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Financial Management and Analysis of Projects : 4. Financial Management of Executing Agencies : 4.2. Institutions and Systems
4.2.9. Non-Revenue-Earning Projects
4.2.9.1. Introduction
4.2.9.1.1.
The following topics, relating to
nonrevenue-earning projects, are examined in this section:
- Financial Management and Accounting Systems,
- Government Accounting,
- Executing Agency (EA),
- Planning and Budgetary Control,
- Financial Accounting and Costing, and
- Internal Control Systems.
4.2.9.2.Financial Management and Accounting Systems
4.2.9.2.1.
For nonrevenue-earning EAs, the design
and installation of the initial financial management system should
usually provide for the necessary accounting procedures throughout
project implementation.
4.2.9.2.2. However, to save expenses,
it may be useful to design and install a system that can be readily
converted for use during implementation. At project preparation,
the financial analyst should either ensure that an existing system
would be adequate for the intended purposes or not. If the system
is inadequate, the EA should design and install a system that will
be operational when the project starts, and can be expanded, if
necessary, as the demands on it increase.
4.2.9.2.3. In nonrevenue-earning projects,
financial management and accounting systems should be kept simple.
An analytical cash book (showing the sources of funds), with payments-out
classified by project activity and payee, could form a satisfactory
basic accounting tool with which to begin operations. It could be
supplemented by additional documents (e.g., asset registers, contract
registers, inventory systems) as the needs for these arise during
implementation.
4.2.9.2.4. The staff required to carry
out initial operations could also be minimal; one or two competent
account clerks or bookkeepers may be enough for each operational
center until full-scale operations commence. Their supervisor could
initially be the project manager, assisted if necessary by an accounting
technician or an accountant.
4.2.9.2.5. A basic system should include
internal controls, which divide responsibility between those who
approve budgets, authorize allotments, approve budgeted expenditures,
make payments from cash resources, keep the books of account, and
reconcile cash and bank balances with the books of account. If the
staff is not large enough to meet this minimum division of responsibility,
devices to provide minimum security, such as requiring two persons
to execute each action jointly, should be used (e.g., two signatures
on checks; two responsibility levels for posting account books and
balancing).
4.2.9.2.6. Government departments
or agencies implement most nonrevenue-earning projects. The checklist
that follows is designed to facilitate examination of typical government
budgeting, accounting, and internal control systems, and should
be read in conjunction with Reviews of Revenue-Earning EAs. The
latter contains detailed recommendations for reviews applicable
to both forms of projects.
4.2.9.3. Government Accounting
4.2.9.3.1.
Most nonrevenue-earning projects will be executed by entities that
are part of a government, or government-controlled, government-sponsored
bodies (e.g., cooperatives). Any existing financial regulations
on the operation of financial management and accounting systems
should be reviewed to ensure their compatibility with ADB's
requirements. Any amendments to regulations should be made only
to strengthen an EA's internal systems, in addition to supporting
the project.
4.2.9.3.2. Before each project is started,
the financial analyst must achieve a complete understanding of the
principles, rules and operations of the management, accounting and
budgetary systems. Government systems may include what appear to
be overly bureaucratic prepayment checks; repetitive bookkeeping
at different levels and locations; performance delays caused by
a seeming lack of delegated responsibility; and "old-fashioned"
regulations.
4.2.9.3.3. Dismantling existing checks
and balances in systems, without (i) understanding the consequences;
and (ii) substituting adequate new measures-without the necessary
trained staff to implement them-can cause more trouble than
the existing deficient systems. Improvements in government budgetary
and accounting systems should only be recommended and implemented
when the analyst, the operating staff, and the government (and the
government auditor in many countries) are mutually satisfied that
the changes are beneficial and operable. There should be assurance
that adequately trained staffs are available to operate the new
systems.
4.2.9.3.4. As the largest collectors and
distributors of funds in a country, governments require sound financial
management systems, with mandated methods of budgeting and accounting.
The cash accounting basis has been the normal accounting practice
for most governments (compared with the accrual basis for commercial
practice, including parastatals).
4.2.9.3.5. An EA, which is part of
a government administration, would normally adopt the government's
systems of budgeting and accounting, unless the government and ADB
staff can agree that a specialized form of project accounting would
be beneficial to the government. Therefore, analysts should recognize
and report in the Aides Memoire and BTORs of the identification
and preparation missions (as well as in the RRP) that the systems
to be used are adequate and acceptable to ADB.
