotau, Esa'ala, Kiriwina-Goodenough, SamaraiMurua PNG

Terms of reference for

Entity subject to the assessment: Location of the Entity:

Section 1: Contact Details
[The following contact details should be completed: The physical address, phone numbers, fax number, website and E-mail address of the entity; The contact details of senior officers and of key contact persons; The contact details of the Audit Task Manager and staff concerned in Finance, contract and operational functions at AIDCO headquarters or in the Delegation; The contact details of other relevant persons involved with the Action, for example: other partner donors or officers in national Ministries]

Entity : [full name of the entity concerned by the assessment]
Address Phone Website Contact 1 [indicate executive positions e.g. Director or General Manager] Name E-Mail Function Phone/Fax Country Fax

Contact 2 [complete and add more contacts where appropriate. Indicate Head of Finance and Accounting, project officers, etc ] Name E-Mail Function Phone/Fax

Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 Section 1: Contact Details (continued) Delegation of the European Commission in PNG Address The Lodge.viot@ec. Economics and Governance section +675 321 3544 E-Mail Roberto. PO BOX 76.europa.europa.eu Phone/Fax ROBERTO CECUTTI Function Head of Trade.cecutti@ec. Brampton street. Port Moresby +675 321 3544 Country PNG Phone Fax +675 321 7850 Audit Task Manager Name THOMAS VIOT Function Trade and Economics coordinator +675 321 3544 E-Mail Contact 2 Name Thomas.eu Phone/Fax 2 .

the Accra Agenda for Action (AAA). an effective and efficient internal control system for the management of operations. the PNG Commitment on Aid Effectiveness and the Cairns Compact. The assessment will also provide sufficient information to inform the separate preparation of a Sub-national Public Expenditure Framework for Accountability (PEFA) assessment.Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 Section 2: Reason for the Assessment. While providing Budget Support (BS) remains an important objective for the EU in PNG. DPs also support decentralised administrations. 3. DPs and the PNG government agreed to conduct an institutional assessment of country systems with a view to both provide a baseline study of PNG government systems against jointly agreed international standards and develop a roadmap (capacity development plan) to support PNG to improve its government systems to international standards. Where the Commission implements the budget by decentralised management. it must first (art. the EU has specific requirements in order to delegate implementation tasks to third countries for the implementation of EU programmes. The scope of the assessment will be structured around five essential criteria which encompass the whole functioning of country systems. In addition. Regulatory Context and applicable Assessment Criteria (a) Context of the assignment In accordance with the Paris Declaration on Aid Effectiveness. In order to increase the use of country systems. the country is currently not eligible to BS and is likely to remain so in the medium term. In view of the above the PNG Government and DPs have identified the need to focus the institutional assessment of country systems particularly on provincial and district administrations. including their budgetary execution (Financial Regulation applicable to the 10th European Development Fund art. The EU Support to Districts and Local Level Governments (SDLLG) project supports particularly the capacity building of district administrations as well as central agencies aiming at improving public financial management at decentralised levels. The five criteria that will structure the scope of the assessment are: 1. However the government is committed to pursue decentralisation and has allocated increasing amounts of the national budget to provincial and districts administrations over the recent years. the PNG Government and the Development Partners (DPs) present in the country have committed themselves to improve aid effectiveness and notably increase the use of country systems when implementing development assistance. 2. an accounting system that enables the correct use of Development Partners funds to be verified and the use of funds to be reflected in the Development Partners accounts. 3 . which includes effective segregation of duties of authorising officer and accounting officer or of the equivalent functions. DPs have jointly agreed on international standards of good practise against which a baseline of PNG country systems can be elaborated. 21). 24 of the FR for 10 th EDF) obtain evidence of the existence and proper operation within the entities to which it entrusts the implementation. mainly due to the level of non compliance with public financial management requirements. In addition. an independent external audit.

