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Irrigated Agriculture Improvement Project (RRP CAM 51159-002)

Financial Management Assessment Report

November 2019

Cambodia: Irrigated Agriculture Improvement Project Prepared by the Pacific Rim Innovation and Management Exponents, Inc. on behalf of the Ministry of Water Resources and Meteorology for the Asian Development Bank.

http://www.adb.org/Documents/RRPs/?id=51159-002-3

CONTENTS

EXECUTIVE SUMMARY

I. INTRODUCTION 1

II. COUNTRY AND SECTOR FINANCIAL MANAGEMENT ISSUES 1

III. PROJECT FINANCIAL MANAGEMENT SYSTEM 4

A. Overview 4 B. Financial Management System Strengths 6 C. Financial Management System Weaknesses 7 D. Personnel, Accounting Policies and Procedures, Internal and External Audit 8 E. Financial Reporting Systems and Use of Information Technology 9 F. Disbursement Arrangements and Funds Flow Mechanism 10

IV. RISK DESCRIPTION AND RATING 13

V. ACTION PLAN 18

VI. SUGGESTED COVENANTS 20

VII. CONCLUSION 21

ANNEX

1. Financial Management Assessment Questionnaire 22 2. Time-bound Action Plans of Previous Projects Implemented by MOWRAM 44

ABBREVIATIONS

ADB – Asian Development Bank DCDM – Department of Cooperation and Debt Management DFWUC – Department of Farmer Water User Community FMA – financial management assessment FMIS – financial management information system FMM – financial management manual FMR – financial management report FMS – financial management system IAD – Internal Audit Department IPSAS – International Public Sector Accounting Standards M&E – monitoring and evaluation MEF – Ministry of Economy and Finance MOWRAM – Ministry of Water Resources and Meteorology MPF – macroeconomic policy framework MRD – Ministry of Rural Development MTEF – medium-term expenditure framework NAA – National Audit Authority NBC – National Bank of Cambodia PDWRAM – Provincial Department of Water Resources and Meteorology PEFA – public expenditure and financial accountability PFM – public financial management PFMRDP – Public Financial Management for Rural Development Program,

Subprogram PFMRP – Public Financial Management Reform Program PIU – project implementing unit PMU – project management unit SOE – statement of expenditures SOP – standard operating procedure TOR – terms of reference WAF – withdrawal application form WAR – withdrawal application register

EXECUTIVE SUMMARY 1. The proposed Irrigated Agriculture Improvement Project (the project) will be implemented by the Ministry of Water Resources and Meteorology (MOWRAM). The Ministry will be the executing agency, with the Department of Farmer Water User Community as the designated implementing agency. The executing and implementing agencies will be responsible for the overall financial management function of the project, including, budgeting, accounting, funds disbursement, monitoring and reporting, and will be supported by the financial management consultants to be assigned to the project management unit. 2. The assessment observed that government has adequate accounting and financial policies and guidelines which are implemented for all externally financed projects and programs. The government launched the comprehensive Public Financial Management Reform Program (PFMRP) in 2004, later supported by ADB’s Public Financial Management for Rural Development Program (PFMRDP), Subprogram 2. It supports MOWRAM in budget preparation and execution, financial management and accounting, procurement, internal audit development, and in monitoring and evaluation. However, there are identified inherent risks, such as in external/independent audit, where capacity of the Government Supreme Audit Institution is inadequate, particularly in project audit reporting, providing ineffective oversight of public expenditures. Consequently, all projects are audited by private auditors, recruited by the Ministry of Economic and Finance (MEF). Corruption issues are also reported, posing significant constraints to development effectiveness.

3. The assessment also identified key project/control-specific risks that include, among others, (i) inadequate capacity of independent auditors in project audit reporting, thus lacking in effective oversight of public expenditures; (ii) insufficient project financial staff numbers and skills, and equipment (vehicles, computers, etc.); (iii) limited computerized application in financial management reporting and desegregated financial and physical progress reporting; and (iv) inadequate internal control and segregation of accounting staff duties.

4. Overall risk rating for the project is Substantial before mitigation, and Moderate after the

mitigation measures are undertaken. The environment for public financial management in

Cambodia is generally less than satisfactory. The implementation of the action plan that

strengthens standardized policies and guidelines designed for externally financed projects, and

that forms part of the government’s ongoing comprehensive PFMRDP 2, the identified risks would

be curbed.

5. MOWRAM has the capacity to administer the advance fund and implement the statement

of expenditures procedures since the executing and implementing agencies have previously

worked with ADB and are currently implementing several ADB-funded projects. A number of

projects implemented by MOWRAM were reviewed with regards to financial management,

including: (i) Water Resources Management Sector Development Program; (ii) Climate-Resilient

Rice Commercialization Sector Development Program; (iii) Greater Mekong Subregion Flood and

Drought Risk Management and Mitigation Project; (iv) Climate-Friendly Agribusiness Value

Chains Sector Project; and (v) Uplands Irrigation and Water Resources Management Sector

Project.1 No specific time-bound action plan for the first three projects was prepared as the

1 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loans, Grant,

Technical Assistance Grant, and Administration of Loan and Technical Assistance Grants to the Kingdom of

financial management risk mitigation measures – Financial Management Assessment Guidelines

were not comprehensive. The time-bound action plans of the last two projects indicate the

following risks: (i) limited staff capacity in financial management; (ii) limited capacity in internal

audit and quality of internal and external audit reports; and (iii) delays and incomplete submission

of the unaudited project financial statements. Mitigation measures include (i) capacity building;

(ii) regular reviews of internal control processes and audit; and (iii) update of the terms of

reference for external auditors (see Annex 1 for more details). There were no proper monitoring

system for the financial management risk mitigating measures implemented in Cambodia in

previous projects. The mechanisms will be improved during the administering of this project, by

monitoring and updating the progress of the financial management risk mitigating measures on

an annual basis.

6. MOWRAM is part of the government’s comprehensive PFMRP, which is being supported

by an ADB Grant.2 The MEF and MOWRAM have agreed to implement an action plan as key

measures to address the deficiencies. The financial management time-bound action plan is given

below.

Financial Management Risk Mitigation Measures Time-Bound Action Plan

Weakness Mitigation Action Responsibility Timeframe

Limited capacity of PMU staff in project financial management. Although the PMU finance officer is gaining significant experience in project finance management (concurrently the finance officer of Loan 3289-CAM), he lacks familiarity with the MEF FMM, and updated ADB loan disbursement procedures, and Peachtree/Sage.

Ensure the PMU finance staff are continually trained on budget preparation and execution, financial management and accounting, procurement, internal audit monitoring and evaluation under the PFMRDPa which is supported by an ADB grant covering three ministries (including MOWRAM).

ADB, CARM, MEF, and MOWRAM

Start in Q1 2020 and progress will be updated annually

Assign a project accountant (trained in financial management, accounting, and Sage under PFMRD) to assist the PMU finance officer or staff. Project accountant and cashier will be nominated from the Finance Department of MOWRAM.

MOWRAM Start in Q1 2020 and progress will be updated annually

Project management and implementation consultants, including financial management consultants, to conduct training

MOWRAM PMU Start in Q1 2020 and progress will be

Cambodia for the Water Resources Management Sector Development Program. Manila; ADB. 2013. Report and Recommendation of the President to the Board of Directors: Proposed Loans and Administration of Grants and Loan to the Kingdom of Cambodia for the Climate-Resilient Rice Commercialization Sector Development Program. Manila; ADB. 2012. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Loan and Grant to the Kingdom of Cambodia for the Greater Mekong Subregion Flood and Drought Risk Management and Mitigation Project. Manila; ADB. 2018. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Loan and Grant to the Kingdom of Cambodia for the Climate-Friendly Agribusiness Value Chains Sector Project. Manila; and ADB. 2015. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Kingdom of Cambodia for the Uplands Irrigation and Water Resources Management Sector Project. Manila.

2 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Grant for Subprogram 2, and Grant Assistance to the Kingdom of Cambodia for the Public Financial Management for Rural Development Program. Manila.


for PMU staff on project financial management, standard operating procedures and FMM, ADB’s Loan Disbursement Handbook; and provision of the PAM.

updated annually

Limited capacity of PMU staff to prepare FMR. PMU staff do not have capacity to show financial information and physical progress in one report, as required in the FMM. The current project accounting system is semi-manual with the limited use of Excel spreadsheets. The accounting software still needs to be installed in the PMU finance unit to be established and the PMU staff trained in this.

Improve the system in project accounting to link the installed Sage software in the Finance Department with the project accounts and physical progress. Procure an agreed software, that links project internal reporting activities with those at inter-department and agency levels to reduce, eliminate budget, disbursement variances, to enhance the financial management system of PMU. Conduct training for PMU on how to generate FMRs from the agreed project accounting and reporting software.

MOWRAM, Finance Department; and project management and implementation consultants


Capacity in internal audit is limited. IAD staff comprises many staff assigned from other MOWRAM departments since 2007 but without the necessary educational background and a few new young staff with accounting degrees but lacking experience in internal audit. In addition, the IAD claims it does not have enough equipment to perform their respective duties effectively and efficiently.

Collaborate with the PFMRDP to ensure capacity building of the internal audit department under the PFMRDP.

MOWRAM Start in Q1 2020 and progress will be updated annually

Low quality of external audit, particularly the required project audit standards.

Coordinate with and make use of the terms of reference for auditors that are being strengthened by MEF. Closely monitor contract performance of external auditors to ensure that auditing firms have assigned staff with qualification and experience as agreed in the contract.

MOWRAM and MEF


ADB = Asian Development Bank, CARM = Cambodia Resident Mission, FMM = financial management Manual, FMR = financial management report, IAD = Internal Audit Department, MEF = Ministry of Economy and Finance, MOWRAM = Ministry of Water Resources and Meteorology, PAM = project administration manual, PFMRDP = Public Financial Management for Rural Development Program, PMU = project management unit. a ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Grant for

Subprogram 2, and Grant Assistance to the Kingdom of Cambodia for the Public Financial Management for Rural Development Program. Manila.

Source: Transaction technical assistance consultant.

I. INTRODUCTION 1. The Irrigated Agriculture Improvement Project will assist the Government of Cambodia to: (i) modernize, and improve climate and disaster resilience of four irrigation systems in Battambang, Kampong Cham, Kampong Thom, and Takeo provinces to supply water to 43,500 hectares (ha) for 291,847 persons, of whom 148,288 (51%) are women; (ii) ensure sustainability of these irrigation schemes by strengthening institutional and financial capacity of the government staff and farmer water user communities in operations and maintenance; (iii) improve farming practices for increased agriculture productivity and crop diversification; and (iv) establish a national water resources data management center, a water resources information system, and an irrigation asset management system for better water resources management, planning, operations and investment. 2. The financial management assessment (FMA) of the project was conducted in May 2018 at the executing and implementing agencies levels. The objective of the assessment was to determine whether the Ministry of Water Resources and Meteorology (MOWRAM) at central level, the designated executing agency, and its Department of Farmer Water User Community (DFWUC), the designated implementing agency, have sufficient and suitable financial management systems (FMSs) to implement the project. The FMA focused on the country and public financial management (PFM) systems, including accounting, budgeting, funds flow, financial reporting, auditing and internal control. The executing and implementing agencies are to replicate identified PFM strengths, applying these as best practices in the project, whilst lessons from known weaknesses are analyzed as risks for which mitigation measures are proposed and an action plan established to ensure successful project implementation. The assessment process entailed visiting the accounting department, economic and budget planning department of the executing and implementing agencies. The FMA reviewed financial management issues at country and sector- and at project and control levels. Risks are identified while mitigating measures are recommended as contained in the time-bound action plan.

