Enhancing Internal Audit in Maldives

Enhancing Internal Audit in Maldives

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Project Number: 4 July 2007 Enhancing Internal Audit in Maldives (Financed by the Australia-ADB South Asia Development Partnership Facility [RETA 6337: Development Partnership Program for South Asia]) A. Basic Data 1. Activity Title: Enhancing Internal Audit in Maldives 2. Project Officer(s): Kyung Nam Shin 3. Request Date: 8 June 2007 4. Executing Agency: Asian Development Bank (ADB) 5. Implementing Agency(ies): The Ministry of Finance and Treasury, The Government of Maldives 6. Types of Interventions: Innovative Intervention 7. Amount Requested: $500,000 8. Period this funding request will cover: 20 January 2008 – 20 July 2009 (18 months) 9. Region/Country: Republic of Maldives B. Description of Executing and Implementing Agency Ministry of Finance and Treasury (MOFT) will be the Executing and Implementing Agency headed by the Financial Controller. This agency has significant experience in executing and implementing projects over a range of agencies. This was clearly demonstrated on the projects post the Tsunami period in project monitoring, financial reporting and staff training to ensure projects are implemented as per the agreed requirements. Whilst Government of Maldives (GOM) has developed an initial organization chart and budgets for the Internal Audit Department, during the preparation of the Strategic Management Plan, the current GOM’s plans will be ...

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Project Number: 4
July 2007


Enhancing Internal Audit in Maldives
(Financed by the
Australia-ADB South Asia Development Partnership Facility
[RETA 6337: Development Partnership Program for South Asia])



A. Basic Data
1. Activity Title: Enhancing Internal Audit in Maldives
2. Project Officer(s): Kyung Nam Shin
3. Request Date: 8 June 2007
4. Executing Agency: Asian Development Bank (ADB)
5. Implementing Agency(ies): The Ministry of Finance and Treasury, The Government of Maldives
6. Types of Interventions: Innovative Intervention
7. Amount Requested: $500,000
8. Period this funding request will cover: 20 January 2008 – 20 July 2009 (18 months)
9. Region/Country: Republic of Maldives
B. Description of Executing and Implementing Agency
Ministry of Finance and Treasury (MOFT) will be the Executing and Implementing Agency headed
by the Financial Controller. This agency has significant experience in executing and
implementing projects over a range of agencies. This was clearly demonstrated on the projects
post the Tsunami period in project monitoring, financial reporting and staff training to ensure
projects are implemented as per the agreed requirements. Whilst Government of Maldives
(GOM) has developed an initial organization chart and budgets for the Internal Audit Department,
during the preparation of the Strategic Management Plan, the current GOM’s plans will be
reviewed and incorporated as part of the overall recommendations and agreement.

C. Proposed Project
1. Background and Rationale:

The GoM has initiated a program to modernize the public accounting system to enable it to
improve financial management of the public sector, enhance public sector governance and
strengthen its accountability. Phase I was completed in 2002, with a technical assistance support
provided under the Capacity Building of the Maldives Public Accounting System (hereafter
referenced as the PAS) Project financed by the Asian Development Bank. During the Phase I of
PAS, a detailed diagnostic study of existing systems and proposed reforms was undertaken, and
an implementation strategy prepared. The implementation was deferred until the recent passage
of the Public Finance Act that necessitates changes to current systems for financial management
and regulatory reporting. As part of the overall modernization, the MoFT will need to establish an
internal audit function. To this end, it requires a preparation of Strategic Management Plan and
using it as a basis for establishing the internal audit function for the GoM.

2. Objectives:

To enhance an internal audit function in order to provide an independent and objective opinion to
the Financial Controllers, Accounting Officers, Management of the GoM on risk management,
control and governance, by measuring and evaluating control and governance effectiveness in
achieving the organization’s agreed objectives. Moreover, the internal audit function will provide
an independent and objective consultancy service specifically to help line management improve
the organization’s risk management, control and governance. Also, the risk assessment
management will need to be explored to cover the processes on financial statement misstatement
and framework of potential sources of risk which could be applied to Atolls administrative bodies.

