Catalog

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p. 41 of 53 BACK | NEXT Classification of Developing Member Countries in Bank Operations Bank Operations in Pacific Island Developing Member Countries Lending and Relending Policies (Ordinary Capital Resources) Lending and Relending Policies (Asian Development Fund) Sector Lending Program Lending Assistance to Private Enterprises Financial Intermediation Loans/Credit Lines Financing of Interest and Other Charges During Construction Financing of Indirect Foreign Exchange Cost of Projects Lending Foreign Exchange for Local Expenditures on Projects Retroactive Financing Supplementary Financing of Cost Overruns of Bank-Financed Projects Use of Surplus Loan Funds Foreign Exchange Risk in Bank Operations Sector Development Programs Technical Assistance Guarantee and Security Arrangment for Bank Loans Environmental Considerations in Bank Operations Gender and Development in Bank Operations Project Performance Management System The Bank's Cooperation with NGOs Emergency Rehabilitation Assistance Loan for Small DMCs Rehabilitation Assistance After Disasters Cooperation Arrangements with International Organizations and Bilateral Sources Coordination with Aid Agencies Regional Cooperation Cofinancing Japan Special Fund Guarantee Operations Bank's Operational Missions Communication with Members of the Board of Directors Processing of Loan Proposals Project Financial Management Systems, Financial Analysis and Financial Performance Indicators Economic Analysis of Projects Procurement of Goods and Works Use of Consulting Services Formulation and Implementation of Loan Convenants Effectiveness of the Loan Agreement Loan Disbursement and Loan Closing Project Accounting, Financial Reporting, and Auditing Post Evaluation Country Planning and Programming Incorporation of Social Dimensions in Bank Operations Poverty Reduction ADB Accountability Mechanism Involuntary Resettlement Internal Audit Confidentiality and Disclosure of Information Indigenous Peoples Governance Anticorruption Enhancing the Asian Development Bank's Role in Combating Money Laundering and the Financing of Terrorism

Operations Manual

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This OM has been superceded by OM J7

OM Section 43: Issued on 10 January 2002
Project Accounting, Financial Reporting, and Auditing¹

Bank Policies (BP)

Introduction

1. Article 14(xi) of the Agreement establishing the Asian Development Bank (the Charter) requires inter alia that ADB take necessary measures to ensure that the proceeds of any loan made, guaranteed, or participated in by ADB are used only for the purposes for which the loan was granted and with due attention to considerations of economy and efficiency. Article 14(xiv) of the Charter also states that ADB should be guided by sound banking principles in its operations.

Policy

2. ADB requires accurate and timely financial information from its borrowers² to be assured that the expenditures incurred on a project were in fact for the purposes stated in the loan agreement; and to satisfy ADB with respect to the economy and efficiency of a project and its executing agency. Cognizant of the need for accountability for the effective and efficient allocation of resources, including the need to monitor project benefits and operation costs for purposes of benefit monitoring and evaluation and post evaluation,³ ADB further requires that borrowers' financial management and accounting systems are adequate to generate reliable financial data relevant to each lending operation, including the review and audit thereof. To this end, loan and project agreements include relevant financial management and audit covenants for compliance by borrowers. ADB also pursues a systematic review of accounting and auditing arrangements during project preparation to ensure that these meet internationally accepted standards and practices.

Operational Procedures (OP)

Project Accounting and Financial Reporting

1. To ensure the provision of adequate, timely and reliable information for the purpose of project monitoring, an agreement should be reached early in the project processing cycle, preferably at project identification, on the timing, form, and content of the annual financial statements, including project accounts, to be submitted for audit, together with copies of any material information or explanations on matters not normally covered by an executing agency's annual financial statements.

2. If there are serious doubts that the executing agency will be able to submit the project accounts and audited financial statement on time, unaudited financial statements may be required, as an interim measure, until such time that the audited financial statements will be made available.

Appointment of Auditors and the Scope of an Audit

3. An executing agency should have its project accounts and financial statements, and, where appropriate, those of the agency itself for each fiscal year, audited in accordance with appropriate auditing standards consistently applied by independent auditors whose qualifications, experience, and terms of reference are acceptable to ADB.

