T R A C E 1 Anticipate, prevent, monitor… Concurrent Auditing: An Important Tool for Achieving...

T R A C E1

Anticipate, prevent, monitor…

Concurrent Auditing:

An Important Tool for

Achieving Transparency

Presentation

Presented by:

Hans F. Gude, KPMG San Francisco Mary P. Andrade, KPMG Quito

February 2001

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Presenters

Hans F. Gude, San Francisco, CA

Director of KPMG’s TRACE practice.

Formerly director of KPMG FEMA practice.

Manager of compliance audits of states for FEMA to insure that they properly applied hundreds of millions of dollars in federal disaster grants.

Task manager for diagnostic assessment of Honduras concurrent audit.

Project manager of U.S. oversight team for concurrent audit in Belize.

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Presenters, Cont.

Mary Wyatt de Andrade, Quito, Ecuador

Manager in KPMG’s TRACE practice.

Resident in Quito, Ecuador, past 20 years.

Former internal auditor for Bank of America.

Before joining KPMG, managed $30M IDB loan for the Ecuadorian government.

Has worked as a multinational tax consultant to foreign petroleum investors in Ecuador.

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TR ansparency in the

A ccounting and

C ontrol

E nvironment

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KPMG TRACE Practice

Evolved out of disaster practice.

Dedicated practice.

U.S. based with international focus.

Private sector component: Abitagua example.

Endorsement by Govt. of Ecuador.

Work with in-country KPMG offices.

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KPMG Global Resources

Personnel: 100,000+

Offices: 1,100

Countries: 160

Revenues: $12 Billion

“We increasingly find KPMG is the firm most willing to be the innovator and chart the new course.” - Emerson’s 2000 Big Five Annual Report

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Presentation Outline

Traditional auditing vs. Concurrent auditing

Project examples

Issues unique to disasters

Lessons learned

Potential HIPC Applications

Recommendations

Issues surrounding concurrent auditing

Q&A

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Basic Goals for Development Funds

Types of costs (typical infrastructure project): Force account labor, equipment, materials

Purchased materials and equipment

Rented facilities and equipment

Engineering

Contractor

Want to ensure that:

Funds go to authorized uses…

Funds be efficiently applied…

Funds be accounted for…

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Eligibility, Allowability, Efficiency

Eligibility: Does the expense fall under a

category authorized by the loan agreement?

Allowability: Is the cost supportable by an audit

trail and administrative requirements?

Efficiency: Are you getting value for your

money?

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The Traditional Audit

Periodic vs. concurrent approach.

Audit after the funds are disbursed.

No role in establishing or improving processes.

Focus on the numbers.

Result:

Inefficient application of funds through poor transparency, poor management, or fraud.

KPMG will be pleased to certify that…

“All the money is gone…”

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What is Concurrent Auditing?

Hands-on oversight of project from pre-disbursement to last disbursement.

Begins with diagnostic assessment of the executing unit’s capabilities and controls.

Diagnostic leads to recommendations for strengthening of observed problems

Incorporates continuous training of public-sector employees.

Includes continuous testing and monitoring.

Evaluates the eligibility, allowability, and efficiency of project expenditures.

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Project Specialists

Financial and compliance auditing

Forensic auditing and fraud (former FBI)

Sectoral (health, banking, government, etc.)

Systems

Information risk management

Construction management

Disaster cost tracking

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Diagnostic Involves a Holistic Assessment Organization

Staffing

Policies and procedures

Cost tracking

Accounting system

Technology (level of automation)

Communications and reporting

Project monitoring

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Comparison of Traditional and Concurrent AuditingTransaction approach Holistic approach

Focus on the numbers Focus on the processes as well as the numbers

Ex-post audit Concurrent, or continuous

Inspect, detect, and react

Anticipate, prevent, and monitor

Ineffective people are the primary source of risk

Ineffective processes are the primary source of risk

Expert Knowledge of Accounting and Auditing

Expert Knowledge of Business

Focus on accounting and finance departments

Focus on all departments having roles in the process

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Representative Experience

Concurrent audit of US$29M roadway and potable water loan, Honduras (IDB).

Concurrent audit of US$20M emergency loan, Belize (IDB).

Concurrent audit of relief grants, Nicaragua (Catholic Relief Services).

Audit of United Nations offices throughout Southeast Asia and Latin America (5-yr contract).

Audits of multi-lateral development bank loans throughout Latin America.

Consulting to U.S. Department of Housing and Urban Development to track ~$4 billion in construction grants.

Audit of the states of Georgia and Arkansas for the Federal Emergency Management Agency (FEMA) to determine statewide compliance and accountability in the use of federal disaster grants.