3. Scope of Work/Description of Proposed Approaches

As part of the preparation of the Strategic Management plan, the following tasks will be
completed: -

• Review the Public Finance Act (passed in December 2005) and proposed Public Audit Bill
(passed in April 2007), identify stakeholder and their expectations. This will include running
workshops, defining parameters of internal audit after stakeholder consultations, common
activities and specific needs of specialist ministries, detail how government auditors can add
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value and bring about positive change and recommend organizational models needed to achieve
the objectives;

• Through stakeholder consultations define the Mission, articulate the common mission discussed
and recommend the organizational authority and responsibilities of the function between audit
and functional staff;

• Develop and recommend formal framework for organization and management structure, address
centralized versus decentralized approach and the options for the line ministries’ structure;

• Assess skills requirements and include a detailed analysis of the necessary critical resources,
skills and competencies, consider external providers as an option to approaching internal audit to
accessing needed skills sets and assess time required to train core staff;

• Examine options for developing or acquiring enabling infrastructure, methodologies and
technologies and options of developing own programs compared to acquiring what is
commercially available consistent with international audit standards;

• Develop broad Audit Plan to be used as the basis for the development of more detailed plans;

• For reporting and communication protocols define the development, format, review and timing of
audit reports. Document organizational expectations for the timely follow-up and resolution of
internal audit issues and recommendations on internal audit and auditees;

• Establish a methodology for measuring of results by develop objective and subjective metrics and
for a process for communicating audit results to all staff;

• Prepare a time table for establishing the audit function and for commencement of audit; and

• Prepare a multi-year budget sufficient to achieving stakeholder expectations.
4. Work Plan and Reporting
The establishment of internal audit will be completed over three phases.
Phase I the following are some key reports that will required as part of the delivery of the services: -
i. Inception Report;
ii. Draft Strategic Management Plan by the end of month 2:

Phase II activities will be completed on the basis of Phase I recommendations and agreement with
GOM and will include the following: -

i. Organization structure and reporting requirements;
ii. Appointment of staff;
iii. Staff training;
iv. Audit programs;
v. GOMs’ Budget requirements to support the Internal Audit Department; and
vi. Management Reporting and action etc (please see details in DMF)

Phase III will be the actual implementation of the agreed arrangements.
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5. Expected Outputs and Outcomes

Outcomes

The establishment of internal audit function will enable:
• Improvement by the Government in evaluating various management models in establishing the
internal audit function including (i) central MoFT based; and (ii) decentralized (auditors) based in
line ministries. The alternative models should consider (i) relationship with Auditor General; (ii)
establishment of benchmarks; (iii) audit program development; (iv) risk management tool and
framework development; (v) staff training requirements; and (vi) reporting.
• Enhancing accurate, reliable, and timely financial reporting and monitoring to meet international
accounting standards for providing financial information to the Government for
management/financial decision making; and
• Ensuring more comprehensive and updated control over public funds, development of appropriate
budget and cash management strategy which will be shared with atolls

Outputs

Phase 1
1. Assessment and evaluation of current Audit General’s staff that will be transferred to the Internal
Audit Division
2. Preparation of Strategic Management Plan to assist the Government in evaluating various
management models in establishing the internal audit function, and recommendations

Phase 2
3. Assist with the establishment of the organizational structure, institutional framework and operations
of the Internal Audit Office.
4. Prepare human resource policies, mandate and any additional legislation requirement, audit and
accounting standards to be followed;
5. Prepare corporate plan, including auditor and accounting registration standards, strategic audit
plans and time recording system;
6. Assist with assessment and evaluation of current Auditor General’s staff that may be suitable to be
transferred to the Internal Audit Division;
7. As an option for completing internal audit activities, prepare outsourcing systems, including
contracting out of audits to private auditors according to procedures for review of bidders’ financial
status and ability to perform work;
8. Prepare comprehensive audit manual based on risked-based auditing and performance auditing
methodology;
9. Develop risk assessment tool and framework covering the processes and each potential sources of
risks, what those risks are, and how an audit approach would respond to mitigate those risks, etc.
10. Train staff by means of formal training sessions and on-the-job training and implemented new
methodologies relating to relevant audit tasks and related risk mitigation;
11. Procure computer equipment and installed the hardware and software to be integrated and
interfaced with on-going Public Accounting System Management Information System; and
12. Establish a computer audit group, computerize strategic audit planning process and install the
time recording system, and train auditors and computer system audits.

Phase 3
13. Commence audits and work with staff over 4-6 months on actual audits and management reports;
14. Pilot test audit approach risk-by-risk framework in a pilot ministry, in a pilot state owned
enterprise, and in a Bank of Maldives

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6. Project Evaluation and Information Dissemination

Stakeholder participation will be needed to evaluate the activity’s results. A consultation and feedback
process will be considered. Moreover, workshops and seminars will be held to facilitate findings and
recommendations and to enhance government officials’ capacity toward undertaking efficient
management and operating of internal audit functionalities.