control over 4 . the Auditor should take into consideration the requirements set in the COSO guidelines for monitoring and assessing internal control systems. segregation of duties. (iii) assessment of the reaction to the risks of the organisation and (iv) development of responses to the risks (accepting. and determining the appropriate response. providing discipline and structure. as authorisation and approval procedures. procedures and actions established to address risks and to achieve the entity’s objectives. The assessment against these standards should ensure that there is sufficient information collected to allow a separate assessment against Public Expenditure Framework for Accountability (PEFA) indicators relating to predictability and control in budget execution (indicators PI-13 through PI-15. Risk assessment is the process of identifying and analysing the relevant risks to the achievement of the entity’s objectives. 5. management's philosophy and operating style). These standards are widely accepted and codified into the national legislations of several developed countries. the organisational structure.Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 4. In addition. Therefore. for example. influencing the control consciousness of its staff. (ii) risk evaluation. transparent procurement which are non-discriminatory and exclude any conflict of interest grant award procedures which are non-discriminatory and exclude any conflict of interest FIRST CRITERION: EFFECTIVE AND EFFICIENT INTERNAL CONTROLS The first criterion is based on international standards on internal control set by the Committee of Sponsoring Organizations (COSO) on monitoring internal control systems. the Auditor should also take into consideration the requirements concerning internal control of the EU Financial Regulation for General Budget. in particular article 28a and relevant articles of the Implementing Rules. PI18 and PI-20 to PI-22) as modified where applicable by the Guidelines for application of the PEFA Performance Measurement Framework at Sub-national Level (2008). with a view to determining to what extent EU requirements go beyond international benchmarks and without taking these aspects into account in the definition of the roadmap. Control environment factors include the integrity and ethical values of management and staff. Risk Assessment Every entity faces a variety of risks that must be assessed. avoiding.e. It implies (i) risk identification. The minimum requirements for this criterion include: Control Environment The control environment sets the tone of an organization. the “tone at the top” (i. treatment or termination). for EU internal purposes. It is the foundation for all other components of internal control. the organisation’s commitment to competence. as well as human resources policies and practices. including a supportive attitude towards internal controls throughout the organisation. Control Activities Control activities are the policies. Control activities occur throughout the organization and include a range of detective or preventive activities as diverse.

The assessment against these standards should ensure that there is sufficient information collected to allow a separate assessment against Public Expenditure Framework for Accountability (PEFA) indicators relating to accounting. Monitoring is accomplished through ongoing monitoring activities. verifications. for EU internal purposes. Information systems produce reports. SECOND CRITERION: ACCOUNTING The second criterion uses the international standard on cash accounting set by the International Public Sector Accounting Standards (IPSAS) issued by the International Federation of Accountants (IFAC) entitled “Financial Reporting under the cash basis of accounting”. Ongoing monitoring occurs in the course of operations and includes regular management and supervisory activities. accurate and accessible. recording and reporting (indicators PI-16 and PI-17 and PI-23 to PI-25) as modified where applicable by the Guidelines for application of the PEFA Performance Measurement Framework at Sub-national Level (2008). The organisation’s ability to make appropriate decisions is effected by the quality of information which implies that the information should be appropriate. Monitoring Internal control systems need to be monitored to assess the quality of the system's performance over time. financial and compliance-related information. In addition. as well as how individual activities relate to the work of others. that make it possible to run and control the organisation. The minimum requirements for this criterion include: (a) Completeness of the financial statements comprising: A statement of cash receipts. and (c) A comparison of budget and actual amounts 5 . The Auditor should take into consideration the requirements set in the IPSAS for monitoring and assessing public accounting systems. the Auditor should also take into consideration the requirements concerning accounting of the EU Financial Regulation for General Budget and relevant articles of the Implementing Rules. reconciliations. timely. or supervision. cash payments and cash balances (b) Accounting policies and explanatory notes. separate evaluations or a combination of both. with a view to determining to what extent EU requirements go beyond international benchmarks and without taking these aspects into account in the definition of the roadmap.Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 security of assets. and other actions personnel take in performing their duties. reviews of operating performance and operations. They must have a means of communicating significant information upstream. current. across and up the organization. containing operational. Information and Communication Information and communication are essential to realising all internal control objectives. All personnel should understand their own role in the internal control system. Effective communication should flow down. There also needs to be effective communication with external parties.