II. COUNTRY AND SECTOR FINANCIAL MANAGEMENT ISSUES 3. Public financial management (PFM) and procurement risks and mitigation. As provided in ADB Country Partnership Strategy with Cambodia (2014–2018), in order to mitigate PFM and oversight capacity risks, Asian Development Bank (ADB) will extend its support to the PFM reform program by improving the financial accountability of rural development ministries and other selected ministries in areas of ADB engagement and the PFM capacity of subnational administrations. ADB measures that will mitigate procurement and corruption risks in its operations include: (i) identifying risks and implementing targeted mitigation measures for all projects to ensure transparency and accountability through governance and risk assessment and risk management plans; (ii) tightening project procurement and applying measures to ensure a well-functioning monitoring and evaluation (M&E) system; (iii) conducting joint investigations of irregularities in ADB-financed projects; and (iv) supporting the further development of the government’s updated standard operating procedures, procurement manual, and financial management manual (FMM) for all externally assisted projects and programs in Cambodia, and training government officials to apply them effectively.

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4. Public expenditure and financial accountability (PEFA) assessment. The overall ratings of the PEFA 2nd assessment conducted in 20153 shows some improvements in the following area: (i) aggregate expenditure out-turn compared to original approved budget (B to A rating); (ii) effectiveness of internal audit (D to C); and (iii) transparency of inter-governmental fiscal relations (C+ to B). Performance slippage occurred in the following areas: (i) stock and monitoring of expenditure payment arrears (C+ to D+); (ii) comprehensiveness of information included in budget documentation (B to C); (iii) public access to key fiscal information (C to D); (iv) multi-year perspective in fiscal planning, expenditure poliy and budgeting (B to C+); and (v) transparency of taxpayer obligations and liabilities (B to C+). The other PFM performance indicators do not show any significant change in either direction. Most rating are within C and D. 5. PFM reform strategy. The importance of PFM is reflected in the Rectangular Strategy Phase 3 (2013–2018)4 and the National Strategic Development Plan (NSDP, 2014–2018).5 The government has been implementing a number of reforms to promote governance and public sector efficiency and improved service delivery and has made significant progress in reforming public expenditure policy in the past decade since the Public Financial Management Reform Program (PFMRP) was launched in 2004. The PFMRP aims at mobilizing resources and improving efficiency and accountability in public expenditures that would lead to high rates of economic growth and poverty reduction. The PFMRP is a multi-platform approach, with each platform meant to build on previous achievements.

6. A PFMRP progress report was published6 and it concludes that variable progress has been achieved since 2012. In three objectives, good progress has been achieved, and in 11 objectives, moderate progress has been achieved. Of the 32 recommendations made in the 2012 External Advisory Panel Report,7 25 have either been, or are in the process of being addressed; four are either superseded or no longer valid; and three have yet to be fully addressed. The main recommendations concern a more comprehensive analysis and communication strategy to stakeholders and the need for the National Audit Authority (NAA), the country’s supreme audit institution, to participate more fully in PFMRP reforms.

7. Legislative and policy framework. The Law on the Public Finance System (2008) is basically modern and provides an adequate basis for progressive implementation of the PFMRP. The Audit Law (2000) regulates external and internal audit matters. The revised Constitution (1999) and the Law on Administrative Management of the Capital, Provinces, Municipalities, Districts, and Khans (Organic Law 2008) provide the core foundations for the decentralization reforms. The Law on Subnational Fiscal Regime and Property Management for Subnational Administrations (2012) regulates PFM at the subnational level. Important legislative developments for corruption mitigation include penalty provisions in the Public Finance Law (2008), strengthening the Penal Code for Corrupt Offenses (2009), and passing the Anti-Corruption Law (2010).

8. Institutional capacities. The Ministry of Economy and Finance (MEF) exercises strong central control over public finance matters, including the PFMRP. A dual budget system has

3 Government of Cambodia, Ministry of Economy and Finance. 2015. Final Report. Public Financial Management

Assessment Cambodia – Based on the Public Expenditure Financial Accountability Framework. Public Financial Management Reform Program. Phnom Penh. The 1st PEFA was conducted in 2010.

4 Government of Cambodia. 2013. Rectangular Strategy - Phase III. Phnom Penh. 5 Government of Cambodia. 2014. National Strategic Development Plan, 2014–2018. Phnom Penh. 6 Government of Cambodia. 2013. Cambodian Budget System Reform 2013–2020. Phnom Penh. 7 External Advisory Panel. 2015. Public Financial Management Reform Program–Final External Advisory Panel

Report. Phnom Penh.

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emerged with MEF in charge of preparing and managing the recurrent budget, while the Ministry of Planning ostensibly has powers to prepare and manage a public investment program. Most externally financed investments involve development partners dealing with line ministries, the Council for the Development of Cambodia, and MEF’s Department of Investment Cooperation. MEF’s Department of Investment Cooperation prepares and manages both the government operated externally and domestically financed capital and/or development budgets. The MEF’s Financial Affairs Department, the General Department of Treasury, the Public Procurement Department, and the Cash Management Units are all closely involved with budget execution. MEF’s Financial Affairs Department has financial controllers located in 21 key ministries. A PFM Reform Steering Committee, established through Sub-decree 23 dated 17 January 2014, is responsible for leading, preparing, facilitating, monitoring, and inspecting the government’s PFMRP implementation in cooperation with development partners. The committee is chaired by MEF and supported by the PFM Reform Secretariat. A technical working group, comprising representatives of government institutions and development partners, meets every 6 months to discuss progress and constraints of PFM reform. 9. Program budgeting. Government capacity for budget preparation (strategic planning, program budgeting, and budget execution) is being gradually improved. At the start of each budget cycle, the government produces a Macroeconomic Policy Framework and then develops a Public Financial Policy Framework using the Medium-Term Expenditure Framework (MTEF). The MTEF, which prepares forecasts on the basis of economic and functional classifications, is updated annually to provide forward budget planning from a “top-down” perspective. Based on the MTEF, line ministries prepare annual and medium-term 3-year rolling budget strategic plans, including the public investment program, which link budgets to sector policies and priority strategies. The budget strategic plans and program budgets are prepared annually using a bottom-up approach with inputs from line ministries within fixed timelines. 10. Expenditure management, accounting and financial management. Capacities in budget preparation and execution, financial management and accounting, procurement, internal and external audit, and M&E are still limited, but are being strengthened. The Cash Management Units at MEF monitors budget execution and cash management of all line ministries. This is augmented by a comprehensive set of internal controls (commitment and payment order processes), which are now in place, although further improvements are needed. The National Treasury has rationalized government accounts held at commercial banks and transferred balances to the Treasury Single Account. Additionally, government payments, including salary administration through the banking system, have increased, reducing the number of cash-based transactions. 11. Financial reporting. The accuracy and comprehensiveness of financial reporting are being systematically improved through the implementation of international standard budget classifications, charts of accounts, and integration of capital spending. The National Treasury controls the government bank accounts at the National Bank of Cambodia (NBC) and reconciles these accounts with corresponding cash books monthly, within 4 weeks from the end of the month. In addition, cash forecasting models are expected to be further improved under the financial management information system (FMIS). Areas for improvement in accounting include: (i) adopting IT accounting and promoting a harmonized treasury and line ministry accounting system in line with the improved FMIS; and (ii) implementing robust and computerized asset management system.

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III. PROJECT FINANCIAL MANAGEMENT SYSTEM

A. Overview 12. Executing and implementing agencies. MOWRAM and DFWUC, both public sector stakeholder agencies, are the proposed project executing agency and implementing agency, respectively. MOWRAM is responsible for identifying policy and strategy development of water resources to serve business operation and development and to preserve water resources according to national and international sustainable features in accordance with the policy context of the government. 13. Day-to-day management of the project will be the responsibility of the project management unit (PMU) that has been established at DFWUC. The PMU follows two key documents: (i) the government’s May 2012 Standard Operating Procedures (SOP); and (ii) FMM for externally financed projects or programs (prepared in 2012 and updated in 2018, as further updated from time to time).8 14. Organization and staff capacity. The assessment reveals both executing and implementing agencies have sufficient experience dealing with projects funded by the development partners including ADB. These include program and investment loans, and various technical assistance projects. Executing and implementing agencies have adequate internal control systems and financial reporting arrangements, not only for regular budget and expenditure management, but also for other development partners-funded projects. Additional capacity development support is necessary, particularly in ADB financial management and procurement to comply with procedural requirements. Figure 1 shows the organizational structure of the project.

8 Government of Cambodia, MEF. 2012. Standard Operating Procedures. Phnom Penh; Government of Cambodia,

MEF. 2012. Financial Management Manual for Externally Financed Projects or Program. Phnom Penh. The Procurement Manual Volume I and II issued the Sub-decree no. 74ANK.BK of Cambodia on 22 May 2012.

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Figure 1: Project Organization Structure

DFWUC = Department of Farmer Water User Community; EIA = environmental impact assessment; FWUC = farmer water user community; GDR = General Department of Resettlement; IAIP = Irrigated Agriculture Improvement Project; MAFF = Ministry of Agriculture, Forestry and Fisheries; MOE = Ministry of Environment; MOWRAM = Ministry of Water Resources and Meteorology; NWRDMC = National Water Resources Data Management Center; PDWRAM = Provincial Department of Water Resources and Meteorology; PMIC = project management and implementation consultant; PMU = project management unit; SRP = Sustainable Rice Platform; WCS = Wildlife Conservation Society. Source: MOWRAM.

15. Information management. The PMU is led by a Project Director who is Undersecretary of State. MOWRAM/PMU have implemented various projects financed by ADB, Agence Francaise de Developpement, Japanese International Cooperation Agency, Korean International Cooperation Agency, and World Bank. ADB-funded projects include the following: (i) Supporting Policy and Institutional Reforms and Capacity Development in the Water Sector;9 (ii) Climate-Resilient Rice Commercialization Sector Development Program (Rice SDP);10 (iii) Water

9 ADB. 2010. Technical Assistance to Cambodia for Supporting Policy and Institutional Reforms and Capacity

Development in the Water Sector. Manila. 10 ADB. 2013. Report and Recommendation of the President to the Board of Directors: Proposed Loan and

Administration of Grant and Loan to the Kingdom of Cambodia for the Climate-Resilient Rice Commercialization

Sector Development Program. Manila.

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Resources Management Sector Development Program;11 (iv) Flood Damage Emergency Reconstruction Project;12 (v) Community-Based Disaster Risk Reduction;13 and (vi) Uplands Irrigation and Water Resources Management Sector Project.14 16. Budgeting. MOWRAM has been undertaking intensive capacity development to improve its PFM system. It is one of the three ministries15 implementing ADB’s Public Financial Management for Rural Development Program, Subprogram 2. Under Subprogram 2, the capacity building of the three rural development ministries has been supported in budget preparation and execution, financial management and accounting, procurement, internal audit development, and M&E. As a result, a number of capacity building trainings on PFM for MOWRAM staff have been implemented including: (i) 3-year rolling Public Investment Plan; (ii) preparation and monitoring of entity budget and program budgets; (ii) SOPs; (iii) FMM; (iv) IT programs, i.e., Microsoft Outlook, Microsoft Project, and Advance Excel; (v) accounting program of government (Chart of Accounts); (vi) audit of development partners programs; (vii) internal audit; and (viii) audit management and accounting software, Sage 50. 17. The MOWRAM Finance Department installed Sage 50 in a new server supported by ADB’s PFMRDP and successfully recorded all accounting transactions of entity budget and expenditures and produced the required government financial reports. It also implemented recording of both entity and program budgets and expenditures to produce the government required financial reports.16 Moreover, accounting staff of the Finance Department were trained as trainers in the Training of Trainers on Financial Management, Government Accounting Program, Accounting Software of Sage 50 to train MOWRAM accounting and finance staff at the national and provincial levels. B. Financial Management System Strengths 18. The project FMS has defined strengths, as follows:

• The government has adequate accounting and finance policies and guidelines which are implemented for all externally financed projects and programs, as discussed in the SOP and FMM.