7. Scope of Replication/Use in other DMCs

The Strategic Plan for establishing the internal audit in the Republic of Maldives will be a good basis
for replicating the establishment of similar institutions in other developing member countries through
the presentation of this report by the Financial Controller and/or the Senior Auditor of the Republic.
Staff from neighboring countries will be encouraged to adopt similar models in their countries by
visiting Maldives and arranging workshops.

D. Cost Estimate and Disbursement Schedule

Item Partner Contribution Requested Total Disbursement
1. Preparatory Activities
(specify)
-Consultants
-Travel -Equipment (specify)
-Others (specify)
2. Implementation
activities (specify)
-Consultants(int’l) 200.00 200.00
40.00 30.00 70.00 -Consultants(local) and/or
counterpart staff

-Travel (international and 90.00 90.00
local)
-Equipment (computers 25.00 25.00
and fax machines)
- Procurement of audit 80.00 80.00
programs
-Reports and 10.00 10.00
communications etc
3. Monitoring and
Evaluation
-Consultants and/or
counterpart staff
-Travel
-Equipment (specify)
-Others (specify)
4. Training and Capacity
Building (specify)
-Consultants
-Travel
-Equipment (specify)
-Seminar and 20.00 10.00 30.00
conferences
-Training 30.00
5. Auditing
6. Office accommodation 37.00 37.00
and transport
7. Miscellaneous 10.00 5.00 15.00
Administration and
support costs
8. Contingencies 40.00 30.00 70.00
Total Expenses 167.00 500.00 667.00
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E. Proposed Project Management System

It is proposed that the Executing and Implementing Agency be Ministry of Finance and Treasury
(MOFT), Republic of Maldives. A Working Group be established, chaired by the Financial Controller
and comprising members from the Auditor General’s Office and the key ministries such as Education
and Health. Milestones will be established comprising the delivery of key reports, workshops and
implementation.


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Appendix
DESIGN AND MONITORING FRAMEWORK

Data Design Performance Assumptions
Sources/Reporting Summary Targets/Indicators and Risks Mechanisms
Impact

• Enhance an internal audit • Management reports • Internal Audit
function and the quality of produced by each Committee (IAC)
governance to provide an Agency using PAS
independent and objective • Regular reports from
opinion to the Financial • A set of agreed annual various user
Controller, Accountable financial statements on ministries and
Officers, and Management Government finances agencies on audit
of the Government of prepared by the and governance
Maldives on risk Ministry of Finance and function
management, control and Treasury (MoFT), implementation
governance. audited by Audit Office,
and presented to the • Resolutions based
• This activity will expedite People’s Majilis on management
institutional reorganization (Parliament). financial statements
and capacity building aiming and reviewed for
to enhance efficiency, action by the Senior
accountability, and Management of
transparency of the public each Agency
accounting and budget
execution.
Outcomes

The enhancement of internal
audit function will enable: • A fiscal targeting • Monitoring by • Government commitment
• Support the Government in framework based on the Treasury Division to reform,
evaluating various data from the newly
management models in introduced Public • Regular reports of • Political and economic
establishing the internal Accounting System, various ministries and stability,
audit function including (i) agencies,
central MoFT based; (ii) • Developed and • Delays in the Government
decentralized (auditors transparent internal • Loan review missions reorganization to adapt the
based in line agencies); (iii) audit function, reform,
relationship with Auditor
General; (iv) establishing • Strengthened
benchmarks; (v) audit capabilities of MoFT,
program development; (vi) Line Agencies, Internal
risk management tool and Audit Department, etc
framework development;
(vii) staff training; and (viii) • Developed risk
reporting; management framework
• Enhance accurate, reliable, to include operational
and timely financial risk across the
reporting and monitoring to organization,
meet international
accounting standards for
providing financial
information to the
Government for
management/financial
decision making; and
• More comprehensive and
updated control over public
funds, development of
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appropriate budget and
cash management strategy
which will be shared with
atolls