unless immaterial. with a view to determining to what extent EU requirements go beyond international benchmarks and without taking these aspects into account in the definition of the roadmap.assets and liabilities of a different nature should not be offset with each other. the reporting and economic entity covered should be clearly identified. In addition. the Auditor should also take into consideration the EU requirements concerning external auditing of the financial regulations. in particular article 35(6) of the Implementing Rules. THIRD CRITERION: EXTERNAL AUDIT The third criterion uses the international standards on external audit set by the International Organization of Supreme Audit Institutions (INTOSAI). Therefore. it should be disclosed in the financial statements.the financial statements should be easily identifiable (i.the financial statements should be presented in a consistent manner with those of the previous reporting period (i. the period covered and the currency used should be clear.e. the readers should be able to distinguish them clearly from the other documents . Revenue and liabilities of a different nature should not be offset with each other. the conduct of auditors should be above suspicion and reproach. Their work should be performed with objectivity and impartiality. The assessment against these standards should ensure that there is sufficient information collected to allow a separate assessment against Public Expenditure Framework for Accountability (PEFA) indicators relating to external audit (indicators PI-26 and PI28) as modified where applicable by the Guidelines for application of the PEFA Performance Measurement Framework at Sub-national Level (2008).e.e. fair presentation . and if these have changed the impact of the change should be clearly disclosed). comparability . events and conditions in accordance with the accounting framework used for preparing them. independence: In order to sustain public confidence. the Auditor should take into consideration the requirements set by the INTOSAI for monitoring and assessing external audit systems.the financial statements should be prepared under the going concern accounting convention (i.e. They may not perform activities incompatible with the practice of public auditing.the financial statements should be fairly presented. When this is not the case. clear identification . unless immaterial. consistency .Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 periodicity . Auditors should be 6 . The minimum requirements for this criterion include: Ethical standards Integrity. i.The financial statements should be prepared at regular intervals of time (generally a period of 12 months at least). no offsetting . etc). objectivity. using the same accounting rules and presentation. for EU internal purposes. Opinions and reports should be based exclusively on factual evidence assembled in accordance with the auditing standards. assumption of continuation of the activities). they should be a faithful representation of the transactions. if the financial statements are published as a part of a larger report. going concern .the financial statements should be presented with comparative financial information (for example comparative numbers of the previous financial period).

examination of documentation. management representations. observation of assets. The auditing standards discuss the nature of the audit evidence (for example. an identification of the financial statements being audited) (c) a statement to identify the responsible party of the subject matter and to describe the responsible party’s responsibility and the auditor’s responsibility (for example. Standards of work performance Planning. The auditor should assess the risks of material misstatement of the financial statements and must design his audit procedures in response to the assessed risks. The assurance provided in the opinion should be related to the scope of the work and to the audit evidence obtained (for instance. Standards of reporting The pronouncements on audit reports foresee several types of possible reports and the pronouncements may differ between ISA or INTOSAI or GAGAS.The auditor must document his work in writing in his working papers. and exempt from superfluous details. Audit evidence . The risks assessment should consider the internal controls of the audited organisation and the risks of fraud.The audit work should be duly planned. external confirmations. Documentation . to the point. an opinion report should include the following basic elements: (a) to whom it is addressed (b) a clear identification and description of its subject matter (for example. whether the financial statements are fairly stated. analytical procedures. They are required to perform their work with due professional care. only a limited assurance can be given) 7 .In performing his audit.Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 independent from the audited entity and have no conflicts of interests in performing their work. etc). Supervision and quality control .The work of the audit assistants should be duly supervised and the auditor must implement a quality control system of his work. In all sets of standards the report should be clear. or whether a contractual provision has been complied with). the auditor must obtain evidence to support his audit opinions. who is responsible for preparing the financial statements under audit) (d) an indication of the standards under which the audit has been performed (e) a description of the nature and scope of the work (f) the opinion of the auditor about the subject matter (for instance. In all sets of standards. Professional competence and due professional care: Professional auditors should possess the competence to perform the work and maintain their competence through programmes of continuing education. risk assessment and response to assessed risks . Confidentiality: Professional auditors must respect professional secrecy regarding the information obtained about their clients during the course of their services. The nature and extent of the evidence obtained should provide reasonable assurance of the adequacy of the audit opinion. subsequent events. where a limited scope work was performed.

