Establishment and Development of the Internal Audit System for the Public Sector in Kyrgyz Republic INTERNAL AUDIT COMMUNITY OF PRACTICE ISTANBUL FEBRUARY 2008 Mrs. Shaidieva Dinara, Head of the Division of Methodology of Financial Statements and Internal Audit Mrs. Omorova Zamira, Head of the Department of the Public Sector Internal Audit Ministry of Finances of the Kyrgyz Republic

TABLE OF CONTENT I. Goal of the Presentation II. Introduction to the Kyrgyz Republic III. Topics for Discussion: What should be done?

I. Goal Of The Presentation To discuss with the Community of Practice of Internal Auditors (COP-IA) views on establishing internal audit in the Kyrgyz Republic, including structure, methodology and professional development

II. Introduction to the Kyrgyz Republic Kyrgyz Republic is situated in the north-east of Central Asia It has borders with Kazakhstan on the north, Uzbekistan – on the west, Tadjikistan – on the south-west, China – on the south-east. Population: people Number of public servants: people Area: thou.sq.km Average altitude above sea level: 2750 m The highest altitude: 7439 m (Pik Pobedy) The lowest: 394 m (on the south-west of the Republic)

II. a. The Regulatory Institutions in area of Internal Audit in the Kyrgyz Republic Private sector Financial market supervision and regulation agency – regulates audit activity on financial reporting independent audit. The main objectives: establishment of legislative and methodological basis, certification and licensing. Audit organizations – having license to conduct financial reporting audit Public sector Chamber of Accounts – the supreme body of public finance external audit Financial control Department of the Ministry of Finance - implements financial control and audit of budget funds in the budget institutions in public sector for internal audit system development Financial statements and internal audit methodology department of the Ministry of Finance – develops methodology and internal audit standards in public sector for internal audit system development have internal audit functions Internal audit departments in 6 (six) Ministries – have internal audit functions

II. b. The legal framework for audit activity regulation in the Kyrgyz Republic Private Sector Private Sector The Law «On Auditing Activity» since 2002 regulates audit activity on financial reporting independent audit International Audit Standards since 2003 Financial Reporting International Standards since 2001 Public Sector The Law on «Chamber of Accounts of the Kyrgyz Republic» since 2004 regulates audit of the state budget execution Regulation on “The Ministry of Finances” envisaging its rights to undertake internal audit over use of the budget Internal Regulations of 6 Ministries indicate presence of internal audit departments in the ministries

II. c. Prerequisites for the internal audit system establishment in the public sector I. Resolution of urgent issues I. Resolution of urgent issues: A lack of clear delimitation between definition of financial management and control, external and internal audit The existing internal audit departments in the Ministries undertake financial control (inspections), but not the internal audit aiming at law enforcement and development of the recommendations on increasing the ministry’s effectiveness and efficiency, increasing the effectiveness of internal control and quality. II. Implementation of the Decrees of the President of the Kyrgyz Republic: «About state strategy on combating with corruption» «On approval of the Action Plan for Public Finance Management System Reform»

II. d. First steps towards establishment of the internal audit system Already developed: Draft Law of the Kyrgyz Republic «On internal Audit», approved by the Government of the Kyrgyz Republic on 28 September 2007 and forwarded to the Parliament for consideration Draft Concept on establishment and development IA system for state bodies and institutions of the Kyrgyz Republic for ; Draft IA Standards in the Kyrgyz Republic on the basis of Standards of the International Institute of Internal Auditors; Guidelines on the IA Goals: To define principles of IA at the state bodies To define competence framework of the state bodies in the field of IA To establish responsibility and authority /powers on development of IA standards and methodology To strengthen the basic goals and tasks of the IA system TO define the main directions for actions in this area To set up single requirements on planning, reporting and monitoring of IA activities To provide a methodical help to internal auditors

III. Topics For Discussion: What should be done Topic 1: Structuring and Coordinating of Internal Audit Topic 2: Development of methodology Topic 3: Professional development

III. a. Topic 1: Internal Audit Structuring and Coordinating --How to make it work? 1. Legal Background (Law «On Internal Audit»): An authorized state body in the area of the internal audit is one determined by the Government of the Kyrgyz Republic The Regulation about the Authorized State Body in the area of the internal audit is also approved by the Government

Topic 1 (cont.) The Main Functions of the Authorized Body 1. Develops standards of IA aligned with standards of the International institute of internal auditors 2. Undertakes monitoring of observance of IA standards by IA services, and once in two years evaluates services of IA 3. Develops recommended IA methodology Provides consulting assistance for services of IA at the audit objects according to their inquiries 4. Provides methodological guidance and coordinates IA activities with the Chamber of Accounts in those objects of IA where there are no IA services 5. Prepares and represents annual report on activity of IA services for the previous year to the Government and The Chamber of Accounts 6. Coordinates activity on training and professional development of internal auditors

Topic 1 (cont.) Main issues on establishment of IA services in the ministries How to determine in what agencies to establish IA services? - according to a budget size? - according to an agency size (existence of regional departments)? - other? What should be included into report to the Government on IA services activity? How to structure the relations to provide IA effectiveness and integrity?

Topic 1 (cont.) How to ensure internal audit Effectiveness and Integrity? Proposals for discussion(“stick and carrot methods”) «Stick» Method To empower an Authorized Body to introduce to the Government for punishment those Ministries that haven’t provided in time the IA Plan implementation reports Positive side: introduction of executive discipline at transition period Negative side: discreditation of the reform; an excessive control can become in a future as an «inhibition factor» «Carrot» Method Conducting training seminars for heads of the ministries on IA as a part of an internal system of the organization management. To explain an overall objective of introduction - to help organization’s administration with efficient management. At the initial stage to enter a system of incentives for heads of the ministries for introduction the modern audit methods Positive side: undertaking reforms through comprehending a necessity for the ministries themselves; Difficulties: additional financial expenses, a lack of qualified staff and experience in conducting training seminars

III. b. Topic 2: Development of the Methodology On evaluation of needs in the audit; On strategic and annual planning; On monitoring the activity on the internal audit; On preparation of quarterly and annual reports; What experience do the countries with a developed internal audit system in the public sector have?

III. c. Topic 3: Professional development Analysis and dissemination of successful experience of internal control and audit system development Development of a training course programme, trainings focused on the internal control system and audit development Development of the International Standards Certification System

Thank you for attention! Ministry of Finance of the Kyrgyz Republic