Quality review feedback on FY2017/18 www.pwc.com Quality review feedback on FY2017/18 at KSG, Nairobi 3rd – 7th December 2018 Presenter: Fitzgerald Oyoo

Quality financial statements Quality is a measure of excellence or a state of being free from defects, deficiencies and significant variations. It is brought about by strict and consistent commitment to certain standards that achieve uniformity of a product in order to satisfy specific customer or user requirements. Quality in financial statements is “the ability of financial statements to be free from errors, detailed enough to enable users to achieve key attributes of: understandability, reliability, relevance, and comparability. This could be achieved by adherence to the National Treasury guidance on financial reporting and use of the resources provided by the NT for the same.

Importance of quality in financial statements Quality brings about: “Understandability” means that quality of financial information which exists when users of that information are able to comprehend its meaning. “Reliability" means that quality of financial information which exists when that information can be depended upon to represent faithfully, and without bias or undue error, the transactions or events that either it purports to represent or could reasonably be expected to represent;

Importance of quality in financial statements cont… “Comparability" means that quality of financial information which exists when users of that information are able to discern and evaluate similarities in, and differences between, the nature and effects of transactions and events, at one time and over time, either when assessing aspects of a single reporting entity or of a number of reporting entities; “Relevance" means that quality of financial information which exists when that information influences decisions by users about the allocation of scarce resources by: helping them form predictions about the outcomes of past, present or future events; and/or confirming or correcting their past evaluations;

Quality review process at NT The National Treasury performs periodic reviews/checks of the County Governments entities’ financial statements to confirm whether the Entities have consistently and appropriately applied the financial reporting templates prescribed by the Public Sector Accounting and Standards Board (PSASB). This entails subjecting the financial statements to the quality review checklists approved by the PSASB.

Quality Review Checklist The review checklist has the following sections for consideration: Section A: Non financial information Section B: Statement of receipts and payments Section C: Statement of Assets and Liabilities Section D: Statement of Cash flows Section E: Summary statement of appropriation- Recurrent and Development combined. Section F: Notes to the financial statements Section G: Appendices to the financial statements

Section A: Non-financial information Correct template has been adopted and recommended reporting framework adopted as provided through the National Treasury Website Key entity information and entity management has been completed Statement of management responsibilities has been populated Financial statements are well-formatted and aligned Page numbering is well done

Section B – Statement of receipts and payments The prior period balances agree to the audited financial statements Figures agree with IFMIS GoK reports Balances tie to the notes Casting has been done

Section C – Statement of assets and liabilities Prior period balances agree to the audited financial statements Figures agree with IFMIS GoK reports Balances tie to the notes Casting has been done Fund balance carried forward from prior financial year agrees to the fund balance brought forward in the current financial year The Net Financial Assets equals the Net Financial Position Any Prior Year Adjustments are auditable and explained in the Notes

Section D – Statement of cash flows Prior period balances agree to the audited financial statements Statement of cash flow is in agreement to the GOK IFMIS Statement of Cash Flows generated from IFMIS Casting has been done Cash and cash equivalent balance at END of the year agrees to the cash and cash equivalent balance in the Statement of Assets and Liabilities. Changes in assets and liabilities agree to the statement of assets and liabilities

Section E – Statement of Appropriation: Recurrent and Development Combined Casting has been done The summation of the totals in the respective recurrent and development appropriations agree to the combined appropriation A commentary has been provided for any significant underutilization (below 50% of utilization) and any overutilization The "Actual on comparable basis column in the Combined Statement of Appropriation agrees to the Statement of Receipts and Payments

Section F – Notes to the Financial Statements The notes are complete and cast Comparatives agrees to PY audited financial statements Details of the various bank accounts have been disclosed including bank name, branch and account number

Section G – Appendices to the Financial Statements Progress on implementation of auditor's recommendations has been completed Pending bills Summary of fixed assets Imprest balance schedule IFMIS Reports generated and reconciled to the financial statements