• The government launched the comprehensive PFMRP17 in 2004, supported by ADB’s PFMRDP 2. The ADB grant supports MOWRAM in budget preparation and execution, financial management and accounting, procurement, internal audit development, and in monitoring and evaluation. This support includes (i) system development, including

11 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loans, Grant,

Technical Assistance Grant, and Administration of Loan and Technical Assistance Grants to the Kingdom of

Cambodia for the Water Resources Management Sector Development Program. Manila. 12 ADB. 2012. Report and Recommendation of the President to the Board of Directors: Proposed Loan and

Administration of Grant to the Kingdom of Cambodia for the Flood Damage Emergency Reconstruction Project.

Manila. 13 ADB. 2014. Grant Assistance to the Kingdom of Cambodia for Community-Based Disaster Risk Reduction. Manila. 14 ADB. 2015. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Kingdom

of Cambodia for the Uplands Irrigation and Water Resources Management Sector Project. Manila. 15 The three rural development ministries are MOWRAM, Ministry of Agriculture, Forestry, and Fisheries, and Ministry

of Rural Development. 16 Based on discussions with Director of Finance and his staff on 4 May 2018. 17 Government of Cambodia. 2004. Public Financial Management Reform Program–Strengthening Governance through Enhanced Public Financial Management. Phnom Penh.

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program budgeting, budget entities, new budget classification, new chart of accounts, and computerized financial management with the successful introduction of the Sage Accounting System in March–April 2014; and (ii) capacity development of the Finance Department.

• The PFMRP is also strengthening internal audit through (i) the Operationalized Audit Manual developed under the PFMRDP, Subprogram 1,18 with key staff from internal audit departments trained in using the audit manual; (ii) improved governance and internal control framework; (iii) internal audit management systems implemented with appropriate manuals; (iv) manual on auditing computerized accounting systems; and (v) manual on auditing externally funded projects.

• The PMU Finance Officer is concurrently the finance officer of the PMU of the Uplands Irrigation and Water Resources Management Sector Project,19 and has gained significant experience in project finance management.

C. Financial Management System Weaknesses 19. The project FMS has defined weaknesses, as follows:

• PMU staff have limited capacity in project financial management. The Finance Officer has gained experience under the Uplands Irrigation and Water Resources Management Sector Project, but lacks familiarity with the MEF FMM for externally financed projects.

• There is limited capacity in preparing financial management reports (FMRs) as required by the executing agency and MEF. The current project accounting system is semi-manual with partial use of Excel spreadsheets. A computerized accounting software is one of the key internal controls as stated in the MEF FMM (May 2012) for externally financed projects or programs. Although there have been significant improvements in accounting and budgeting in MOWRAM, the improvements have so far been in the Finance Department, and have yet to be applied to provincial offices and to projects. The computerized accounting system using Sage 50 is yet to be fully introduced to the MOWRAM PMU. The accounting software needs to be installed in the PMU finance unit, and staff trained in its use. Moreover, existing reporting systems do not have capacity to show financial information and physical progress in one report as required in the FMM.

• The financial reporting of ADB-funded projects use the modified cash basis of accounting. As in the Government’s roadmap, it is targeted to fully comply with the cash basis of accounting under International Public Sector Accounting Standards (IPSAS) by 2020. The modified cash basis of accounting, not duly recognized internationally, may continue till 2023, followed by modified accrual till 2023. It is expected to fully comply with IPSAS accrual by 2027. As per ADB requirements, the next project financial statements will be prepared in accordance with the cash IPSAS.

• Internal audit capacity is inadequate, as assessed by the Finance Director and the Deputy Director of MOWRAM’s Internal Audit Department (IAD). Many IAD staff were

18 ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Program Cluster,

Grant for Subprogram 1, and Grant Assistance to the Kingdom of Cambodia for Public Financial Management for

Rural Development Program, Subprogram 1. Manila. 19 ADB. 2015. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Kingdom

of Cambodia for the Uplands Irrigation and Water Resources Management Sector Project. Manila.

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assigned from other MOWRAM departments, but without the necessary educational background. New staff with accounting degrees lack experience in internal audit. Additionally, the IAD claims not to have enough equipment to perform their respective duties effectively and efficiently.

• The quality of external audit remains a concern, particularly the need to (i) raise awareness of the required standards for project audit; (ii) strengthen the terms of reference (TOR) for external auditors; and (iii) review the practice of audit bundling to create large contracts in the light of inadequate capacity and experience of auditors.

D. Personnel, Accounting Policies and Procedures, Internal and External Audit 20. Personnel. The proposed PMU is currently administering the ADB loan-funded Uplands Irrigation and Water Resources Management Sector Project. The PMU is composed of a project team nominated from the DFWUC of the PMU. To implement the proposed project at the field level, staff will be assigned by the Provincial Department of Water Resources and Meteorology (PDWRAM) of Battambang, Kampong Cham, Kampong Thom, and Takeo provinces.20 21. The PMU finance officer has relevant project financial management experience as finance officer in the Uplands Irrigation and Water Resources Management Sector Project. However, further training is needed to familiarize with the MEF FMM, ADB loan disbursement procedures and report preparation, and increase skills in Peachtree and/or Sage, which are installed in MOWRAM’s Finance Department. A project accountant trained in financial management, accounting and Sage 50 under PFMRD will be nominated from Finance Department to assist the finance officer in financial management to segregate project-related duties during implementation. 22. Policies. Key results of PFMRDP included extending and improving budget classification and chart of accounts to enable more effective record keeping and budgetary control and introducing the FMIS into the central and provincial treasuries. Significant improvements in MOWRAM Finance Department’s accounting and budgeting have been observed but the same are yet to be fully developed at provincial and project levels as PMU and project implementing units (PIUs) continue to use semi-manual systems aided by simplified Excel spreadsheets. Currently the Government institutions in Cambodia inconsistently apply modified cash in preparing project financial statements, for externally/development partners funded projects. The project will apply the modified cash. However, in line with the following roadmap (Table 1), prepared by the National Accounting Council and MEF, the project will gradually follow the use the cash basis of accounting under IPSAS, including financial reports produced for the project. Table 1: Cambodia’s Roadmap toward International Public Sector Accounting Standards

Compliance

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

Cash basis Modified Cash Modified Accrual Full Accrual

• cash flow • cash flow • cash flow • cash flow

• receivable • receivable • receivable

• payable • payable • payable

• financial asset • financial Asset

• financial liability • financial Liability

20 ADB. 2015. Consultation Mission to Cambodia: Uplands Irrigation and Water Resources Management Sector Project.

Aide Memoire. 3 April (internal).

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• non-financial Asset

• revaluation non-financial asset

Cash basis part 1

Cash basic part II Cash basic part III

Source: Ministry of Economy and Finance, and National Accounting Council, 2019.

23. Internal Auditing. The MOWRAM IAD was established by Sub-decree No. 54 ANK/BK issued by the Government of Cambodia on 29 May 2006, following Sub-Decree No. 40 ANKR/BK dated 15 February 2005 on the organization and functions of the internal department within ministries and public enterprises. The department received capacity building on internal audit under ADB’s PFMRDP 2. However, the overall qualifications and work experience of IAD staff is still limited. It is essential that the department be provided with (i) continuous capacity building through on-the-job training on internal audit, including advanced Excel; and (ii) necessary equipment such as laptops and desktop computers, printer, and service vehicle. Based on Sub-Decree No. 54, the IAD is mandated to conduct internal audit of 11 departments of MOWRAM and 25 PDWRAMs based on the 3-year rolling plan and annual plan to be approved by the Minister of MOWRAM. The IAD conducted internal audit of MOWRAM’s Finance Department, Department of Irrigated Agriculture, and Department of Engineering, 25 PDWRAMs, and 1 ADB-funded project. A few minor weaknesses were found and subsequently addressed after the audit recommendations were issued. 24. External auditing. The quality of audit reports remains a concern after the findings of the August 2014 Cambodia Joint Country Portfolio Performance Review. ADB, World Bank, and JICA conducted a Financial Management Seminar in December 2013 to raise awareness on the required project audit standards. 25. Project financial statements of past and ongoing projects implemented by MOWRAM/PMU and financed by ADB and other institutions are required to be annually audited by external audit firms from the pre-qualified list acceptable to ADB, selected under the bundled audit arrangement of MEF in agreement with ADB. Contract performance will need to be closely monitored to ensure that audit firms have assigned staff with the qualifications and experience as agreed in contracts. 26. MOWRAM/PMU will initiate the detailed consolidated project accounts to be audited in accordance with international standards on auditing and/or with the government’s audit regulations by an auditor acceptable to ADB. The annual audit report will include a separate audit opinion on the use of the advance accounts, sub-accounts, and the statement of expenditures (SOE) procedures. ADB reserves the right to verify the project’s financial accounts to confirm that ADB funds are used in accordance with ADB policies and procedures. The audited project accounts must be disclosed in the ADB and MOWRAM websites. E. Financial Reporting Systems and Use of Information Technology 27. Training has been concluded in MOWRAM for the computerized accounting system (Sage 50) as early as 2014. However, implementing the budgeting and accounting systems in projects

10

and provinces still needs to be completed. Although finance staff working for the proposed PMU has some work experience with ADB-funded projects, they still have limited capacity in preparing FMRs for projects funded by ADB and other institutions. The PMU is yet to fully appreciate the accounting application to record financial transactions and produce FMRs to replace Excel-based simplified spreadsheets. Concerned staff at provincial and project offices require further training on the computerized FMR generation and relevant features of the accounting software. 28. MOWRAM will prepare quarterly FMRs in accordance with the FMM (updated in 2018) issued by MEF for externally financed projects or programs. FMRs will be submitted to ADB within 45 days after the end of each quarter. FMRs consist of (i) statement of receipts and disbursement detailing sources of fund received and all expenditures incurred for a particular period and fund balance; (ii) summary of accumulated expenditure report by categories and by project activities, providing information about the analysis of funds received and spent and fund balance; (iii) project balance sheet and/or advance account reconciliation; and (iv) loan disbursement summary by categories and its balance. 29. MOWRAM offices have information technology equipment, however, most are outdated and fail to function effectively. MOWRAM and PMU do not have enough desktops and laptops, printers and copiers. Some staff have been found to possess computer skills for specialized applications (e.g., advanced Excel, Access, Outlook, Microsoft Project, MYOB, Peachtree or Sage 50). As computerized accounting software is one of the key internal controls stated in the FMM) for externally financed projects, it is recommended that a computerized accounting system, Sage 50, be procured and utilized for the proposed project. F. Disbursement Arrangements and Funds Flow Mechanism 30. Disbursement Arrangements for ADB Loans. The Loan and Grant proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time)21 and detailed arrangements agreed upon between the government and ADB. Pursuant to ADB's Safeguard Policy Statement (2009),22 ADB funds may not be applied to the activities described on the ADB Prohibited Investment Activities List set forth at Appendix 5 of the Safeguard Policy Statement. 31. Direct payment, reimbursement, and advance fund (SOE) procedures will be used for the project. MOWRAM will be responsible for preparing the projected annual contract awards and disbursements, including in (i) requesting budgetary allocations for counterpart funds; (ii) preparing withdrawal applications; (iii) sending the withdrawal applications to ADB; and (iv) collecting supporting documents for the project expenditures incurred. 32. Advance fund procedure. Immediately after project effectiveness, the government (through MEF), will open three pass-through accounts (one for the loan, one for the Asian Development Fund grant and one for the High Level Technology Fund) at the NBC to receive the advances from ADB. The pass-through accounts will be in United States dollar. MEF will be the account holder, and delegates the authority to MOWRAM, the authorized party. 33. MOWRAM will open and manage three advance accounts (one for the loan, one for the Asian Development Fund grant, and one for the High Level Technology Fund) at NBC or a commercial bank acceptable to ADB. MOWRAM will also submit evidence satisfactory to ADB