8 . The assessment against these standards should ensure that there is sufficient information collected to allow a separate assessment against Public Expenditure Framework for Accountability (PEFA) indicator 18 relating to procurement as modified where applicable by the Guidelines for application of the PEFA Performance Measurement Framework at Sub-national Level (2008). To ensure adequate implementation of these principles. FOURTH CRITERION: PROCUREMENT The fourth criterion uses the OECD-DAC Common Benchmarking and Assessment Methodology for Public Procurement Systems. as well as the way in which the publication must be done. award notice).Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 (g) the date of the report (h) the identification of the auditor issuing the report and signature. The application of this general principle notably entails that: Publication Appropriate publication at all stages of the procurement process must be ensured (tender notice. In addition. evaluation and award criteria). reference to the minimum information that must be published should be specified. The tender publication must indicate clearly the terms and specifications of the tender and the conditions of the contract. The minimum requirements for this criterion include: Transparency In the legal texts of many international institutions. The circumstances and conditions under which such contacts may (or may not) be made should be specified. including Milne Bay province. These terms and conditions should not change during the procurement process. for EU internal purposes. contacts between the contracting authority and the candidates must be made in a transparent way. Contacts between the contracting authority and the candidates While the procurement procedure is under way. transparency is mentioned as a key principle for appropriate contract awarding procedures. Therefore the Auditor is expected take into due account these two assessments and to focus particularly on the procurement practices at provincial and districts level. This should also include guidelines about the information and documents which must be provided with the invitation to tender (for example the selection. Therefore. exclusion. against World Bank/AusAid benchmarks.with a view to determining to what extent EU requirements go beyond international benchmarks and without taking these aspects into account in the definition of the roadmap. the Auditor should take into consideration the requirements set by the OECD-DAC Common Benchmarking and Assessment Methodology for Public Procurement Systems. AusAid conducted in 2010 a general procurement assessment in PNG using the OECD-DAC methodology and another one in the education sector. the Auditor should also take into consideration the specific EU main requirements for this criterion included in Title V of the Financial Regulation for General Budget and Title IV of the Financial Regulation for EDF.

Non-discrimination and equal treatment The principle of non-discrimination aims at ensuring an equal access and treatment of all tenderers and potential tenderers. (b) The circumstances under which each type of procedure must be applied. (e) The publicity measures that need to be followed. A locally established supplier should not be treated less favourably than another locally established or a foreign supplier. With that aim. the tendering procedures can generally address various subjects: (a) The description of the procedures to be followed. The award decision should be published. depending on the circumstances).Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 Transparency of the award decision The decision taken during the evaluation of the proposals should be recorded in writing. Use of tendering procedures The financial regulations of the above-noted international institutions mention the use of tendering procedures as a key principle for appropriate procurement. including the possibility to use alternative procedures under specific circumstances. (f) The method of presentation of the tenders ensuring their confidentiality. Equal treatment For the evaluation of tenders the contracting authority should establish measures to ensure fair. conditions and measures to ensure that the overall principles of transparency. The minutes of this decision should include minimum information about each candidate declared to satisfy the requirements. 9 . objective and impartial treatment of all the tenders. which ensures that reasonable time is set for the presentation of the tenders. (c) The measures to ensure that the procedure used are commensurate to the nature and value of the procurement being made (different types of procedures more or less formalised. (g) The deadlines for submission and opening of tenders. Tendering procedures set the framework. The technical and other specifications of the tender should not have the effect of creating unjustified obstacles to competitive tendering and international trade. and the quotation obtained by each candidate according to the award criteria published with the invitation to tender. Common aspects that appear to be often accepted by the above-noted institutions are: Equal access The contracting authority should establish criteria and publish information which gives to all potential suppliers an equal opportunity to compete. equal treatment and best value for money are respected during the implementation of the procurement process. (d) The methods of solicitation or invitation to bid.