Quality review issues in financial reporting Variances between amounts captured under IFMIS and the financial statements Unexplained reconciling/ suspense difference in the statement of assets and liabilities Non-compliance to the PSASB prescribed reporting formats/ templates: Missing information Accuracy and completeness of the financial statements including notes Failure to prepare separate financial statements for other county government entities Inconsistencies in budget execution Non compliance with Accrual reporting framework Incorrectly brought forward opening balance Casting errors in the financial statements

Variances between amounts captured under IFMIS and the financial statements Finding description: We noted variances between the figures in the financial statements and the figures extracted from IFMIS Recommendations Financial transactions should be recorded directly in IFMIS as per the budget lines prescribed in the standard chart of accounts. The County Executive/Assembly should ensure that all payments are processed through IFMIS. Further assistance, in relation to IFMIS, should be sought from the National Treasury to ensure compliance. The County Executive/Assembly should ensure that bank reconciliations are carried for all bank accounts to help in detecting any receipts or payments that may not have been captured.

Suspense balances in the statement of assets and liabilities Finding description We noted that for some counties, the Statement of Assets and liabilities had a reconciling/suspense difference, which was not explained Recommendation The County Executive/Assembly should investigate and resolve the suspense balances before submitting to respective offices. The net financial assets should be equal to the net financial position at any given point in time.

Bank reconciliations not done in IFMIS Finding description The County Executive/Assembly did not carry out automatic bank reconciliations in IFMIS for all the bank accounts. Instead, bank reconciliations were prepared outside IFMIS. Recommendation The County Executive/Assembly should ensure that they use the Cash Management (CM) module of IFMIS to prepare auto reconciliations on a regular basis. Once done, the reconciliation report should be checked, signed off and filed as evidence of review. To achieve this all receipts and payments should be accurately captured in IFMIS.

Accuracy and completeness of the financial statements including notes. Description There were several errors/inconsistencies/inaccuracies/incompleteness in a number counties’ financial statements as follows: Notes not tying to the statements of receipts/payments and assets Comparatives not tying to the prior year FSs Missing supporting schedules e.g. schedules on pending bills, etc Incomplete supporting schedules, where the total does not tie to the line item in the statements of receipts/payments and assets

Accuracy and completeness of the financial statements including notes cont.. Recommendations: The County Governments should ensure that the errors in the financial statements have been corrected. The County Executive/Assembly should ensure that the amounts reported on the face of the financial statements tally to the respective notes to the financial statements. Further, the annual reports should be subjected to internal quality reviews before submission to ensure that any errors, inconsistencies and missing information have been addressed.

Failure to prepare financial statements for County government entities Finding description Sections 164 and 167 of the PFM Act, 2012, require Accounting Officers of County Government entities, including public funds, to prepare individual financial statements for each entity and submit to the Office of the Auditor General within three months after the end of the financial year. Recommendation The County Executive /Assembly should prepare and submit their financial statements to the Office of the Auditor General with copies to the National Treasury, the Controller of Budget and Commission on Revenue Allocation as per requirements of Section 164 and 167 of the PFM Act, 2012.

Inconsistencies in budget execution Finding description: We noted that : There were variances between the expenditure budgets posted in IFMIS and the budget as per the financial statements. Instances where the statement of budget appropriation and statement of receipts and payments had variances relating to the actual payments Recommendation: The expenditure budget uploaded in IFMIS should agree to the financial statements Actual expenditure report in the statement of receipts and payments should agree to the amount reported in statement of budget appropriation

Non-compliance with accrual reporting framework for funds established by the County Government Finding description On 8th August 2014, the Public Sector Accounting Standards Board (PSASB) prescribed the reporting framework to be used for all public sector entities vide Gazette Notice No. 5440. Section 2.2.2 of Gazette Notice No 5440 on the PFM Act requires County government entities to prepare financial statements on the IPSAS accrual reporting framework. We noted the financial statements for FY 2016/2017 for the entities established by the County Government were prepared on a cash basis of accounting.

Non-compliance with accrual reporting framework for funds established by the County Government cont…. Recommendation The Fund Administrator should ensure that the financial statements for funds established by the County Government are prepared on IPSAS accrual in accordance with Section 2.2.2 of Gazette Notice No 5440 on reporting framework as prescribed by PSASB.

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