4.2.9.3.6. The responsibility for
government accounting and budgeting services varies among countries,
and must be determined as part of project identification, in order
that missions can identify locations of the authorities for obtaining
agreement to modifications to a particular system. An Accountant-
or Comptroller-General may be responsible or, in other countries,
the Ministry of Finance may determine the budgetary and accounting
practices.
4.2.9.3.7. Because there is no consistency,
analysts must not assume that (i) the system with which they are
familiar in one country also applies identically in another and
(ii) EA staff are fully conversant with the responsibility levels
and authority in their own country. (The Auditor-General's
Office or equivalent may be the most reliable source of information
on the subject).
4.2.9.3.8. The senior financial staff
of a recognized government accounting service should hold responsible
roles (e.g., accountants-general), from which they can influence
the development and maintenance of sound accounting practices.
4.2.9.3.9. The existence of these
services cannot, however, be taken to imply that government practices
are automatically sound and acceptable for prospective EAs. Prescribed
government practices may have been unofficially modified at the
local level because they are too detailed, misunderstood, or ill
supervised.
4.2.9.3.10. Analysts should familiarize
themselves with the precise roles which responsible officials play
in controlling and monitoring the performance of accounting in government
before seeking their assistance on specific project accounting matters.
4.2.9.3.11. The term "accountant"
in government often has a very different meaning or interpretation
from "public accountant" in the private sector. An accountant-general
may be a designation for an official post, whose incumbent may have
little or no knowledge of finance and accounting.
4.2.9.4. Executing Agency
4.2.9.4.1.
The status of an EA should be established
to determine, in particular, its ability to:
- budget for and obtain budget approvals for required funds;
- furnish funds promptly for project implementation and operation and maintenance;
- institute, operate or amend financial accounting systems to respond to ADB requirements;
- provides the necessary staff, with requisite skills, for project implementation; and
- institute satisfactory internal and external controls and audit arrangements.
4.2.9.4.2.
To the extent that any of the above
requirements is outside the agency's jurisdiction, analysts
should conduct the examination with the responsible institution(s)
to ensure either their agreement to fulfill the requirements promptly
or to delegate to the agency the right(s) to implement them during
the project period.
4.2.9.5. Planning and Budgetary Control
4.2.9.5.1.
The reviews relating to annual budgets
and budgetary control recommended in section
4.2.8.3 are also appropriate as far as they apply to a nonrevenue-earning
project. Experience with these projects, however, emphasizes the
importance of determining the budgetary system that will apply during
the project period.
4.2.9.5.2. At project identification, staff
should be satisfied that they fully understand the system and that
they have obtained (or can obtain at negotiations) agreement on
the: (i) budget procedures to be used by an EA and/or by controlling
institutions which give higher-level approvals and which will ensure
timely and adequate project implementation, (ii) timing of all budget
framing and approval operations to ensure annual allocation and
release of funds, and (iii) timing of release of counterpart funds
provided in budgets.
4.2.9.5.3. If a borrower's
fiscal year in which the project is due to begin starts before the
date of loan effectiveness, it is essential to ensure that the budget
for project start-up (including the costs of operating the EA and
its accounting system, and of engaging auditors) is available for
the initial fiscal year.
4.2.9.5.4. The availability of such
provisions should be confirmed in the RRP. If there are no budget
provisions, the RRP should describe how the project would be funded
pending budget authorization.
4.2.9.6. Financial Accounting and Costing
4.2.9.6.1.
It is preferable that an EA maintains
at least the records specified in section
4.2.9.8, but in some accounting systems (particularly those
of governments) many such records - particularly control accounts
- may not be maintained. Typical government accounts may reflect
only budget heads for services.
4.2.9.6.2. A project or project component
may utilize only one line in an expenditure "block",
or it may even be contained with other items in a one-line entry.
Unless ADB staff make early requests for more detailed reporting,
project subcomponent expenditures may be impossible to control when
the project starts. When a government budgetary and accounting system
is to be used, it is useful to decide the details of project expenditures
for which regular reporting will be required, and whether these
can be introduced into the accounting or costing system without
difficulty.