21 ADB. 2017. Loan Disbursement Handbook. Manila. 22 ADB. 2009. Safeguard Policy Statement. Manila.

https://www.adb.org/documents/loan-disbursement-handbook

https://www.adb.org/documents/safeguard-policy-statement

11

that the advance accounts have been duly opened. The currency of the advance accounts is in United States dollar. The advance accounts will be used exclusively for share of eligible expenditures. MOWRAM who administers the advance account is accountable and responsible for proper use of advances to the advance account. 34. The total advance to the respective advance accounts will not exceed the estimate of ADB’s share of expenditures to be paid through the respective advance account for the next 6 months. MOWRAM may request for initial and additional advances to the respective advance account based on an Estimate of Expenditure Sheet23 setting out the estimated expenditures to be financed through the respective advance account for the forthcoming 6 months. For every liquidation and replenishment request of the advance account, the borrower will furnish to ADB (i) the Statement of Account (Bank Statement) where the advance account is maintained: and (ii) the Advance Account Reconciliation Statement reconciling the above mentioned bank statement against the executing agency’s records.24 Before the submission of the first withdrawal application, the borrower should submit to ADB sufficient evidence of the authority of the person(s) who will sign the withdrawal application on behalf of the borrower and the authenticated specimen signatures of each authorized person. The minimum value per withdrawal application is $100,000, unless otherwise approved by ADB. The borrower is to consolidate claims to meet this limit for reimbursement and advance account claims. Withdrawal applications and supporting documents will demonstrate, among other things that the goods, and/or services were produced in or from ADB members, and are eligible for ADB financing. 35. The SOE Procedure. The SOE procedure will be used for reimbursement of eligible expenses or liquidation of advances to the advance accounts. Any individual payment to be reimbursed or liquidated under this procedure shall not exceed the equivalent of $100,000. SOE records should be maintained and made readily available for review by ADB's disbursement and review mission or upon ADB's request for submission of supporting documents on a sampling basis, and for independent external audit. 25 36. Disbursement and Liquidation Procedures for Government Funds. Withdrawal of government counterpart funds must be carried out in accordance with the government policies and procedures, through its regular budget for cash and through tax exemption issued by MEF for civil works. MOWRAM will be responsible for submitting withdrawal applications to MEF. Counterpart funds withdrawal applications should be prepared in accordance with the budget plan agreed between MOWRAM and MEF. Counterpart funds may only be withdrawn for project expenditures specified in the project agreements. 37. Counterpart Funds Replenishment. The project team completes the Government Withdrawal Application Form (WAF) and attaches a statement of actual expenditure. Supporting expenditure documentation must be maintained by the project team for subsequent review by MEF or audit. The WAF must be signed by the authorized signatories of the MOWRAM/project team and submitted to Department of Cooperation and Debt Management (DCDM). The WAF must be recorded in the Project Counterpart Funds Withdrawal Application Register (WAR). 38. The DCDM will review the completed forms and in conjunction with the Finance and Administration Department transfers the funds to the project’s counterpart funds account, and

23 Available in Appendix 29 of the Loan Disbursement Handbook. 24 Follow the format provided in Appendix 30 of the Loan Disbursement Handbook. 25 Checklist for SOE procedures and formats are available at:

http://www.adb.org/documents/handbooks/loan_disbursement/chap-09.pdf and http://www.adb.org/documents/handbooks/loan_disbursement/SOE-Contracts-100-Below.xls



http://www.adb.org/documents/handbooks/loan_disbursement/chap-09.pdf

http://www.adb.org/documents/handbooks/loan_disbursement/SOE-Contracts-100-Below.xls

12

advises MOWRAM of the transfer. On receipt of advice from the NBC that funds have been deposited into the counterpart funds account, the receipt of the funds should be recorded in the General Ledger and the WAR must be updated. 39. Key Internal Controls. WAFs must be signed by the authorized signatory/signatories and sequentially numbered starting with the number one. For the counterpart funds initial advance, the PMU completes the Government WAF and submits to the DCDM in MEF. The maximum amount of the advance will be agreed between MOWRAM/project team and MEF. The WAF must be signed by the authorized signatories of MOWRAM/project team and submitted to the DCDM. The withdrawal application must be recorded in the WAR. Figure 2 presents the project funds flow arrangement.

Figure 2: Funds Flow Arrangement

ADB = Asian Development Bank, DFWUC-PMU = Department of Farmer Water User Community-Project Management Unit, HLT = High Level Technology, MEF = Ministry of Economy and Finance, MOWRAM= Ministry of Water Resources

Key

Document flow

Funds flow

DFWUC-PMU

Dir

ect

pay

me

nts

Op

erat

ing

cost

s

ADB

MEF

Payees (suppliers, contractors, consultants, firms, participants, staff)

Advance Account

(ADB Grant), NBC

Counterpart Fund Account, NBC

Advance Account

(ADB Loan), NBC

PDWRAMs

Sub-Accounts (4) (ADB Loan)

Advance Account

(HLT Fund), NBC

MOWRAM/DFWUC-PMU

13

and Meteorology, NBC = National Bank of Cambodia, PDWRAM = Provincial Department of Water Resources and Meteorology. Source: ADB.

IV. RISK DESCRIPTION AND RATING

40. For inherent risks, the assessment focuses on risks posed by the overall environment in which the executing and implementing agencies operate (before considering the impact of the executing and implementing agencies’ financial management system and control) such as country rules and regulations and the entity working environment (assuming the absence of any counter checks or internal controls).

Table 2: The Inherent Risks

Risk Description Risk

Assessment Mitigation Measures or Risk Management Plan

Inherent Risk

I. Country Specific

External Audit. Audit capacity needs improvement. The NAA’s capacity has been gradually strengthened, but is still inadequate to provide effective oversight of public expenditures. Likewise, quality of audit reporting remains a concern, particularly the need to raise awareness of the required standards of audit of projects, strengthening the terms of reference for external auditors, and the review of audit bundling practices to create large contracts in the light of inadequate capacity and experience of auditors.

Substantial MOWRAM to coordinate with MEF to update the terms of reference for external auditors. MEF to provide oversight and MOWRAM to closely monitor contract performance of external auditors to ensure that auditing firms have assigned staff with adequate qualification and experience. MEF will monitor closely the quality of financial statements prepared by MOWRAM.

Governance and anti-corruption. Corruption remains a major issue and poses significant constraints for development effectiveness.

Substantial ADB to ensure that ADB’s Anti-corruption Policy (1998, as amended to date) is explained to and discussed with the executing and implementing agencies. The specific policy requirements and anticorruption measures to guide MOWRAM to include (i) requiring contractors, bidders, suppliers and consultants to sign declarations of ethical conduct; (ii) strengthening transparency through posting project information on the executing agency websites; (iii) developing complaint redress mechanisms; and (iv) strict monitoring and enforcement of procurement procedures and contracts.

14


Assessment Mitigation Measures or Risk Management Plan

Financial reporting standards. Risk related to the country’s inconsistent application of the financial reporting standards used to prepare project financial statements.

Substantial ADB and other development partners have been supporting the government to update its national financial reporting standards to fully align with the International Public Sector Accounting Standards (IPSAS). A draft roadmap has been submitted to ADB by the government to show its plans and commitments to transition towards the IPSAS cash basis. ADB will continue to resolve this issue by implementing the time-bound roadmap.

II. Entity Specific

Financial Management Practices. Limited financial management capability is observed, although improvements are noted as a result of the PFMRDP.

Moderate MEF and MOWRAM to continue monitoring the progress and results of PFMRDP covering three ministries including MOWRAM. These ministries are being supported in budget preparation and execution, financial management and accounting, procurement, internal audit development, and monitoring and evaluation. Trainers from the Finance Department of MOWRAM to further train accounting and finance staff of MOWRAM at the national and provincial levels on financial management, government accounting, and accounting software.

Overall Inherent Risk Substantial

ADB = Asian Development Bank, MEF = Ministry of Economy and Finance, MOWRAM = Ministry of Water Resources and Meteorology, NAA = National Audit Authority, PFMRDP = Public Financial Management for Rural Development Program. Source: Asian Development Bank.

41. For the project or specific control risks, the assessment focuses on risks arising from the failure of the specific project’s financial management and internal control arrangements that ensure project funds will be used economically and efficiently and for the intended purposes. Table 3 presents the summary findings.

Table 3: The Project or Control Risks


Assessment Mitigation Measures or Risk

Management Plan

Disbursements and Funds Flow. The PMU finance officer is familiar with FMM, but needs more training on ADB’s Loan Disbursement Handbook.

Moderate Provide specific training on ADB disbursement guidelines as part of the PMU consultancy package.

Staffing. Lack of staff numbers and skills of finance unit of PMU.

Moderate The PMU to start the selection process for the PMU project accountant, preferably from Finance Department of MOWRAM. Project consultants will be engaged to assist with project management, including project financial management.

15


Assessment Mitigation Measures or Risk

Management Plan

Accounting Policies and Procedures. The duties of finance officer are not segregated between preparing orders and making payments.

Substantial Once assigned to the PMU, the project accountant can handle preparing orders so the finance officer focuses on responsibility for handling payments.

Internal Audit and Internal Control. Capacity for internal audit and internal control are improving, but remain limited. Lack of capacity increases fiduciary risks and leads to less effective and transparent financial management practices, including for procurement.

Moderate Further improvement of earlier capacity building for internal audit needed. ADB to extend support to MOWRAM for the project to ensure that the organization’s internal audit unit carries out regular reviews of the internal control processes, systems and procedures of the project and the audit findings are reported to the project management and the MEF

External Audit. Lack of analysis in reviewing transactions and interpreting project financial statements.

Substantial PMU will work with MEF to update the terms of reference and to engage external auditors who can provide qualified staff to audit the project accounts.

Reporting and Monitoring. Finance officer has limited capacity to prepare FMRs. The current project reporting system does not have the capacity to link the financial information with the project physical progress.

Substantial PMU Finance officer will undertake on-the-job training conducted by the finance consultant to be provided through the project consultancy package. Standard reporting and monitoring will be based on linked financial and physical progress of works and goods delivery.

Information System. PMU has no accounting software to record accounting transactions and generate FMRs automatically.

Moderate PMU to coordinate with the Finance Department for installation of agreed accounting software at the PMU, based on double-entry accounting procedures, developed chart of accounts that will allow transactions to be traced and followed during audit.

Overall Control Risk Substantial

Overall (Combined) Risk Substantial The implementation of mitigation actions as proposed will reduce risk to low.

ADB = Asian Development Bank, FMM = financial management manual, FMR = financial management report, MEF = Ministry of Economy and Finance, MOWRAM = Ministry of Water Resources and Meteorology, PMU = project management unit. Source: Asian Development Bank.

42. Risk management actions include measures to support funds flow arrangements, and to strengthen staff financial management skills to avoid potential problems. These include (i) developing accounting and monitoring systems to standard format; and (ii) introducing computerized accounting at all levels (central to provincial). The implementation of the risk management measures will ensure that financial management arrangements will be adequate for the project. 43. Table 4 summarizes the risk assessment reflecting the measures required and responsible entities and/or units.

16

Table 4: Summary Risk Assessment Risks Risk Rating Mitigating Measures Responsibility

Staffing. Lack of staff numbers and skills of finance unit of PMU. PMU staff has insufficient familiarity with FMM for the externally financed projects and the ADB loan disbursement guidelines.

Substantial PMU to start the selection process for the PMU project accountant, preferably from Finance Department of MOWRAM. Project consultants will be engaged to assist with project management, including project financial management. Provide specific training on ADB disbursement guidelines as part of the PMU consultancy package.

MOWRAM Finance Department, PMU; Project (Financial) Management Consultant; ADB

Accounting Policies and Procedures. The duties of finance officer are not segregated between preparing orders and making payments.

Substantial Assign project accountant to handle preparation of orders, bills, etc.; finance officer to handle payment responsibilities.