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Example: Hurricane Reconstruction, Honduras Proyecto De Emergencia Para La Infraestructura Vial

Y De Agua Potable

US$28.7 Million

Audit fees: $600,000

Approx. 1.5 years

September 1999 to February 2001

Two executing units

Scope of Work Diagnostic assessment

Concurrent Audit

Project Financial Statements

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Sample Observations, Honduras

Need for policies and procedures manual

Need for position descriptions

Scoring criteria was often changed once proposals were submitted

Hours worked did not match the standard work day per the government or per individual contracts

Lack of documentation supporting site visits

Insufficient oversight of construction projects by government officials

No comparisons between percentage of completion and amounts paid

Environmental concerns identified after projects were awarded were not properly communicated to the IDB

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Example: Hurricane Reconstruction, Belize Hurricane Keith Emergency Reconstruction

Facility, Financial and Concurrent Audit Services

US$20.0 Million

Audit fees: US$240,000

12 months, beginning January 2001

Special PEU established

Scope of Work

Diagnostic assessment

Concurrent Audit

Audit Project Financial Statements

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Issues Encountered

Several million already obligated in disaster response costs.

PEU could not request reimbursement till KPMG certified that the requested costs were eligible.

However, KPMG wanted to conduct its diagnostic assessment first.

Pressure to disburse funds…

Result: compression of initial tasks.

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Issues Unique to Disasters Large portion of funds already disbursed

Response-period purchases are often chaotic

Looser audit trails

Little time for considered decisions

Relaxed procurement rules

Price spikes

Broader range of agencies and departments

Broad types of costs: questions of eligibility

Repair vs. Upgrade questions

Costs based on reasonableness

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Lessons learned International lending agencies must demand greater

accountability from loan recipients in terms of achieving the objectives outlined at the beginning of the loan.

International lending agencies should insist on the existence or creation of a proper control environment prior to the disbursement of funds.

Concurrent audits must address the accounting and financial aspects of the project as well as the technical aspects such as construction.

The in-country representatives of the international lending agencies should ensure that “No Objections” are given only after careful and full consideration of the issue at hand.

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Potential Applications for HIPC:HIPC Mission/Vision

Linking debt relief more firmly and transparently to poverty.

Ensure that resources released will truly contribute to effective and sustainable poverty reduction.

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Potential Applications for HIPC:HIPC Goal StatementsGoal TRACE

Role?

Linking debt relief more firmly and transparently to poverty. Ensure that resources released will truly contribute to effective and sustainable poverty reduction. Bank and fund staff work in this area should emphasize providing assistance to HIPC’s to strengthen their own public expenditure management systems.

Institutional arrangements and procedures need to be developed to ensure that the savings from debt service are channeled towards programs linked to poverty reduction.

Bank and fund staff will assist in selected areas of public expenditure management, including working with those tools currently in place in each country for monitoring specific types of poverty oriented spending.

Monitored through the country’s own public financial management system.

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Recommendations In proposal processes, permit audit firm to

propose refinements to the TOR.

Incorporate concurrent audits into TOR.

Disallow ineligible or unallowable costs.

Get the audit firm in early, to assist in setting up the PEU.

Require PEUs to implement diagnostic recommendations.

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Concerns About Concurrent Audit:Bank and Borrowing Country

Cost. In the long run cheaper than corruption.

Relationship to Bank Oversight. “Isn’t this our job?”

Resistance by Borrowing Country: More expensive. “Don’t need it.”

Government officials rejected idea of concurrent audit because we become judge and jury.

Restrictive or obstructive legal structures that disallow concurrent audits.

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Cost for Traditional vs. Concurrent Audits

Sample: 48 IDB projects

Total Loan Amount: $2.5 Billion

Total Audit Fees: $7.4 million

Average fee-to-loan ratio: 0.30%

(.30 cents for every $100 of loan value)

High Ratio: 7.00%

Low Ratio: 0.01%

Standard Deviation: 1.22%

Honduras ratio: 2.09%

Belize ratio: 1.25%

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Concerns About Concurrent Audit:Concurrent Auditor Liability

KPMG viewed as responsible for all problems

Reduction of U.S. supervisory role

Lack of follow-through by PEUs and Banks with concurrent auditor’s recommendations.

Little or no participation in development of the TORs, thus locking in potential audit approach that may not be optimum.

Physical danger (Colombia).

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Question

and

Answer…

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How to Contact TRACE

Hans Gude, Director KPMG LLPOne Embarcadero Cntr, Suite

2000San Francisco, California 94111(415) 951-0100(415) 986-3439 [email protected] Eric Ospina, Sr. ManagerKPMG LLP450 East Las Olas Blvd., Suite

750Fort Lauderdale, Florida 33301(954) 534-6000(954) 462-4765 [email protected]

Mary Andrade, ManagerKPMG LLPP.O.Box 17-17-344Quito, Ecuador(593) 921-1491(593) (2) 438 702 (fax)[email protected] Johnny Hale, PartnerKPMG LLPBosque de Duraznos 55Bosques de las Lomas11700 Mexico City, Mexico52 (5) 726 43 4352 (5) 596 80 60 [email protected]

T R A C E 1 Anticipate, prevent, monitor… Concurrent Auditing: An Important Tool for Achieving...

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