is determined to be the most advantageous. (k) The existence of legal remedies for the procurement procedures. as well as in cases of fraud or corruption during the procurement process. This may not necessarily mean the tender with the lowest price but it may mean the tender with be best balance between quality and price. This principle entails that the contract is awarded to the tender which.Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 (h) The functioning of the evaluation/contract award procedure. On no account may the combined total costs eligible for financing be exceeded. in terms of the specific evaluation criteria set forth for the tender. Penalties and sanctions An adequate use of tendering procedures should be supported by adequate specification of the sanctions applicable in case of incorrect or irregular application of the procedure. Absence of conflict of interest The contracting authority should establish measures to ensure that the evaluation process is exempt from any conflicts of interests or other influences. role. Grant applications shall be submitted in writing. grants are subject to ex ante and ex post publicity rules. The minimum requirements for this criterion include: Main principles Grants shall be subject to the principles of transparency and equal treatment. Grants may not be cumulative or awarded retrospectively and they must involve co-financing. Grant award procedure The grants shall be implemented through the publication of calls for proposals. functions and operation of tender committees and evaluation committees. FIFTH CRITERION: GRANT AWARD PROCEDURES The Auditor should take into consideration the EU requirements for this criterion included in Title VI of the Financial Regulation for General Budget and Title VI of the Financial Regulation for EDF. Grants may not have the purpose or effect of producing a profit for the beneficiary. (j) The appointment. (i) The regulation of contacts when the procedure is under process. Best value for money The general principle of economy and efficiency and best value for money in the public procurement procedures can be found in the texts of the above-noted international institutions. 10 . and the measures taken so that the members of such committees are independent from each other. With a view to ensuring the observance of those principles. In no circumstances shall the same costs be financed twice by the budget.

Section 3: General reference documents (a) Legal framework The PNG Public Financial Management Act. The applicants shall be informed in writing of the decision on their application. If the grant requested is not awarded. with a view to determining which proposals may be financed. different from the procedures of the Entity. to the local government bodies or agencies. which will be using their own procedures. ASSESSMENT OF THIRD PARTY SYSTEMS If the Entity further delegates some tasks e. Implementation Where implementation of the action requires the award of procurement contracts by the beneficiary. the grant shall be suspended or reduced or terminated after the beneficiary has been given the opportunity to make his observations. it is necessary to verify how those third party procedures are controlled. with reference in particular to the selection and award criteria already announced.Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 Proposals shall be evaluated. the relevant procedures shall be as set out. The auditor's analysis should be based on the questionnaire's section: Application of the standards at the implementing partner/project level for each of the pillars. The selection criteria shall be such as to make it possible to assess the applicant's ability to complete the proposed action or work programme. on the basis of pre-announced selection and award criteria. The auditor should analyse how the Entity controls and uses the third party systems and report on any corrective measures which may need to be taken by the Entity before it can be entrusted with the budget implementation tasks in the decentralised management mode. over all contractors and subcontractors who have received Community funds.g. The award criteria announced in advance in the call for proposals shall be such as to make it possible to assess the quality of the proposals submitted in the light of the objectives and priorities set. The ‘Financial Regulation’: Council Regulation No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities (OJ L248 of 16/09/2002) as amended on 1 May 2007. without prejudice to subsequent checks by the entity. Payment and control The amount of the grant shall not become final until after the entity has accepted the final reports and accounts. the entity shall give the reasons for the rejection of the application. Should the beneficiary fail to comply with his obligations. The ‘Implementing Rules’: Commission Regulation of 23 December 2002 laying down detailed rules for the implementation of Council Regulation No 1605/2002 on the Financial 11 . on documents and on the premises. Each grant decision or agreement shall provide expressly for the Commission and the Court of Auditors to exercise their powers of control.

see: This section should present and describe other information that has or may have a significant impact on the assessment and the sources or documents from which this information can be obtained. Samarai-Murua. The assessment will be performed at the Milne Bay provincial administration in Alotau and in each of the four district administrations in the province: Alotau. The Financial Regulation of 18 February 2008 applicable to the 10th European Development Fund (OJ L 78/1 of 19 March 2008). Section 4: Entity concerned by the assessment The entity is the Milne Bay provincial and districts' administrations in PNG.Obtain target Discuss and Consolidated Collect Distribute AAPs Directorates populations and publish Delegation EuropeAid process adopt andAAPs out Delegation EuropeAid AAP carry final A-D (risk) analysis consolidated (draft/final) & AAPs AAP prepare & EuropeAid. KiriwinaGoodenough. Section 5: Other Information and Sources For further information on the entity.05 AAP draft consolidated EuropeAid Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 Regulation applicable to the general budget of the European Communities (OJ L357 of 31/12/2002) as amended on 1 May 2007. Esa'ala. 12 .