MOWRAM Finance Department, PMU

Financial reporting. The accounting software still needs to be installed in the PMU finance unit and the PMU staff trained in this. The current project accounting system is semi-manual with the limited use of Excel spreadsheets. A computerized accounting software is one of the key internal controls as stated in the FMM for externally financed projects.

Substantial Support for PMU’s plans to purchase accounting software for ongoing proposed projects. PMU Finance officer will undertake on-the-job training conducted by the finance consultant to be provided through the project consultancy package. Staff training for PMU on how to generate FMRs from the accounting software.

MOWRAM Finance Department, PMU; Project (Financial) Management Consultant

Internal Audit. Capacity in internal audit is limited. IAD staff comprises many staff assigned from other MOWRAM departments since 2007 but without the necessary educational background and a few new young staff with accounting degrees but lacking experience in internal audit. In addition, the IAD claims it does not have enough equipment to perform their respective duties effectively and efficiently.

Moderate Further capacity building for internal audit. Monitor capacity building of the internal audit department under the PFMRDP. ADB to extend support to MOWRAM for the project to ensure that the organization’s internal audit unit carries out regular reviews of the internal control processes, systems and procedures of the project and the audit findings are reported to the project management and the MEF. IAD to be provided with continuous capacity building through on-the-job trainings on internal audit, and in

MOWRAM; ADB; MEF

17

Risks Risk Rating Mitigating Measures Responsibility

spreadsheet financial tools. Provide the necessary support and equipment such as laptop computer, printer, and vehicles.

External Audit. Need to raise awareness of the required project audit standards, strengthen terms of reference for external auditors, and review the practice of audit bundling to create large contracts in the light of inadequate capacity of auditors and experience.

Substantial Update the terms of reference for auditors and to further improve audit quality. Closely monitor contract performance of external auditors to ensure that auditing firms have assigned staff with qualification and experience as agreed in the contract.

MOWRAM; MEF

Reporting and Monitoring. The PMU has limited capacity to prepare FMRs and does not have capacity to show financial information and physical progress in one report as required in the FMM.

Substantial System improvement in project accounting to link the installed Sage software in the Finance Department with the project accounts and physical progress of construction, goods delivery and installation, and capacity building implementation. Standard reporting and monitoring will be based on linked financial and physical progress of works and goods delivery. PMU finance officer to undertake on-the-job training conducted by the finance consultant to be provided through the project consultancy package.

MOWRAM Finance Department, PMU; Project (Financial) Management Consultant

Information System. PMU has no accounting software to record accounting transactions and generate FMRs automatically.

Moderate MOWRAM Finance Department to install agreed accounting software (Sage) at the PMU, based on double-entry accounting procedures, developed chart of accounts that will allow transactions to be traced and followed during audit. Software incorporates periodic FMR generation.

MOWRAM Finance Department, PMU

ADB = Asian Development Bank, FMM = financial management manual, FMR = financial management report, IAD = Internal Audit Department, MEF = Ministry of Economy and Finance, MOWRAM = Ministry of Water Resources and Meteorology, PFMRDP = Public Financial Management for Rural Development Program, PMU = project management unit. Source: Asian Development Bank.

18

V. ACTION PLAN

44. The project will prepare the TOR and allocate adequate budget to provide appropriate training and capacity building to accounting department staff to establish robust financial management arrangements, including for record-keeping, internal controls, payables, receivables, budgeting, accounting, project management, and bank account management and the preparation of loan withdrawal applications and statement of expenditure. Independent out-sourced accounting support will continue to ensure, among others, timely and rigorous reconciliations, orderly records keeping, financial reporting and strict adherence to financial management policies and internal controls, and to ensure orderly and timely periodic processes for the preparation and audit of periodic project accounts. The following table shows proposed time-bound actions in support of project financial management for the project.

19

Table 5: Time-Bound Action Plan


Limited capacity of PMU staff in project financial management. Although the PMU finance officer is gaining significant experience in project finance management (concurrently the finance officer of Loan 3289-CAM), he lacks familiarity with the MEF FMM, and updated ADB loan disbursement procedures, and Peachtree or Sage.

Ensure the PMU finance staff are continually trained on budget preparation and execution, financial management and accounting, procurement, internal audit monitoring and evaluation under the PFMRDP,a which is supported by an ADB grant covering three ministries (including MOWRAM).

ADB; CARM; MEF; and MOWRAM

Start in Q1 2020 and will update the progress annually.

Assign a project accountant (trained in financial management, accounting, and Sage under PFMRD) to assist the PMU finance officer or staff. Project accountant and cashier will be nominated from the Finance Department of MOWRAM.

MOWRAM Start in Q1 2020 and will update the progress annually.

Project management and implementation consultants, including financial management consultants, to conduct training for PMU staff on project financial management, standard operating procedures and FMM, ADB’s Loan Disbursement Handbook; and provision of the project administration manual.

MOWRAM PMU Start in Q1 2020 and will update the progress annually.

Limited capacity of PMU staff to prepare FMR. PMU staff do not have capacity to show financial information and physical progress in one report, as required in the FMM. The current project accounting system is semi-manual with the limited use of Excel spreadsheets. The accounting software still needs to be installed in the PMU finance unit to be established and the PMU staff trained in this.

Improve the system in project accounting to link the installed Sage software in the Finance Department with the project accounts and physical progress. Procure an agreed software, that links project internal reporting activities with those at inter-department and -agency levels to reduce/eliminate budget/disbursement variances, to enhance the financial management system of PMU. Conduct training for PMU on how to generate FMRs from

MOWRAM, Finance Department; project management and implementation consultants


20


the agreed project accounting and reporting software.

Capacity in internal audit is limited. IAD staff comprises many staff assigned from other MOWRAM departments since 2007 but without the necessary educational background and a few new young staff with accounting degrees but lacking experience in internal audit. In addition, the IAD claims it does not have enough equipment to perform their respective duties effectively and efficiently.

Collaborate with the PFMRDP to ensure capacity building of the internal audit department under the PFMRDP.

MOWRAM Start in Q1 2020 and will update the progress annually.

Low quality of external audit, particularly the required project audit standards.

Coordinate with and make use of the terms of reference for auditors that are being strengthened by MEF. Closely monitor contract performance of external auditors to ensure that auditing firms have assigned staff with qualification and experience as agreed in the contract.

MOWRAM and MEF


ADB = Asian Development Bank, CARM = Cambodia Resident Mission, FMM = financial management manual, FMR = financial management report, IAD = Internal Audit Department, MEF = Ministry of Economy and Finance, MOWRAM = Ministry of Water Resources and Meteorology, PFMRDP = Public Financial Management for Rural Development Program, PMU = project management unit. a ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Grant for

Subprogram 2, and Grant Assistance to the Kingdom of Cambodia for the Public Financial Management for Rural Development Program. Manila.

Source: Transaction technical assistance consultant.

VI. SUGGESTED COVENANTS

45. Right to Audit. The government will ensure that contracts financed from the project will include provisions specifying the right of ADB to audit and examine the records and accounts of the project and all contractors, suppliers, consultants, and other service providers related to the project. The government shall enable ADB, upon ADB’s request, to discuss the financial statements for the project and the financial affairs related to the project from time to time with the auditors appointed by the PMU and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only in the presence of an authorized officer of the PMU unless the PMU shall otherwise agree. 46. The PMU shall (i) maintain, or cause to be maintained, separate accounts for the project; (ii) have such accounts and related financial statements audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose

21

qualifications, experience and terms of reference are acceptable to ADB; (iii) furnish to ADB, as soon as available but in any event not later than 6 months after the end of each related fiscal year, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors’ opinion on the use of the Loan and Grant proceeds and compliance with the financial covenants of this Loan/Grant Agreement), all in the English language; and (iv) furnish to ADB such other information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request. 47. Governance and Anti-corruption. The government will ensure that (i) the program is carried out in compliance with all applicable Cambodia anti-corruption regulations, and ADB’s Anticorruption Policy (1998, as amended to date); (ii) all project staff actively participate in the training in Cambodia’s anti-corruption regulations and ADB’s Anticorruption Policy; and (iii) a website is maintained to disclose the audited annual project accounts, project progress, and procurement activities.

VII. CONCLUSION

48. Overall risk rating for Project FMA is Substantial before mitigation, and expected to be Moderate after the mitigation measures are undertaken. General environment for public financial management in MOWRAM is generally satisfactory and to a large extent strengthened by standardized policies and guidelines which are implemented for all externally financed projects and programs. These are discussed in the upgraded SOP and FMM. Although project financial management and internal auditing capacities are still limited and need improvement, these are expected to improve significantly as part of the government’s ongoing comprehensive Public Financial Management Reform Program as supported by the PFMRDP 2. 49. The FMA results prepared for the project are summarized from the updated responses and information obtained from the executing and implementing agencies. Details are given in Annex 1. Proper mitigation measures and management actions are presented to address the key issues identified. 50. Engagement of a team of international and domestic implementation consultants for capacity building in project management during project implementation is recommended. The finance consultant will assist in (i) providing training, including on-the-job training, for PMU finance unit, and (ii) coordinating with the MOWRAM Finance Department on ongoing budgeting and accounting systems improvements, including computerization of the accounting system using Sage 50.

22 Annex 1

Financial Management Assessment Questionnaire – Ministry of Water Resources and Meteorology and Department of Farmer Water User

Communities IRRIGATED AGRICULTURE IMPROVEMENT PROJECT

Topic Response Potential Risk Assessment

1. Executing/Implementing Agency M- PMU;

M- MOWRAM

1.1 What is the entity’s legal status /registration?

The Ministry of Water Resources and Meteorology (MOWRAM) was established by the Royal Krom NS/RKM/0699/04 dated 23 June 1999. Under sub-decree no. 58ANKR/BK dated 30 June1999, the Ministry of Water Resources and Meteorology now has twelve departments. The duties and responsibilities of each department were set up and revised to strengthen agricultural production to contribute to reducing poverty in accordance with Cambodian government's policy. PMUs/PIUs and other donors’ Project are part of MOWRAM’s project and they effected when the MEF and Donors had signed loan/grants agreement, so the project mobilized, PMU/PIU are established, structure created which lead and guided by the Secretary General or Secretary of State.

M

M

1.2 How much equity (shareholding) is owned by the Government?

NA

1.3 Obtain the list of beneficial owners of major blocks of shares (non-governmental portion), if any

NA

1.4 Has the entity implemented an externally-financed project in the past (if so, please provide details)?

Yes, it has implemented externally financed projects of ADB, AFD, WB, JICA, and KOICA. Recent and ongoing ADB projects include (i) Supporting Policy, and Institution Reforms and Capacity Development in Water Sector, (ii) Resilience Rice Commercialization Sector Development Program, (iii) Water Resource Management Sector Development Program, (iv) Flood Damage Emergency Reconstruction Project; and (v) Community-Based Risk Deduction.

M

1.5 Brief describe the statutory report requirements for the entity

For the MOWRAM: The statutory reporting requirements for the entity are determined by the Prime Minister. The reports may include the receipts of and uses of fund under the Financial Monitoring Report. For the PMU and other donor projects: to follow the donor requirements, such as ADB’s in LDH-2017 and SOP produced by MEF and revised May 2012.

S

S

Annex 1 23


1.6 Describe the regulatory or supervision agency of the entity.

[See Figure 1 of this Annex].

M

1.7 What is the government body for the project? Is the government body for the project independence?

Yes. M

1.8 Obtain current organizational structure and describe key management personnel. Is the organizational structure and governance appreciate for the needs of the project?

Yes. M

1.5 Is the organizational structure appropriate for the needs of the project?

Yes. The PMU was established by decision No. 034 SSR.Th.TO dated 8 January 2014 which appointed 6 staff members. The PMU comprises (i) Project Director, (ii) Project Manager, (iii) Technical Officer, (iv) Finance Officer, (v) Administrative Office, (vi) Procurement Officer, and (vii) FWUC Officer. The additional staff members will be appointed when the loan project is implemented. Two staff members from MAFF and Directors of PDWRAMs of Kampong Thom and Battambang will also be members of the PMU.

