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

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.europa. Brampton street. PO BOX 76.viot@ec.eu Phone/Fax 2 .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.cecutti@ec.europa.eu Phone/Fax ROBERTO CECUTTI Function Head of Trade. Economics and Governance section +675 321 3544 E-Mail Roberto.

The five criteria that will structure the scope of the assessment are: 1. the country is currently not eligible to BS and is likely to remain so in the medium term. In order to increase the use of country systems. the EU has specific requirements in order to delegate implementation tasks to third countries for the implementation of EU programmes. In addition. which includes effective segregation of duties of authorising officer and accounting officer or of the equivalent functions. 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. In addition. the Accra Agenda for Action (AAA). mainly due to the level of non compliance with public financial management requirements. 2. Where the Commission implements the budget by decentralised management. 21). an independent external audit. DPs have jointly agreed on international standards of good practise against which a baseline of PNG country systems can be elaborated. 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. including their budgetary execution (Financial Regulation applicable to the 10th European Development Fund art. 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. 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 . 3. The assessment will also provide sufficient information to inform the separate preparation of a Sub-national Public Expenditure Framework for Accountability (PEFA) assessment. While providing Budget Support (BS) remains an important objective for the EU in PNG. 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. The scope of the assessment will be structured around five essential criteria which encompass the whole functioning of country systems. 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. Regulatory Context and applicable Assessment Criteria (a) Context of the assignment In accordance with the Paris Declaration on Aid Effectiveness. DPs also support decentralised administrations. it must first (art. the PNG Commitment on Aid Effectiveness and the Cairns Compact.Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 Section 2: Reason for the Assessment. 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. an effective and efficient internal control system for the management of operations.

Risk assessment is the process of identifying and analysing the relevant risks to the achievement of the entity’s objectives. (iii) assessment of the reaction to the risks of the organisation and (iv) development of responses to the risks (accepting. the Auditor should also take into consideration the requirements concerning internal control of the EU Financial Regulation for General Budget. It implies (i) risk identification. procedures and actions established to address risks and to achieve the entity’s objectives. Control environment factors include the integrity and ethical values of management and staff. the organisation’s commitment to competence. Control Activities Control activities are the policies. in particular article 28a and relevant articles of the Implementing Rules.Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 4. Therefore. 5. 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. for EU internal purposes. 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. In addition. as well as human resources policies and practices. 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 predictability and control in budget execution (indicators PI-13 through PI-15. (ii) risk evaluation. control over 4 . Risk Assessment Every entity faces a variety of risks that must be assessed. providing discipline and structure. the “tone at the top” (i. and determining the appropriate response. influencing the control consciousness of its staff. It is the foundation for all other components of internal control.e. 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). management's philosophy and operating style). The minimum requirements for this criterion include: Control Environment The control environment sets the tone of an organization. for example. as authorisation and approval procedures. the organisational structure. avoiding. the Auditor should take into consideration the requirements set in the COSO guidelines for monitoring and assessing internal control systems. treatment or termination). These standards are widely accepted and codified into the national legislations of several developed countries. including a supportive attitude towards internal controls throughout the organisation. segregation of duties.

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”. They must have a means of communicating significant information upstream. 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. current. Effective communication should flow down. The Auditor should take into consideration the requirements set in the IPSAS for monitoring and assessing public accounting systems. Monitoring is accomplished through ongoing monitoring activities. All personnel should understand their own role in the internal control system. 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. containing operational. separate evaluations or a combination of both. for EU internal purposes. There also needs to be effective communication with external parties. 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). Information and Communication Information and communication are essential to realising all internal control objectives. across and up the organization. or supervision. verifications. and (c) A comparison of budget and actual amounts 5 . The minimum requirements for this criterion include: (a) Completeness of the financial statements comprising: A statement of cash receipts. cash payments and cash balances (b) Accounting policies and explanatory notes.Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 security of assets. Ongoing monitoring occurs in the course of operations and includes regular management and supervisory activities. that make it possible to run and control the organisation. Monitoring Internal control systems need to be monitored to assess the quality of the system's performance over time. and other actions personnel take in performing their duties. The organisation’s ability to make appropriate decisions is effected by the quality of information which implies that the information should be appropriate. reviews of operating performance and operations. financial and compliance-related information. timely. accurate and accessible. In addition. as well as how individual activities relate to the work of others. 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. Information systems produce reports. reconciliations.

