Governance

Public Financial Management

China, People’s Republic of

Background

The transition from a centrally planned to market economy was a fundamental change in the governance system of the People's Republic of China (PRC). In 1982, their constitution was amended to provide a legal mandate for the existence of an audit system. A year later, the National Audit Office (CNAO) was established, subsequently, the creation of local audit institutions. In 1994, the Audit Law was promulgated, a landmark act signifying that auditing in China had entered a new phase of development. Audits in the past had been focused mainly on investigations and checking for compliance, while the new Law required a look into the authenticity and effectiveness of State revenues and expenditures.

Objectives

The ADB-funded technical assistance Project "Strengthening the Government Auditing System" assisted CNAO in formulating government auditing standards and procedures that would conform with PRC's Audit Law and be consistent, as far as practicable, with international auditing standards. Further, it assisted CNAO in designing a training program to promote full and consistent adherence by CNAO auditors to the revised government auditing standards and procedures.

Strategies

CNAO received technical advice on international auditing standards and audit policies and practices of supreme audit institutions (SAIs) in other countries. Also, it received advice on the practicality and compatibility of new audit principles and approaches with the PRC audit system. CNAO senior officers visited SAIs in several Asian countries and a private audit firm, and learned how auditing standards were being applied in the region. From these visits, they studied the audit mandate of the SAIs and their comprehensive audit scope and compared it with CNAO's own policy on audit coverage. They also learned about modern risk-based audit methods and related planning processes, including evaluation of internal controls. Other auditors were trained on the implementation of the newly issued auditing standards and procedures.

CNAO compiled the new and revised auditing standards in an audit standards manual, which served as the basis for the preparation of an audit standards training manual. The training manual, which also contained authoritative and comprehensive information on best audit practices, served the following purposes

• to help CNAO trainers develop specific training course material
• to guide CNAO auditors on professional practices and methods in conducting audits.

Both manuals are in English and Chinese language, and in CD-ROM format to facilitate future update work. They were distributed to all CNAO departments and provincial audit offices. Positive feedback was received from CNAO regarding continuing use of the manuals as reference in conducting audits and in nation-wide audit training programs.

Upgrading of auditing capability is a continuing process. Considering the large number of PRC government auditors, it is important for CNAO to closely monitor implementation of the new/revised standards and procedures. After Project completion, CNAO initiated measures to ensure continued compliance by their auditors with the auditing standards and procedures. These measures comprised establishing systems for accountability, quality review, and reward. CNAO also directed that every audit must adhere to the audit standards, including

• preparing audit programs,
• evaluating and testing the internal control,
• conducting substantive tests,
• preparing working papers,
• collecting and evaluating audit evidence,
• conducting audit reviews,
• reporting the audit results,
• imposing audit sanctions and penalty.

Furthermore, building on the work of other development assistance partners, additional training courses are continually held by CNAO to expand the number of trained auditors.

Accomplishments

The most important outcome of the Project was the adoption of the latest audit concepts, such as materiality and risk, internal controls, audit planning and programming, and management of audits, which improved the quality of CNAO audits. As the auditors gain confidence with the application of new auditing standards and procedures, the full impact of ADB's technical assistance project will be more evident in the long run. Already, CNAO reported the effective results from the better quality of their audits. They also reported that audit results are drawing increasing public attention.

The project results were consistent with the recommendation of the Governance Assessment for PRC to strengthen the implementation of its accountability systems developed in previous years.

Providing assistance to strengthen the government auditing system is consistent with ADB's policies on governance and anticorruption and will enhance public accountability, which is a key element of good governance. As a consequence, this will help reduce waste and abuse of public funds, thus contributing to combating corruption.

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Mongolia

The goal of the Governance Reform Program (GRP) was to assist in the transition to a new system of public sector governance in Mongolia through the establishment of

• an efficient public sector financial management system
• a sound public sector accountability system
• a transparent data and information dissemination system

The reform measures introduced under GRP have significantly changed the course of public sector administration and financial management in Mongolia. The design of the GRP components has corresponded to the critical need to

• put in place a sound medium term expenditure framework (MTEF), accompanied by clear macroeconomic-fiscal linkages as outlined in the fiscal framework statement (FFS)
• integrate capital budget planning
• restore fiscal discipline gradually by paving way for accrual accounting, and consolidation of all extra-budgetary funds
• link resource allocations with targeted and actual performance of the spending units
• streamline public sector personnel management processes
• enhance ex-post budgetary controls through financial and operational performance audits. The adoption of these measures will enhance transparency, reliability, and quality of public services

While public sector financial efficiency in Mongolia has been eroded due to the lack of budgetary discipline, operational efficiency in budgetary bodies has been affected by the lack of a proper incentive structure.

The GRP supported the adoption of performance contracting and merit-based recruitment and promotion procedures in the pilot agencies. While these reforms have to penetrate deeper into the pilot agencies as well as the rest of the large civil service, the PSMFL calls for adoption of a number of critical measures to enhance transparency in civil service recruitments and promotion.

One of the most successful outcomes of GRP is its contribution to enhancing awareness of the need for, and the direction of, the public sector administration and financial management reforms that are underway.

In particular, the PSMFL has triggered a debate on the desired level of autonomy of the lower level budgetary bodies, and aimag and soum administrations within the overall framework of the Mongolian Constitution.

While retaining a considerable degree of decentralized decision making in day-to-day operations, the PSMFL requires local bodies to deliver their outputs in accordance with the overall policy priorities and performance contracts established by the sectoral ministries and other relevant bodies that coordinate economic activities at the central and local levels. These provisions have been discussed extensively and reviewed by stakeholders (including the budgetary bodies and provincial-level officials) and all political parties.

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Samoa

Implementation of the economic and public sector reform continued in 2001, and the Government's commitment to ongoing reforms was reaffirmed in the Strategy for the Development of Samoa.

The new Public Finance Management Act of 2001 provides legal framework for improved fiscal governance, and the Public Bodies (Performance and Accountability) Act of 2002 also proposes the legal framework for better corporate performance and governance of public bodies.

An ADB Program Loan provided the framework for these legislative changes. In the area of financial sector reform, the Financial Institutions Act of 1996 was amended to place non-bank financial intermediaries under Central Bank of Samoa supervision. The government also moved to improve regulation and supervision of the Offshore Finance Center by introducing amendments to the 1987 Offshore Banking Act.