M

1.9 Does the entity have a Code of Ethics in place?

Yes, following the Statute for Civil Servants. Project staff will be required to sign the Code of Conduct during project implementation in accordance with ADB’s Risk Assessment and Risk Management Plan (RARMP).

M

1.10 Describe (if any) any history, issues, reports of ethics violates involving the entity any management? How were they addressed?

NA

2. Funds Flow Arrangement M- PMU;

M-MOWRAM

2.1 Describe (proposed) project funds flow arrangements, including a funds flow diagram and explanation of the flow of funds from ADB, government and other financiers, to the government, EA, lA, suppliers, contractors, ultimate beneficiaries, etc., as applicable.

The flow of funds for project from ADB, government, and the EA/IA will be specified in the Project Administration Manual based on the nature of the project. [The proposed funds flow arrangements are shown in Figure 2, this Annex].

M

24 Annex 1


2.2 Are the (proposed) arrangements to transfer the proceeds of the loan (from the government / Finance Ministry) to the entity satisfactory?

Yes. MOWRAM normally follows the procedures based on the Financial Management Manual (FMM) for externally financed projects/programs which is accepted by MEF and ADB.

M

2.3 Are the disbursement methods appropriate?

Yes. M

2.4 What have been the major problems in the past in receipt, accounting and/or administration of funds by the entity?

Significant problem for accounting framework that has not followed the acceptable accounting standards

S

2.5 In which bank will the Imprest Account (if applicable) be established?

National Bank of Cambodia (NBC) or Foreign Trade Bank (FTB), subject to acceptance by MEF and ADB

L

2.6 Is the bank holding the imprest account capable of: • Executing foreign

exchange and local currency transactions?

• Opening letters of credit (LC) and handling a large volume of transactions?

• Issuing detailed monthly bank statements promptly?

• • • Yes.

• • Yes.

• • Yes.

L

2.7 If the executing or implementing agency has used imprest funds earlier, has it experienced any difficulty in obtaining 100% of the imprest funds disbursed by ADB?

There were some initial difficulties, but these were resolved with guidance and assistance from the consultant and from MEF.

M

2.8 Does the (proposed) project implementing unit (PIU) have experience in the management of disbursements from ADB?

The PMU/PIU is currently implementing the Upland Irrigation Water Resources Management Project (UIWRMP), the Flood Emergency Reconstruction Project-Additional Financing (FDERP-AF) financed by ADB. Despite this experience, the PIU’s capacity is still limited since many tasks in the other projects are being done by consultants.

M PMU/PIU may

experience difficulties in

performing their tasks without

consultant support.

Annex 1 25


2.9 Does the PIU have adequate administrative and accounting capacity to manage the imprest fund and statement of expenditure (SOE) procedures in accordance with ADB's Loan Disbursement Handbook? Identify any concern or uncertainty about the PIU administrative and accounting capacity which would support the establishment to a ceiling on use of the SOE procedure.

Yes, but capacity is limited; need more guidance, especially in preparing project financial statements. For MOWRAM/PMU staff still limited capacity to prepare the Statement of Expenditures (SOE)

M

2.10 Is the entity exposed to foreign exchange risk? If yes, describe the entity’s policy and arrangements for managing foreign exchange risk.

Foreign exchange risks between USD and SDR are managed by ADB and MEF. If ADB provided training on this matter, the concerned project staff will attend it.

M

2.11 How are the counterpart funds accessed?

Accessed through MEF as a borrower; will finance the project in accordance with the loan agreement; PIU has to provide counterpart to imprest account.

L

2.12 How are payments made from the counterpart funds?

Immediately after loan effectiveness, the Government, through MEF, will open US dollar imprest accounts at the National Bank of Cambodia or a commercial bank acceptable to ADB for the RGC counterpart funds. Withdrawal of government counterpart funds is being carried out in accordance with the Government Policies and Procedures. MOWRAM will be responsible for submitting Withdrawal Applications to MEF. Counterpart funds withdrawal applications should be made in accordance with the budget plan agreed between MOWRAM and MEF. Counterpart funds may only be withdrawn for expenditures of the project which are specified in the project loan agreements.

M

2.13 If the project funds will flow to communities or NGOs, does the PIU have the necessary reporting and monitoring features built into its systems to track the use of project proceeds by such entities?

NA. The project will not directly involve NGOs in the operation.

M

26 Annex 1


2.14 Are the beneficiaries required to contribute to project costs? If beneficiaries have an option to contribute in kind (in the form of labor), are proper guidelines formulated to record and value the labor contribution?

No contribution by beneficiaries.

M

3. Staffing S: PMU

L-MOWRAM

3.1 What is the current and/or (proposed) organizational structure of the accounting department? Attach an organization chart.

Determined by MOWRAM. [Organization chart of the Finance Unit of the PMU may be provided on request].

M

3.2 Will existing staff be assigned to the project or new staff be recruited?

Determined by the MOWRAM management level to discuss in order to allocate staff according to PIU’s requirement. In case Finance Department could not find government staff, PIU will recruit from outside but needs approval by MEF for the salary rate (budgeted).

M

3.3 Describe the existing or proposed project accounting staff including job title, responsibilities, educational background and professional experiences. Attached job descriptions and CVs of key existing accounting staff

There are the finance officer, project accountant and cashier; including the accountant and finance specialist recruited from consulting firm under Technical Assistance. Job description and requirements are as stated in Standard Operating Procedures for Externally Financed Projects/Programs.

S

3.4 Is the project finance and accounting function staffed adequately?

Yes; staffed adequately once loan implementation starts. Staffing is based on the Financial Management Manual for the externally financed projects/programs.

S

3.5 Is the project finance and accounts staff adequately qualified and experienced?

The quality and experience of staff are still limited. They need more guidance in preparing annual project financial statements, other financial reports.

S PMU/PIU may

experience difficulties in

performing their tasks without

consultant support.

Annex 1 27


3.6 Is the project accounting and finance staff trained in ADB procedures including the disbursement guidelines (i.e., LDH)?

Yes, but need more guidance in preparing annual project financial statements and other reports.

S Staff may not be

able to fully discharge their res-possibility

3.7 What is the duration of the contract with the finance and accounts staff?

They are assigned to work for the entire duration of the project.

M

3.8 Identify any key positions of the project finance and accounting staff not contracted or filled up yet, and the estimated date of appointment.

Project accountant will be assigned at the start of project implementation.

M

3.9 For new staff describe the proposed project finance and accounting staff including job title, responsibilities, educational background and professional experience. Attached job description

There is no individual TOR for MOWRAM staff (Finance Department). Director of Finance assigned tasks to staff on day-to-day basis and limited their regular tasks. There was a TOR for Finance Department.

M

3.11 Does the project have written position descriptions that clearly define duties, responsibilities, lines of supervision, and limits of authority for all of the officers, managers, and staff?

Yes. This is clearly stated in the SOP for Externally Financed Projects/Programs (May 2012).

M

3.12 What is the turnover rate for finance and accounting personnel (including terminations, resignations, transfers, etc.)?

Rare. M

3.10 Describe the list of training programs attended by finance and accounting staff in the last 3 years.

Staff members are encouraged to attend the trainings/workshops on project management, financial management, and procurement procedures conducted by MEF, ADB and WB.

M

28 Annex 1


4. Accounting Policies and Procedures S- PMU;

M-MOWRAM

4.1 Does the entity have an accounting system that allows for the proper recording of project financial transactions, including the allocation of expenditures in accordance with the respective components, disbursement categories, and sources of funds (in particular, the legal agreements with ADB)? Will the project use the entity accounting system? If not, what accounting system will be used for the project?

There is a functioning computerized accounting system in MOWRAM, as one of the outputs of the Public Financial Management Reform Program. The progress reports mentioned sufficient progress in this output. Peachtree/Sage 50 is available for other projects and at the Department of Finance unit at MOWRAM; but there is no such accounting software for the existing PMU. PMU needs to coordinate with finance unit for guidance in the new software that the unit is implementing.

M

M

4.2 Are controls in place concerning the preparation and approval of transactions, ensuring that all transactions are correctly made and adequately explained?

Yes. The procedures are clearly stated in the FMM. M

4.3 Is the chart of accounts adequate to properly account for and report on project activities and disbursement categories? Obtain a copy of the chart of accounts.

Yes, the chart of accounts has been revised/updated (one of the outputs of the PFMRD) to properly account for and report on activities. These procedures are also clearly stated in FMM, but the finance staff of the PMU/PIU have limited capacity to use the new chart of accounts to produce the required reports. PMU needs to coordinate with finance unit for support in use of the chart of account.

M Entity and Project reports will not be consistent.

4.4 Are cost allocations to the various funding sources made accurately and in accordance with established agreements?

Yes. M

4.5 Are the General Ledger and subsidiary ledgers reconciled regularly and in balance?

Yes. M

Annex 1 29


4.6 Describe the EA's policy for retention of accounting records including supporting documents (e.g. ADB's policy requires that all documents should be retained at least for 1 year after ADB receives the audited project financial statements, or 2 years after the loan closing date, whichever is later). Are all accounting and supporting documents retained in a defined system that allows authorized users easy access?

All accounting and supporting documents are retained on a permanent basis in a defined system that allows authorized users for easy access. They need to be kept for a minimum period of 10 years according to FMM.

S

4.7 Describe any previous audit findings that have not been addressed.

None. S

Segregation of Duties M- PMU;

L-MOWRAM

4.8 Are the following functional responsibilities performed by different units or persons: (i) authorization to execute a transaction; (ii) recording of the transaction; and (iii) custody of assets involved in the transaction; (iv) reconciliation of bank accounts and subsidiary ledgers?

Yes. S

4.9 Are the functions of ordering, receiving, accounting for, and paying for goods and services appropriately segregated?

The users prepare a request to be endorsed by Project Manager, and to be approved by Project Director. The Finance Officer prepares an order and makes payments, and the Administrative Officer is to receive the ordered items. Some functions were combined due to limited number of PMU staff. Once the accounting staff is assigned to the PMU, order preparation and payment can be segregated.

M Lack of internal control.

Budgeting System S- PMU;

M-MOWRAM

4.10 Do budgets include physical and financial targets?

Yes. M

30 Annex 1


4.11 Are budgets prepared for all significant activities in sufficient detail to provide a meaningful tool with which to monitor subsequent performance?

Yes. M

4.12 Are actual expenditures compared to the budget with reasonable frequency, and explanations required for significant variations from the budget?

Yes, but not comprehensive. Staff needs more training in preparing proper annual financial statements.

S

4.13 Are approvals for variations from the budget required in advance or after the fact?

Variations from the budget normally require approvals in advance, however in some cases approvals are after the fact.

S Unauthorized

budget variations

1.14 Is there a ceiling up to which variations from the budget may be incurred without obtain prior approval?

MEF, which controls budget and expenditures, always requires approval.

M

4.15 Who is responsible for preparation and approval of budgets?

PMU Finance Officer is responsible for preparing the budget, and the PMU Project Manager and Director will check and approve it.

M

4.16 Are procedures in place to plan project activities, collect information from the units in charge of the different components, and prepare the budgets?

Yes, according to SOP and FMM M

Annex 1 31


4.17 Describing the budget process. Are the project plans and budgets of project activities realistic, based on valid assumptions, and developed by knowledgeable individuals? Is there evidence of significant mid-year revisions, inadequate fund releases against allocations or inability of the EA to absorb/ spend released funds? Is there evidence that government counterpart funding is not made available adequately or on a timely basis in prior projects? What is the extent of budgeting of major overhead over the last 3 years? Is there a consistent trend either way?

MOWRAM’s budget preparation of the draft budget law involves the following:

• Stage 1: Strategic planning for budget (March–May)

• Stage 2: Preparation of budget packages (June–September)

• Stage 3: Approval of budget (October–December)

The lead entity in the preparation is the MEF. MOWRAM instructs the departments to submit to MOWRAM‘s Finance Department. PIU prepares the budget yearly, following the costs established in the PAM. The Financial Specialist is responsible to prepare the report on counterpart fund. There could be some variance, but not substantial.