comparability .the financial statements should be presented with comparative financial information (for example comparative numbers of the previous financial period). clear identification . etc).the financial statements should be easily identifiable (i.Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 periodicity . fair presentation . the period covered and the currency used should be clear.the financial statements should be presented in a consistent manner with those of the previous reporting period (i. using the same accounting rules and presentation.e. independence: In order to sustain public confidence. it should be disclosed in the financial statements. assumption of continuation of the activities). they should be a faithful representation of the transactions. the reporting and economic entity covered should be clearly identified.e. if the financial statements are published as a part of a larger report. i. objectivity. unless immaterial. the Auditor should take into consideration the requirements set by the INTOSAI for monitoring and assessing external audit systems. When this is not the case. unless immaterial.The financial statements should be prepared at regular intervals of time (generally a period of 12 months at least).the financial statements should be fairly presented. and if these have changed the impact of the change should be clearly disclosed). Auditors should be 6 . the conduct of auditors should be above suspicion and reproach.e. consistency . the readers should be able to distinguish them clearly from the other documents . going concern . THIRD CRITERION: EXTERNAL AUDIT The third criterion uses the international standards on external audit set by the International Organization of Supreme Audit Institutions (INTOSAI). in particular article 35(6) of the Implementing Rules. Revenue and liabilities of a different nature should not be offset with each other. The minimum requirements for this criterion include: Ethical standards Integrity. 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).assets and liabilities of a different nature should not be offset with each other. 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. no offsetting . Therefore. events and conditions in accordance with the accounting framework used for preparing them. Opinions and reports should be based exclusively on factual evidence assembled in accordance with the auditing standards. Their work should be performed with objectivity and impartiality. In addition.e. They may not perform activities incompatible with the practice of public auditing.the financial statements should be prepared under the going concern accounting convention (i. the Auditor should also take into consideration the EU requirements concerning external auditing of the financial regulations. for EU internal purposes.

subsequent events. 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. The risks assessment should consider the internal controls of the audited organisation and the risks of fraud. and exempt from superfluous details. the auditor must obtain evidence to support his audit opinions. analytical procedures. In all sets of standards. where a limited scope work was performed. etc). external confirmations. The assurance provided in the opinion should be related to the scope of the work and to the audit evidence obtained (for instance. Confidentiality: Professional auditors must respect professional secrecy regarding the information obtained about their clients during the course of their services.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. In all sets of standards the report should be clear. 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. Supervision and quality control . 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. 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 nature and extent of the evidence obtained should provide reasonable assurance of the adequacy of the audit opinion. to the point. The auditing standards discuss the nature of the audit evidence (for example. risk assessment and response to assessed risks . Documentation . 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. examination of documentation. Audit evidence . 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. only a limited assurance can be given) 7 .The audit work should be duly planned. or whether a contractual provision has been complied with).In performing his audit. management representations.The work of the audit assistants should be duly supervised and the auditor must implement a quality control system of his work. They are required to perform their work with due professional care.The auditor must document his work in writing in his working papers. observation of assets.

the Auditor should take into consideration the requirements set by the OECD-DAC Common Benchmarking and Assessment Methodology for Public Procurement Systems.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. transparency is mentioned as a key principle for appropriate contract awarding procedures. Therefore. To ensure adequate implementation of these principles. AusAid conducted in 2010 a general procurement assessment in PNG using the OECD-DAC methodology and another one in the education sector. Contacts between the contracting authority and the candidates While the procurement procedure is under way. 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. These terms and conditions should not change during the procurement process. 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. The circumstances and conditions under which such contacts may (or may not) be made should be specified.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. for EU internal purposes. This should also include guidelines about the information and documents which must be provided with the invitation to tender (for example the selection. The tender publication must indicate clearly the terms and specifications of the tender and the conditions of the contract. FOURTH CRITERION: PROCUREMENT The fourth criterion uses the OECD-DAC Common Benchmarking and Assessment Methodology for Public Procurement Systems. exclusion. as well as the way in which the publication must be done. award notice). The minimum requirements for this criterion include: Transparency In the legal texts of many international institutions. reference to the minimum information that must be published should be specified. 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. 8 . evaluation and award criteria). contacts between the contracting authority and the candidates must be made in a transparent way. 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). including Milne Bay province. against World Bank/AusAid benchmarks.