Outputs

Phase 1
1. Preparation of Strategic • MoFT Strategic • Progress report by • Delay in decision making by
Management Plan to assist the Management Plan and the Treasury Division the MoFT on Internal Audit
Government in evaluating reorganization plan, and the consultants, Strategic Management Plan
various management models in and reorganization plan,
establishing the internal audit • MoFT project plans on • Loan review missions
function, and recommendations phases 1, 2 and 3, • Delay in or insufficient
• Monitoring by the capacity building in MoFT
Phase 2 and other user Line • Audit function and Treasury Division and
2. Assist with the establishment governance design Internal Audit, Ministries, Agencies, and
of the organizational structure, Atolls plan,
institutional framework and • Regular reports of
operations of the Internal Audit • Lack of necessary human • A pilot agency various ministries and
Office. implementation plan, agencies, capacity and operational
delays in establishing
3. Prepare human resource institutional arrangements, • A pilot implementation
policies, mandate and any plan for atolls,
additional legislation • Delays in implementation of
requirement, audit and the functions due to • Annual financial
accounting standards to be operational or human statements plan:
followed; resource restrictions, statement of assets and
liabilities, statement of
4. Prepare corporate plan, • Delays in decision making general loan and capital
including auditor and by the Treasury Division on works fund, statement
accounting registration of trust fund, detailed the atolls implementation
standards, strategic audit plans plan. statement of receipts
and time recording system; classified under heads
of revenue estimates, • Implementation plan delays
5. Assist with assessment and detailed statement of
evaluation of current Auditor expenditure classified • Delays in skills assessment
General’s staff that may be under heads of and design of career plans,
suitable to be transferred to the appropriation, statement
Internal Audit Division; of public debt, • Inadequate delivery of
statement of guarantee, training due to resource 6. Prepare comprehensive and statement of constraints or lack of wide-audit manual based on risked- lending. spread participation
based auditing and performance auditing • Risk assessment
methodology; framework focused on
operational risk
7. Develop risk assessment
tool and framework covering • A human resources skill
the processes and each assessment and career potential sources of risks, what plan for staff involved in
those risks are, and how an internal audit function,
audit approach would respond to mitigate those risks, etc.
• A staff training plan in a comprehensive 8. Train staff by means of framework covering formal training sessions and
annual plan and across on-the-job training and all the government implemented new
ministries, agencies methodologies relating to
relevant audit tasks and related
risk mitigation;
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9. Procure computer equipment
and installed the hardware and
software to be integrated and
interfaced with on-going Public
Accounting System
Management Information
System; and

10. Establish a computer audit
group, computerize strategic
audit planning process and
install the time recording
system, and train auditors and
computer system audits.

Phase 3
11. Commence audits and work
with staff on actual audits and
management reports;

12. Pilot test audit approach
risk-by-risk framework in a pilot
ministry,
Activities with Milestones (Project Period: 18 months) Inputs

1. Phase 1 Implementation ADB ($500,000)
- Assessment and evaluation of current Auditor General’s staff that will be transferred to Consultancy, travel:
the Internal Audit Division within 1 month of the commencement of the TA
$320,000
Equipment, procurement - Preparation of a Strategic Management Plan within 2 months of the commencement of
of audit programs: the TA
$105,000
2. Phase 2 Implementation Seminar, conferences and
- Establishment of the organizational structure, institutional framework and operations of training: $40,000
the internal audit office within 3 months of the commencement of the TA
Miscellaneous
administration & support - Prepare human resource policies, mandate and any additional legislation requirement,
costs: $5,000 audit and accounting standards to be followed;
Contingencies: $30,000
- Preparation of corporate plans, including auditor and accounting registration standards,
strategic audit plans and time recording system within 4 months of the commencement of Government ($167,000)
the TA Consultants: $50,000
Reports & - Preparation of comprehensive audit manual based on risked-based auditing and
communications: $10,000 performance auditing methodology within 6 months of the commencement of the TA
Seminar & conferences:
- Developing risk assessment tool and framework covering the processes and each $20,000
potential sources of risks within 8 months of the commencement of the TA Office accommodation &
transport: $37,000 - Procuring computer equipment and installed the hardware and software to be integrated
Miscellaneous and interfaced with on-going Public Accounting System Management Information System
administration & support within 9 months of the commencement of the TA.
costs: $10,000
- Establishing a computer audit and governance group, computerize strategic audit Contingencies: $40,000
planning process and installing the time recording system, and training auditors and
computer system audits within 9 months of the commencement of the TA

- Training staff by means of formal training sessions and on-the-job training etc within 11
months of the commencement of the TA

3. Phase 3 Implementation
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- Commencing risk-based audits and work with staff on actual audits, governance and
management reports within 12 months of the commencement of the TA

- Pilot testing audit approach risk-by-risk framework in a pilot ministry within 14 months of
the commencement of the TA

- Improving the internal audit mechanism based on proof of concept and completion of
internal audit staff within 17 months of the commencement of the TA




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