4. Executing agencies should appoint an auditor at or before the beginning of the project activities, or of each fiscal year in which the project is implemented or operated. Terms of reference (TOR) for an auditor should be set by the executing agency. The TOR should define the scope and detail of the audit and call for the auditor to provide an opinion within a specified timetable in a short form report, which may be amplified as necessary in a long form report. A long form report is normally required by ADB in the case of autonomous and semiautonomous project executing agencies, but it may also be requested for projects having complex financial characteristics. (For model terms of reference, refer to Part 7, Section 7.18 of the Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank.)

5. In case of change in auditor, the borrower is required to (i) advise ADB of the reason for changing the auditor, and (ii) secure ADB concurrence, even if the new auditor is equally acceptable, prior to any change thereof.

Acceptability and Qualifications of Auditors

6. Auditors assigned by a borrower should satisfy the following criteria:

1. They must be impartial and independent of the control of the entity to be audited and of the person appointing them. In particular, they should not, during the period covered by the audit, be employed by; serve as directors of; or have family, financial, or close business relationships with the entity, except as auditors

2. They must be well established and reputable, use procedures and methods conforming with the International Standards on Auditing (ISA)¹ or the generally accepted auditing practices of the country, and employ adequate staff with appropriate qualifications and experience.

3. They must be experienced in the types of assignments they are to undertake for the ADB project.

4. They must be able to fulfill their TOR within the specified timetable.

7. If acceptable auditors are not available in a country to meet the above requirements, the borrower should appoint suitable foreign auditors, preferably to work in collaboration with a local auditor.

8. ADB prefers borrowers to engage auditors who will conform to the ISA. However, it recognizes that in some countries auditors apply local, generally accepted auditing standards that may not conform to, or fully comply with, the ISA, but that have been prescribed by a country's law, or have been adopted by public accountants or associations of accountants in the country concerned. For some borrowers, an assessment of the adequacy of local auditing standards has been made by ADB, and staff should consult the findings of these assessments to gauge the impact of variances from ISA. For borrowers wherein assessments have not been made, ADB staff, during project preparation stage, should make an attempt to evaluate and understand the existing auditing standards and present their assessment of the variances, if any, from ISA. Supplementary auditing and reporting procedures may be requested by ADB, if necessary, to confirm accountability and financial performance in cases where ADB considers that local standards need to be supplemented.

Government Auditors

9. Governments usually require auditing, verification, or authentication, or all three to be carried out by a government auditor or other designated public sector entity. ADB’s requirements² with regard to the independence and competence of an auditor apply also to auditors who are government officials and to government-nominated auditing bodies. Therefore, the particular constitutional and organizational framework under which a government auditor functions should be examined to determine whether or not it assures independence acceptable to ADB. If it does not, the borrower should be requested to make satisfactory additional auditing arrangements, even though a government auditor may be legally required to continue auditing the borrower's financial accounts and statements.

Auditor’s Opinions and Reports

10. A borrower is required to send to ADB copies of the project accounts and annual financial statements, with an opinion and report of an auditor in the short form and/or the long form as appropriate, immediately upon completion of the audit. These should be accompanied by any other material issued by the auditor that is relevant to the interpretation of the audit, such as a management letter. A management letter, submitted by the auditor to the appointing authority, describes any material deficiencies or weaknesses in the accounting system or overall system of internal control and internal audit of the project or executing agency. An audit opinion should also be made by the auditor and submitted to ADB on the use of the imprest fund and statement of expenditures (SOE) in projects where these have been allowed.

Submission of Annual Financial Statements and Auditor’s Reports

11. Loan agreements should provide for submission to ADB of audited (and, if required, unaudited and interim) financial statements pertaining to the project and/or the executing agency's accounts prepared in the English language within reasonable periods, taking into account the fiscal year of the country concerned. Obligation of submission of financial statements and auditors' opinions and reports to ADB should generally remain in force until the loan agreement terminates, unless a shorter duration is considered appropriate.

Financing of Audit Expenditures

12. The costs of annual audits may be included in project costs and are eligible for ADB loan financing for those borrowers for whom the audit costs are incremental (i.e., without the project they would not be incurred). For other borrowers, where only part of the audit costs are incremental (particularly auditing to ADB standards, reporting on compliance with loan

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