objective and impartial treatment of all the tenders. The award decision should be published. depending on the circumstances). A locally established supplier should not be treated less favourably than another locally established or a foreign supplier. including the possibility to use alternative procedures under specific circumstances. (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. 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. Non-discrimination and equal treatment The principle of non-discrimination aims at ensuring an equal access and treatment of all tenderers and potential tenderers. and the quotation obtained by each candidate according to the award criteria published with the invitation to tender. The minutes of this decision should include minimum information about each candidate declared to satisfy the requirements. the tendering procedures can generally address various subjects: (a) The description of the procedures to be followed. (f) The method of presentation of the tenders ensuring their confidentiality. (b) The circumstances under which each type of procedure must be applied.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. With that aim. (d) The methods of solicitation or invitation to bid. (g) The deadlines for submission and opening of tenders. The technical and other specifications of the tender should not have the effect of creating unjustified obstacles to competitive tendering and international trade. Tendering procedures set the framework. 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. equal treatment and best value for money are respected during the implementation of the procurement process. 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. (e) The publicity measures that need to be followed. 9 . which ensures that reasonable time is set for the presentation of the tenders.

Grants may not have the purpose or effect of producing a profit for the beneficiary. With a view to ensuring the observance of those principles. 10 . as well as in cases of fraud or corruption during the procurement process. is determined to be the most advantageous. Grant applications shall be submitted in writing. 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. In no circumstances shall the same costs be financed twice by the budget. The minimum requirements for this criterion include: Main principles Grants shall be subject to the principles of transparency and equal treatment. Grant award procedure The grants shall be implemented through the publication of calls for proposals. This principle entails that the contract is awarded to the tender which. On no account may the combined total costs eligible for financing be exceeded.Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 (h) The functioning of the evaluation/contract award procedure. 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. functions and operation of tender committees and evaluation committees. (j) The appointment. 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. 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. (i) The regulation of contacts when the procedure is under process. (k) The existence of legal remedies for the procurement procedures. grants are subject to ex ante and ex post publicity rules. and the measures taken so that the members of such committees are independent from each other. in terms of the specific evaluation criteria set forth for the tender. role. 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. Grants may not be cumulative or awarded retrospectively and they must involve co-financing.

Payment and control The amount of the grant shall not become final until after the entity has accepted the final reports and accounts. the relevant procedures shall be as set out. 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. it is necessary to verify how those third party procedures are controlled. Section 3: General reference documents (a) Legal framework The PNG Public Financial Management Act. Each grant decision or agreement shall provide expressly for the Commission and the Court of Auditors to exercise their powers of control. different from the procedures of the Entity. over all contractors and subcontractors who have received Community funds. 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.g. Implementation Where implementation of the action requires the award of procurement contracts by the beneficiary. ASSESSMENT OF THIRD PARTY SYSTEMS If the Entity further delegates some tasks e. If the grant requested is not awarded. Should the beneficiary fail to comply with his obligations. 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. with reference in particular to the selection and award criteria already announced. 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 . the entity shall give the reasons for the rejection of the application. 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. 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. with a view to determining which proposals may be financed. which will be using their own procedures. the grant shall be suspended or reduced or terminated after the beneficiary has been given the opportunity to make his observations. The applicants shall be informed in writing of the decision on their application. on the basis of pre-announced selection and award criteria. to the local government bodies or agencies. without prejudice to subsequent checks by the entity. on documents and on the premises.Annex 1 to ToR for an institutional assessment in Milne Bay Version 22 October 2010 Proposals shall be evaluated.

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. 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. Section 5: Other Information and Sources For further information on the entity. Section 4: Entity concerned by the assessment The entity is the Milne Bay provincial and districts' administrations in PNG. 12 .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. The Financial Regulation of 18 February 2008 applicable to the 10th European Development Fund (OJ L 78/1 of 19 March 2008). Samarai-Murua. Esa'ala. 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.

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