T R A C E 1 Anticipate, prevent, monitor… Concurrent Auditing: An Important Tool for Achieving Transparency Presentation Presented by: Hans F. Gude, KPMG.

Presentation on theme: "T R A C E 1 Anticipate, prevent, monitor… Concurrent Auditing: An Important Tool for Achieving Transparency Presentation Presented by: Hans F. Gude, KPMG."— Presentation transcript:

1 T R A C E 1 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

2 T R A C E 2 Anticipate, prevent, monitor… 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.

3 T R A C E 3 Anticipate, prevent, monitor… 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.

4 T R A C E 4 Anticipate, prevent, monitor… TR ansparency in the A ccounting and C ontrol E nvironment

5 T R A C E 5 Anticipate, prevent, monitor… 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.

6 T R A C E 6 Anticipate, prevent, monitor… 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

7 T R A C E 7 Anticipate, prevent, monitor… 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

8 T R A C E 8 Anticipate, prevent, monitor… 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 …

9 T R A C E 9 Anticipate, prevent, monitor… 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?

10 T R A C E 10 Anticipate, prevent, monitor… 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 …”

11 T R A C E 11 Anticipate, prevent, monitor… 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.

12 T R A C E 12 Anticipate, prevent, monitor… 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

13 T R A C E 13 Anticipate, prevent, monitor… Diagnostic Involves a Holistic Assessment Organization Staffing Policies and procedures Cost tracking Accounting system Technology (level of automation) Communications and reporting Project monitoring

14 T R A C E 14 Anticipate, prevent, monitor… Comparison of Traditional and Concurrent Auditing Transaction 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

15 T R A C E 15 Anticipate, prevent, monitor… 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.

16 T R A C E 16 Anticipate, prevent, monitor… 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

17 T R A C E 17 Anticipate, prevent, monitor… 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

18 T R A C E 18 Anticipate, prevent, monitor… 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

19 T R A C E 19 Anticipate, prevent, monitor… 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.

20 T R A C E 20 Anticipate, prevent, monitor… 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

21 T R A C E 21 Anticipate, prevent, monitor… 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.

22 T R A C E 22 Anticipate, prevent, monitor… 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.

23 T R A C E 23 Anticipate, prevent, monitor… Potential Applications for HIPC: HIPC Goal Statements GoalTRACE 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.

24 T R A C E 24 Anticipate, prevent, monitor… 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.

25 T R A C E 25 Anticipate, prevent, monitor… 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.

26 T R A C E 26 Anticipate, prevent, monitor… 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%

27 T R A C E 27 Anticipate, prevent, monitor… 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).

28 T R A C E 28 Anticipate, prevent, monitor… Question and Answer …

29 T R A C E 29 Anticipate, prevent, monitor… How to Contact TRACE Hans Gude, Director KPMG LLP One Embarcadero Cntr, Suite 2000 San Francisco, California 94111 (415) 951-0100 (415) 986-3439 fax hgude@kpmg.com Eric Ospina, Sr. Manager KPMG LLP 450 East Las Olas Blvd., Suite 750 Fort Lauderdale, Florida 33301 (954) 534-6000 (954) 462-4765 fax eospina@kpmg.com Mary Andrade, Manager KPMG LLP P.O.Box 17-17-344 Quito, Ecuador (593) 921-1491 (593) (2) 438 702 (fax) mpandrade@kpmg.com Johnny Hale, Partner KPMG LLP Bosque de Duraznos 55 Bosques de las Lomas 11700 Mexico City, Mexico 52 (5) 726 43 43 52 (5) 596 80 60 fax jhale@kpmg.com