Title: Concurrent Auditing: An Important Tool for Achieving Transparency
1Concurrent AuditingAn Important Tool for
Achieving Transparency
Presentation
Presented by Hans F. Gude, KPMG San Francisco
Mary P. Andrade, KPMG Quito
February 2001
2Presenters
- Hans F. Gude, San Francisco, CA
- Director of KPMGs 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.
3Presenters, Cont.
- Mary Wyatt de Andrade, Quito, Ecuador
- Manager in KPMGs 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.
4TR ansparency in the A ccounting and C ontrol
E nvironment
5KPMG 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.
6KPMG 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.
- Emersons 2000 Big Five Annual Report
7Presentation Outline
- Traditional auditing vs. Concurrent auditing
- Project examples
- Issues unique to disasters
- Lessons learned
- Potential HIPC Applications
- Recommendations
- Issues surrounding concurrent auditing
- QA
8Basic 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
9Eligibility, 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?
10The 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
11What is Concurrent Auditing?
- Hands-on oversight of project from
pre-disbursement to last disbursement. - Begins with diagnostic assessment of the
executing units 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.
12Project 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
13Diagnostic Involves a Holistic Assessment
- Organization
- Staffing
- Policies and procedures
- Cost tracking
- Accounting system
- Technology (level of automation)
- Communications and reporting
- Project monitoring
14Comparison 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
15Representative Experience
- Concurrent audit of US29M roadway and potable
water loan, Honduras (IDB). - Concurrent audit of US20M 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.
16Example Hurricane Reconstruction, Honduras
- Proyecto De Emergencia Para La Infraestructura
Vial Y De Agua Potable - US28.7 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
17Sample 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
18Example Hurricane Reconstruction, Belize
- Hurricane Keith Emergency Reconstruction
Facility, Financial and Concurrent Audit Services
- US20.0 Million
- Audit fees US240,000
- 12 months, beginning January 2001
- Special PEU established
- Scope of Work
- Diagnostic assessment
- Concurrent Audit
- Audit Project Financial Statements
19Issues 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.
20Issues 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
21Lessons 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.
22Potential Applications for HIPCHIPC
Mission/Vision
- Linking debt relief more firmly and transparently
to poverty. - Ensure that resources released will truly
contribute to effective and sustainable poverty
reduction.
23Potential Applications for HIPCHIPC Goal
Statements
Goal TRACE 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 HIPCs 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 countrys own public financial management system. ?
24Recommendations
- 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.
25Concerns About Concurrent AuditBank and
Borrowing Country
- Cost. In the long run cheaper than corruption.
- Relationship to Bank Oversight. Isnt this our
job? - Resistance by Borrowing Country
- More expensive.
- Dont need it.
- Government officials rejected idea of concurrent
audit because we become judge and jury. - Restrictive or obstructive legal structures that
disallow concurrent audits.
26Cost 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
27Concerns About Concurrent AuditConcurrent
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 auditors 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 29How to Contact TRACE
Mary Andrade, Manager KPMG LLP P.O.Box
17-17-344 Quito, Ecuador (593) 921-1491 (593) (2)
438 702 (fax) mpandrade_at_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_at_kpmg.com
- Hans Gude, Director
- KPMG LLP
- One Embarcadero Cntr, Suite 2000
- San Francisco, California 94111
- (415) 951-0100
- (415) 986-3439 fax
- hgude_at_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_at_kpmg.com
-