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Financial Management and Analysis of Projects :
6. Financial Institutions
6.6. FI Reporting and Auditing Issues
6.6.1. Introduction
6.6.1.1. Financial reporting by, and audits of, FIs require individual specifications
for each institution so that financial reporting and auditing requirements
will be appropriate to the type, nature, and form of the institution.
6.6.1.2. For example, an industrial
FI and a microfinance FI have few common characteristics and the
reporting requirements and the auditing specifications will differ
sharply.
6.6.1.3. Unless the financial analyst
concerned is well-experienced in the financial management of FIs,
it is recommended that a consultant be employed, who is experienced
with the type of FI that is to be the subject of financial reporting,
and later, auditing. Specific guidance on MFI reporting and auditing
issues is given below.
6.6.2. FI Financial Reporting
6.6.2.1. FIs should be required to report in accordance with IAS No. 30 (Disclosures
in the Financial Statements of Banks and Similar Financial Institutions)
or SFAS 17 of US GAAP.26
6.6.2.2. In addition to the standard
statements (Balance Sheet, Income Statement and Cash Flow Statement),
an FI should be required to provide the additional statements listed
below. This listing is not all-inclusive and should be amended to
address the objectives and operations of the FI to be audited:
- Income
statement and balance sheet adjusted for subsidies;
- Portfolio
Report for current and two past years;
- Portfolio
Report showing aging of receivables (arrears);
- Portfolio
Report showing aging of portfolio at risk;
- Portfolio
Report showing market and sectoral exposure;
- Capital
Adequacy Analysis;
- Assets
Structure by Income;
- Related
party transactions; and
- Table
of Contingencies, Guarantees, Commitments showing corresponding
securities and collateral.
6.6.3. FI Auditing
6.6.3.1.
Selection of an auditor for a FI should include the provision of
a TOR that is specifically geared to the FI concerned.
6.6.3.2. In addition to the standard
requirements (See section
5.4) for auditor selection and appointment, including providing
a report and an opinion on the annual financial statements, the
auditor should be required to include in the report confirmation,
or otherwise, that the additional financial statements and the performance
indicators listed above can be relied upon.
6.6.3.3. The Terms of Reference should
also address the following:
- The
auditor's impression of the efficiency and effectiveness
of the overall operations and condition of the institution;
- The
adequacy of the intermediary's risk management systems and
internal control procedures, including whether or not the
bank uses VaR, and if so, whether its use is professionally
managed under a separate non-lending manager; results achieved
during the fiscal year; and the operation of VaR as at the
date of completion of the audit;
- The
quality of the loan portfolio and adequacy of loan loss
provisions, illustrated as necessary by use of performance
indicators above;
- The
competence and effectiveness of management, including development
of strategic plans and their implementation;
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- The
adequacy of accounting, financial reporting and management
information systems;
- The
adequacy of public information systems
- The
resolution, or otherwise, of issues identified off-site
or during previous on-site supervisory processes;
- Adherence
to laws and regulations and terms of licenses and agreements,
including loan covenants with ADB;
- A
commentary on central bank or other forms of regulatory
supervision during the fiscal year; and
- Quality
of human resources employed by the FI and their potential
to efficiently sustain all areas of the FI's operations.
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6.6.4. MFI Financial Reporting and Auditing
6.6.4.1. The Consultative Group to Assist the
Poorest (CGAP) publishes specific guidance on MFI reporting and
auditing issues. This guidance includes Handbooks for MFI auditors,
Guidelines for MFI financial statements, and a handbook on appraising
an MFI. These materials can be accessed online at www.cgap.org.*
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26
Financial Analysts have discretion to agree alternative arrangements
(see paragraph 2.4.3).
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