M

32 Annex 1


Payments L- PMU; L-MOWRAM

4.18 Do invoice-processing procedures provide for: (i) Copies of purchase orders and receiving reports to be obtained directly from issuing departments? (ii) Comparison of invoice quantities, prices and terms, with those indicated on the purchase order and with records of goods actually received? (iii) Comparison of invoice quantities with those indicated on the receiving reports? (iv) Checking the accuracy of calculations; (v) Checking the authenticity of invoice and supporting documents?

Yes, these procedures are followed as stated. L

4.19 Are all invoices stamped PAID, dated, reviewed and approved, and clearly marked for account code assignment?

Yes. M

4.20 Do controls exist for the preparation of the payroll and are changes to the payroll properly authorized?

Yes, controls exist because the payroll is based on (i) the number of project staff and job descriptions follow the MOWRAM Decision No. 034 SSR.Th.TO dated January 2014 which was also based on the SOP, and (ii) the salary supplement is based on MEF’s decision.

M

Policies and Procedures L- PMU;

M- MOWRAM

4.21 What is the basis of accounting (e.g., cash, accrual) followed (i) by entity? (ii) by the project

Modified cash accounting. All transactions are on a cash-basis except for advances. Advances are treated as expenditure upon liquidation.

M

4.22 What accounting standards are followed? Financial Reporting Standards, International Public Sector Accounting Standard (specify) or other?

Cambodian Accounting Standard, based on International Accounting Standards and International Financial Reporting Standards.

L

Annex 1 33


4.23 Does the project have an adequate policies and procedures manual to guide activities and ensure staff accountability?

Yes. The SOP, FMM and PM for the externally financed projects/program were developed by MEF, ADB and WB.

L

4.24 Is the accounting policy and procedure manual updated for the project activities?

Yes. L

4.25 Do procedures exist to ensure that only authorized persons can alter or establish a new accounting principle, policy or procedure to be used by the entity?

Yes, procedures exist allowing only authorized persons to make changes for use by the unit.

L

4.26 Are there written policies and procedures covering all routine financial management and related administrative activities?

Yes, there are written policies and procedures such as SOP, FMM and PM.

L

4.27 Do policies and procedures clearly define conflict of interest and related party transactions (real and apparent) and provide safeguards to protect the organization from them?

Yes. L

4.28 Are manuals distributed to appropriate personnel?

Yes. L

4.29 Describe how compliance with policies and procedures are verified and monitored.

External audit is undertaken periodically as agreed with ADB, other partners. However, internal audit is not in place.

M

Cash and Bank M- PMU; M- MOWRAM

4.30 Indicate names and positions of authorized signatories in the bank accounts. Include those persons who have custody over bank passwords, USB, keys, or equivalent for online transaction.

The Minister of MOWRAM is the authorized signatory of the bank account. The Project Director can also be authorized according to the FMM.

S Possible delays in processing payments due to the expected busy schedule of the Minister.

34 Annex 1


4.31 Does the organization maintain an adequate, up-to-date cashbook, recording receipts and payments?

Yes. L

4.32 Describe the collection process and cash handling processes. Do controls exist for the collection, timely deposit and recording of receipts at each collection location?

Yes. M

4.33 Are bank and cash reconciled on a monthly basis? Or more often. Is cash on hand physically verified, and reconciled with the cash books? With what frequency is this done?

Yes, done at least monthly. M

4.34 Are all reconciling items approved and recorded?

Yes. L

4.35 Are all unusual items on the bank reconciliation reviewed and approved by a responsible official?

Yes, unusual items are reviewed before any approval is given.

M

4.36 Are all-reconciling items approved and recorded?

[Same as 4.34]. L

4.37 Are there appropriate controls in safekeeping of unused cheques, USB keys and passwords, official receipts and invoices?

Yes. L

4.38 Are any large cash balances maintained at the head office or field office? If so, for what purpose?

Not allowed by the regulation of the project. L

4.39 For online transaction, how many persons possess USB, keys (or equivalence), and passwords? Describe the security rules on password and access controls.

Only Finance Officer, Project Accountant and Financial Specialist.

M

Annex 1 35


Safeguard Over Assets S- PMU;

L- MOWRAM

4.40 What policies and procedures are in place to adequately safeguard and protect assets from fraud, waste and abuse?

There are policies, but limited, and need to be clearly stated in the FMM and need to be audited.

S

4.41 Does the entity maintain a Fixed Assets Register? Is the register updated monthly? Does the register record ownership assets, any assets under lien or encumbered, or have been pledged?

Yes, there is a fixed assets register, listing ownership and status of assets.

M

4.42 Are subsidiary records of fixes asses, inventories and stokes keep up to date and record with control accounts?

No, the current accounting system such as QuickBooks, Peachtree used by PIU are able to record only payment for purchasing assets, but do not have capacity for inventory control. The PIU needs to establish assets inventory list in Excel-sheet to be updated 1 or 2 times per year and regular updating when new assets are purchased.

S

4.43 Are there periodic physical inventories of fixed assets and stocks? Are fixes assets, inventories and stocks appreciated labelled?

Yes. L

4.44 Are the physical inventories of fixed assets and stocks reconciled with the respective fixes assets and stock registers, and discrepancies analyses ad resolved?

Yes. L

4.45 Describe the policies and procedures in disposal of assets. Is the disposal of each asset appropriately approved and recorded? Are steps immediately taken to located lost, or repair broken assets?

This will depend on the discussion between the PMU/PIU and MEF.

M

4.46 Are assets sufficiently covered by insurance policies?

No. The project did not purchase the insurance. There is no budget and guideline to supporting PMU/PIU to use project fund to buy insurance.

S

36 Annex 1


4.47 Describe the policies and procedures in identify and maintaining fully depreciated assets from active assets.

Need to update the FMM in order to identify maintain fully depreciated assets.

M

Other Offices and Implementing Entities M-MOWRAM

4.48 Are there any other regional offices or executing entities participating in implementation?

No.

4.49 Describe the staff, their roles and responsibilities in performing accounting and financial management functions of such offices as they related to the project?

NA

4.50 Has the project established segregation of duties, controls and procedures for flow of funds and financial information, accountably, and reporting and audits in relation to the other offices or entities?

NA

4.51 Does information among the different offices/implementing agencies flow in an accurate and timely fashion? In particular, do the offices other than the head office use the same accounting and reporting system?

NA

4.52 Are periodic reconciliations performed among the different offices/implementing agencies? Describe the project reporting and auditing arrangements between theses office and the main executing/implementing agencies.

NA

Annex 1 37


4.53 If any sub-accounts (under the lmprest Account) will be maintained, describe the results of the assessment of the financial management capacity of the administrator of such sub-accounts.

No sub-accounts will be used.

Contract Management and Accounting M- PMU;

M- MOWRAM

4.54 Does the agency maintain contract-wise accounting records to indicate gross value of contract, and any variation and escalations, payments made, any undisbursed balances? Are the records consistent with physical outputs/deliverables for the contract?

For such, QuickBooks and Peachtree accounting systems are unable to keep track of gross value of the contract variation and physical outputs/deliverables for the contract. But the PIU uses Excel-based sheet to track all such information and purpose for the reporting. Engineering department also track all this information for their daily work monitoring.

M

4.55 If contract records are maintained, does the agency reconciles them regularly with the contractor?

At PIU. M

Other M- PMU;

L- MOWRAM

4.45 Describe project arrangements for reporting fraud, corruption, waste and misuse of project resources. Has the project advised employees, beneficiaries and other recipients to whom to report if they suspect fraud, waste or misuse of project resources or property?

Follows government and ADB policy guidelines on prevention of corrupt practices. Project provides arrangements how to report misuse of resources.

M

5. Internal Audit M- PMU;

L- MOWRAM

5.1 Is there an internal audit department in the entity?

Yes. It was established by Sub-decree no. 54/ANKR/BK dated 29 May 2006 by the Royal Government of Cambodia.

L

38 Annex 1


5.2 What are the qualifications and experience of audit department staff?

They have limited capacity based on the assessment of the Finance Director as well as the Deputy Director of the Internal Audit Department (IAD). IAD staff comprises few staff with accounting degrees, but lacking experience in internal audit.

M PMU/PIU may experience difficulties in performing their tasks without consultant support

5.3 To whom does the internal auditor report?

The Internal Auditor reports to the Minister. M

5.4 Will the internal audit department include the project in its work program?

Selection of the projects for internal audit is based on the risk identified during the preparation of the three-year rolling plan and annual plan. It is proposed that the IAIP project be included in the internal audit plan.

M

5.5 Are actions taken on the internal audit findings?

Yes. M

5.6 What is the internal audit program? How was it developed?

The internal audit program is to check the compliance, effectiveness, efficiency, and economy of the entity. It is developed based on the Public Auditing Standard for Cambodia

L

5.7 Is lA department independent

Yes. L

5.8 Do they perform pre-audit of transactions?

No. M

5.9 Who approves the internal audit program?

Director of Internal Audit Department L

5.10 What standards guide the internal audit program?

Public Auditing Standard for Cambodia L

5.11 How are audit deficiencies tracked?

The deficiencies are stated in the Internal Audit Report and they will be checked if they have been implemented in the succeeding year.

L

5.12 How long have the internal audit staff members been with the organization?

Most of IAD staffs have been working for the IAD since 2007. Most came from other departments of MOWRAM and do not have the appropriate qualifications to work as internal auditors. Staff that joined IAD in 2010 have appropriate qualifications and have been trained through the PFMRD program. However, they lack experience in internal audit work.

M

5.13 Do any of the internal audit staff have an IT background?

Yes, but limited. M

5.14 How frequently does the internal auditor meet with the audit committee without the presence of management?

They meet the audit committee and the minister any time they deem it necessary.

M

Annex 1 39


5.15 Has the internal auditor identified/reported any issue with reference to retention or availability of records?

Yes. M

5.16 Does the internal auditor have sufficient knowledge and understanding of ADB's guidelines and procedures, including the disbursement guidelines and procedures (i.e., LDH)?

Limited knowledge of guidelines. M Cannot fully discharge their duties

6. External Audit- entity level M- PMU;

L- MOWRAM

6.1 Is the entity financial statement audited regularly by an independent auditor? Who is the auditor?

Yes, audited once a year. The National Audit Authority of Cambodia is the auditor.

M

6.2 Are there any delays in audit of the entity? When are the audit reports issued?

The audit reports will be issued within 3 months of starting the field work. There is no deadline as to when the audit report will be completed after the end of the year.

M

6.3 Is the audit of the entity conducted according to the International Standards on Auditing, or the International standards for supreme Audit Institutions or National Auditing standards?

It is conducted according to the Public Auditing Standard for Cambodia and the International Standards of Supreme Audit Institutions.

L

6.4 Were there any major accountability issues brought out in the audit report of the past three years?

No. L

6.6 Does the external auditor meet with the audit committee without the presence of management?

Yes. M

6.6 Has the entity engaged the external audit firm for any non-audit engagements (e.g., consulting)? If, yes, what is the total value of non-audit engagements, relative to the value of audit services

No, the entity hasn’t done this.

40 Annex 1


6.7 Has the external auditor identified any issues with the availability of completeness of records and supporting documents?

Yes, in previous audits but not in more recent audits.

M

6.8 Does the external auditor have sufficient knowledge and understanding of ADB’s guidelines and procedures included the disbursement guidelines and procedures ( i.e., LDH)?

Yes. L

6.9 Are there any material issues noted during the review of the audited entity finical statements that were not reported in the external auditing report?

No. L

External Audit- project level M- PMU;

L- MOWRAM

6.10 Will the entity auditor audit the project accounts or will another auditor be appointed to audit the project financial statements?