4.2.9.6.3. If they cannot, then the borrower
and/or the entity should be asked to establish a subsystem to meet
ADB's accounting and financial reporting requirements. An
EA should be encouraged to use the resultant totals of a subsystem
to support or reconcile the data in the standard system; i.e. the
subsystem should become an integral costing system of the main accounting
system.
4.2.9.6.4. EA systems must be capable
of clear and timely disclosure of: (i) cumulative and annual project
costs by components agreed on between ADB and the EA for each project,
(ii) operating costs by budget heads analyzed in sufficient detail
to provide control of incremental current expenditures, and (iii)
basis for all types of claims for disbursement of ADB loans.
4.2.9.6.5. The first item above is
particularly important in government accounting, where asset records
covering a period of years are not often maintained. It is also
important that the analyst ensures that the auditor will provide
an audit opinion and report in a form satisfactory to ADB if nonstandard
systems are introduced.
4.2.9.6.6. ADB may agree to finance
incremental recurrent expenditures, i.e., expenditures above a particular
level established at an agreed time with a borrower. Government
accounting systems may not distinguish between base and incremental
expenditures, particularly in the case of salaries, wages, and related
overheads. It is, therefore, necessary to coordinate with an EA
the formulation of adequate means of identifying both budgetary
provisions and accounting data that can provide for and report on
these expenditures. The following steps could be taken:
- estimate
at appraisal the incremental current expenditures, and associate
their incidence with the tracking of implementation of physical
inputs/outputs of the project and reimburse a fixed percentage
of total actual expenditures from each agreed category of incremental
expenses;
- establish
appropriate accounting for special heads of expenditure, subcodes,
subsystems and special reports;
- agree
on accounting for only the main heads of expenditure concerned
and develop a formula for periodic application to total expenditures
under those budget heads to obtain a reasonable apportionment
of incremental expenditures; and
- continuously
revise base and incremental costs.
4.2.9.7. Internal Controls
4.2.9.7.1.
Any system to support a project should
include basic internal control measures. If the internal checks
and control systems are not satisfactory, and the effectiveness
of the external audit is not established, then the project should
not be allowed to proceed until the borrower and/or EA has agreed
to strengthen the internal control systems.
4.2.9.7.2. Government auditors are
normally responsible for the audit of the EAs that perform nonrevenue-earning
projects. Therefore, it may be appropriate to seek their advice
and experience with regard to the efficacy of internal controls
in a particular system. Their involvement may help to introduce
any necessary tightening of controls, as well as encouraging their
active involvement in surveillance of the systems for project implementation.
The financial analyst may best achieve this by providing the government
auditor with a copy of the loan agreement immediately after its
signing and discussing the audit requirements.
4.2.9.8. A Simple System for a Nonrevenue-Earning
4.2.9.8.1.
The following is a simple system for
a nonrevenue-earning project. It should be modified as necessary
to meet the requirements of each project as well as the adequate
and timely delivery of required financial information to the borrowers
and ADB.
- Project Entity Bank Account Record, by categories of expenditures
- Project Entity Cash Payment Record, by categories of expenditures
- Record of Project Expenditures incurred but not paid by categories of expenditures
- Record of Project Expenditures by Third Parties by categories of expenditures
- A Summary of the above to produce Total Project Expenditures by categories of expenditures
- Record of Sources of Project Financing including ADB (and other lenders) Loan Disbursement Claims
4.2.9.8.2.
In addition, it is desirable that
a simple General Ledger be used to record at regular intervals the
totals of payments (by week or by month) using checks and cash,
and funds received. This ledger, in addition to establishing summary
accounts for the above transaction accounts, should include accounts
for assets, liabilities, contracts, and currency transactions.
4.2.9.8.3. Corrections and adjustments
to the data entered in the basic records can be made at any time
prior to entries being summarized in General Ledger entries. Changes
to be made on data already recorded in the General Ledger will need
special entries in that ledger, preferably through the use of a
Journal.
4.2.9.8.4. ADB's Loan Disbursements
Handbook is available from the Knowledge Management section
of the web-based Guidelines. The Loan Disbursements Handbook provides
guidance for financial analysts on Imprest Accounts, Statements
of Expenditures, and Accounts and Audit generally for projects.
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