Yes, another auditor (such as PWC, KPMG, EY or BDO) will be appointed by the project or MEF under a bundled audit arrangement. The PMU has done external audit for two years (2016, 2017) by KPMG.

M

6.11 Are there any recommendations made by the auditors in prior project audit reports or management letters that have not yet been implemented?

Yes. Recommendations to improve the slow approval process for payment in some projects have not been addressed.

M

6.12 Is the project subject to any kind of audit from an independent governmental entity (e.g. the supreme audit institution) in addition to the external audit?

Yes, also subject to an audit by the National Audit Authority or the Ministry of National Assembly and Senate Relation and Inspection (MONASRI), if necessary.

L

6.13 Has the project prepared acceptable terms of reference for an annual project audit? Have these been agreed and discussed with the EA and the auditor?

Yes. Terms of reference need to be discussed with MEF and submitted to ADB to obtain prior approval.

L

Annex 1 41


6.14 Has the project auditor identified any issues with the availability and completeness of records and supporting documents?

No issues found in the KPMG’s report in 2016. L

6.15 Does the external auditor have sufficient knowledge and understanding of ADB's guidelines and procedures, including the disbursement guidelines and procedures (i.e., LDH)?

Yes. L

6.16 Are there any recommendations made by the auditors in prior audit reports or management letters that have not yet been implemented?

The auditor’s recommendation to resolve the issue of slow approval process has not been implemented.

M

[For second or subsequent project] 6.17 Were past audit reports complete, and did they full address the obligation audit reports complete, and did they fully address the obligations under the loan agreements? Were there any materials issues notes during the views of audited project financial statements and related audited report that have remained unaddressed?

There was no issue stated in the KPMG’s auditing report in 2016.

L

7. Reporting and Monitoring S- PMU;

M- MOWRAM

7.1 Are financial statements prepared for the entity? In accordance with which accounting standards?

Yes, they are in accordance with the entity’s requirements.

L

7.2 Are financial statements prepared for the implementing unit(s)?

Yes. L

42 Annex 1


7.3 What is the frequency of preparation of financial statements? Are the reports prepared in a timely fashion so as to useful to management for decision making?

The financial statements have to be prepared in monthly, quarterly and annual basis according FMM.

L

7.4 Does the reporting system need to be adapted for project reporting?

Yes. M

7.5 Has the project established financial management reporting responsibilities that specify the types of reports to be prepared, the report content, and purpose of reports?

Yes, following FMM guidelines, but not fully compliant in automation needs.

M

7.6 Are financial management reports used by management?

Yes, they are used by both the Project Manager and Director, and the MEF.

L

7.7 Do the financial reports compare actual expenditures with budgeted and programmed allocations?

Yes. L

7.8 How are the financial reports prepared? Are financial reports prepared directly by the automated accounting system or are they prepared by spreadsheets or some to other means?

For regular reporting, automated accounting is used. For other functions, spreadsheets are used.

M

7.9 Does the financial system have the capacity to link the financial information with the project’s physical progress? If separate system are used to gather and complete physical data, what controls are in place to reduce the risk that the physical data may not synchronized with the financial data?

None. There is need to adopt a format showing the financial information and physical progress in one report as shown in the FMM.

S Physical data may not synchronize with the financial data.

Annex 1 43


7.10 Does the entity have experience in implementation projects of any other donors’ co-financiers, or development partners?

Yes. L

8. Information System S- PMU;

L- MOWRAM

8.1 Is the financial management system computerized?

Yes, the financial management system used by the Finance Department of MOWRAM is computerized, but the computerized system is not yet used by the PMU.

S Lack of control since two systems are being used.

8.2 If computerized, is the software off-the-shelf or customized?

Limited, customized computerized system. M

8.3 Is the computerized software stand alone, or integrated and used by all departments in the headquarters and field units using modules?

Stand alone. M-S

8.4 How are the project financial data integrated with the entity financial data? It is done through a module in the enterprise financial system with automatic data transfer, or does it entail annual entry?

Financial management information system is still being improved and project reports and government’s expenditures are not interlinked as yet. Currently, the National Treasury handles records for some projects for integration into the financial management information system.

S

8.5 Is the computerized software used for directly generating periodic financial statements, or does it require manual intervention and use of Excel or similar spreadsheet software?

Used directly generating periodic financial statements.

M

8.6 Can the system produce the necessary project financial reports?

Yes, major reports from automated system, some still generated manually using spreadsheets.

M

8.7 Is the staff adequately trained to maintain the system?

No; but training will continue to equip staff. S Staff cannot fully discharge their duties.

8.8 Does the management organization and processing system safeguard the confidentiality, integrity and availability of the data?

Yes, as stated in FMM. L

44 Annex 1


8.9 Are there back-up procedures in place?

Yes, as stated in FMM. L

8.10 Describe the backup procedures – online storage, offsite storage, offshore storage, fire, earthquake and calamity protection for backups

Finance office regularly backs up online and in external drive.

L

Annex 2 45

TIME-BOUND ACTION PLANS OF PREVIOUS PROJECTS IMPLEMENTED BY THE MINISTRY OF WATER RESOURCES AND METEOROLOGY (MOWRAM)

1. Climate-Friendly Agribusiness Value Chains Sector Project approved in 2018.

MOWRAM is one of the implementing agencies (not executing agency) in the project.

Financial Management - Risk Mitigation Measures Time-Bound Action Plan Weakness Mitigation Action Responsibility Timeframe

• Coordination among PMU of MAFF as executing agency and implementing agencies: PDAFF, PDWRAM, PDRD, and others.

Clear roles and responsibilities are detailed in the PAM. Executing and implementing agencies are well informed about their roles and responsibilities by ADB and PIC.

Executing PMU/ MEF

1 month after Loan Negotiation.

• Limited capacity of the project staff at the PMU and/or PPIU on budget execution, accounting, reporting and auditing.

• Four national Financial Management Specialists will be recruited to provide financial management support to the PMU. In collaboration with CARM, they will train accountants of executing and implementing agencies on budget execution, accounting, reporting, and auditing. • Training on project management, financial management, SOP, and project fund flows shall be provided to the project staff in executing and implementing agencies. • Training on ADB disbursement procedures, including online training, will be made available to executing and implementing agencies staff; and project staff will be encouraged to undertake the training to help ensure efficient disbursement and fiduciary control.

MAFF/PMU PIC starting 3 months from project effectiveness and will be a continuing activity to ensure staff are updated of the latest good practice.

Safeguard of vehicles, motorcycles, equipment for workshops, laboratory, and solar power.

• Inventory list must be set up with accountability. • A sound inventory management is required via trainings for implementing agencies.

PMU/PIC 3 months from the mobilization of the PIC.

Most proposed implementing agencies and/or PPIUs do not have accounting system to record financial transactions and prepare the required financial reports.

The accounting system shall be set up and training will be provided for the project accountants at PPIUs and/or implementing agencies.

PMU/PIC 3 months from the mobilization of the PIC.

46 Annex 2


• Limited capacity in internal audit. Quality of both internal and external audit reports remains a concern.

• MEF will ensure that each implementing agency will include qualified accountants and auditors, and ensure that the project is subject to internal audit to ensure that the Internal Audit Unit of each implementing agency carries out regular reviews of the internal control processes. Regular training on audit will be provided.

MEF/ADB By end of Year 1.

• Delays and incomplete submission of the unaudited annual project financial statements.

Executing and implementing agencies staff will be trained in preparing and submitting quality reports of annual project financial statements on a timely basis. MEF to update the TOR for auditors and explore potential participation of supreme audit intuition to further improve quality.

MEF/ADB By the 9th month from the project effectiveness.

ADB = Asian Development Bank; CARM = Cambodia Resident Mission; MAFF = Ministry of Agriculture, Forestry and Fisheries; MEF = Ministry of Economy and Finance; PAM = project administration manual; PDAFF = Provincial Department of Agriculture, Forestry and Fisheries; PDRD = Provincial Department of Rural Development; PDWRAM = Provincial Department of Water Resources and Meteorology; PIC = project implementation consultants; PMU= project management unit; PPIU = provincial project management implementation unit; SOP = standard operating procedure; TOR = terms of reference.

Annex 2 47

2. Uplands Irrigation and Water Resources Management Sector Project approved in 2015. MOWRAM is the project executing agency.

Financial ManagementTime-Bound Action Plan


The PMU staff has limited capacity in project financial management. Although the Finance Officer is gaining experience from her current capacity as PIU Finance Officer of Flood Damage Emergency Reconstruction Project,a she is getting familiar with the FMM for the externally financed projects and program and the ADB’s Loan Disbursement Handbook.

Monitor the progress and results of the Public Financial Management for Rural Development Programb as supported by an ADB grant. This covers three ministries including MOWRAM, which are being supported in budget preparation and execution, financial management and accounting, procurement, internal audit monitoring and evaluation.

ADB CARM/ MEF/ MOWRAM

Immediately

Assign a Project Accountant to the PMU to assist the Finance Officer. The Project Accountant to be nominated from the Finance Department of MOWRAM.

MOWRAM Upon start of loan implementation.

Engage project management and implementation consultants including financial management consultants to build capacity in project financial management. Including training on standard operating procedures and FMM, ADB’s Loan Disbursement Handbook, and provisions of the project administration manual be provided to the PMU staff.

MOWRAM / PMU Upon start of loan implementation.

The PMU has limited capacity to prepare FMRsc and does not have capacity to show financial information and physical progress in one report as shown in the FMM. The current project accounting system is semimanual with the limited use of excel spreadsheets. Computerized accounting software is one of the key internal controls as stated in the FMM – May 2012 of MEF for the externally financed projects and programs.

System improvement in project accounting to link the installed Sage 50 software in the Finance Department with the project accounts. Support for PMU’s plans to purchase accounting software Sage 50 with five users for the existing project and for the proposed project. Staff training for PMU on how to generate FMRs from the accounting software.

MOWRAM/ Finance Department project management and implementation consultants

Immediately upon start of loan implementation.

48 Annex 2


The accounting software still needs to be installed in the PMU finance unit and the PMU staff to be trained in this.

Capacity in internal audit is limited.d IAD staff comprises many staff assigned from other MOWRAM departments since 2007 but without the necessary educational background and a few new young staff with accounting degrees but lacking experience in internal audit. In addition, the IAD claims it does not have enough equipment to perform their respective duties effectively and efficiently.

Monitor capacity building of IAD under the Public Financial Management for Rural Development Program.b It is essential that the IAD be provided with continuous capacity building in the form of on-the-job trainings on internal audit and advanced excel. Provide the necessary support and equipment such as laptop computer, printer, and vehicle.

MOWRAM Immediately

Quality of external audit remains a concern, particularly the need to raise awareness of the required standard of audits of projects, need to strengthen terms of reference for external auditors and the need to review the practice of audit bundling to create large contracts in the light of inadequate capacity of auditors and experience

Update the TORs for auditors and explore potential participation of supreme audit institution to further improve quality. Closely monitor contract performance of external auditors to ensure that auditing firms have assigned staff with qualification and experience as agreed in the contract.

MOWRAM/ MEF Immediately

ADB = Asian Development Bank, CARM = Cambodia Resident Mission, FMM = financial management manual, FMR = financial management report, IAD = Internal Audit Department, MEF = Ministry of Economy and Finance, MOWRAM = Ministry of Water Resources and Meteorology, PIU = project implementation unit, PMU = project management unit, TOR = terms of reference. a ADB. 2012. Report and Recommendation of the President to the Board of Directors: Proposed Loan and

Administration of Grant to the Kingdom of Cambodia for the Flood Damage Emergency Reconstruction Project. Manila.

b ADB. ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Grant for Subprogram 2, and Grant Assistance to the Kingdom of Cambodia for the Public Financial Management for Rural Development Program. Manila.

c As required by project management, executing agency, and MEF. d Technical assistance meeting with the Finance Director and Deputy Director of IAD.