Financial Management Arrangements

Financial Management
Arrangement in
World Bank Operations

The borrower maintains, or causes to be maintained, for project
implementation, financial management arrangements that are
acceptable to the bank and that, as part of the overall
arrangements in place for implementing the project, provide
reasonable assurance that the proceeds of the investment project
financing are used for the purposes for which they are granted.
Financial management arrangements are the planning, budgeting,
accounting, internal control, funds flow, financial reporting, and
auditing arrangements of the borrower and entity or entities
responsible for project implementation. The financial management
arrangements rely on the borrower’s existing institutions and
systems, with due consideration of the capacity of those institutions.
FM Arrangements –
An Overview
2

BORROWER’S VS. BANK’S
ROLE
Borrower’s Role….the borrower furnishes annual
audited Project financial statements six months after
the close of the borrower’s financial year and
unaudited interim financial reports periodically.
Audits are carried out by auditors with independence
and capacity acceptable to the Bank, under terms of
reference acceptable to the Bank.
Bank’s Role….The Bank monitors the timeliness of the
receipt of the annual audited financial statements and
audit reports and reviews their content and quality.
3

KEY DATES
 Signing date – expenditures are eligible from this date
 Effectiveness date – Disbursements can begin
 Closing date – All expenditures must be ‘incurred’ by this
date to be eligible
 Disbursement deadline date – 4 months after the closing
date. The period between the closing date and the
disbursement deadline date is called the grace period. This
period is used to complete payments, do the final
accounting and reporting, and refund of unutilized DA
balance
 Retroactive financing date – When expenditures prior to
the signing date are agreed to be financed, there will be a
‘from’ date, this is the retroactive financing date
4

KEY PROJECT DOCUMENTS
 Project Appraisal Document (PAD)
 Financing or Grant Agreement
 Disbursement and Financial Information Letter
 Project Operations/ Implementation Manual
5

Key FM Risks
 Use of funds not reported (i.e. funds drawn from DA
but not accounted for).
 Use of funds not in accordance with intended
purposes (i.e., not in line with the provisions of the
legal agreement).
 Use of funds not following procurement guidelines.
6

ELEMENTS OF FM SYSTEM
 Budgeting
 Accounting
 Financial reporting
 Funds flow
 Internal controls including internal audit
 External Audit
7

FM ARRANGEMENT (budgeting)
 Budgeting
 Project budgets must be realistic, based on work plans and
developed by knowledgeable individuals in a consultative
manner?
 The implementing entity must have procedures in place to
plan project activities and prepare related budgets, and to
collect information from the units in charge of different
components?
 The implementing entity shall furnish the Bank with its draft
Annual workplan and budget at least 2 months before the
commencement of a project fiscal year for review and
approval
8

 Budgeting
 The annual budget should be prepared based on the
approved annual work plan and procurement plan
 The budget should take into consideration disbursement
estimates based on planned activity and procurement, and
not just based on planned commitments
 The budget should be broken in sufficient detail by project
components/sub-components and categories of expenditures
(goods, works, consulting/ non-consulting services, operating
costs, etc.),
9

 Budgeting
 Only the activities included in an annual workplan and budget,
expressly approved by the Bank shall be eligible for financing
 Ensure that the project is carried out in accordance with the
AWPB
 Annual budget should be broken down by period (quarterly,
monthly) to enable monitoring? Is there a budget monitoring
system in place
 The IFRs should report disbursements, budgets and variances
for the reporting period and cumulative period
 The reporting should also be detailed by components/sub-
components to identify areas of variances to enable
reallocation/adjustments as necessary
10

FM ARRANGEMENT (Accounting)
 Accounting
 Adopt an acceptable national/ international standards for
accounting
 The accounting/ reporting system should preferably be
computerized to adequately account for project activities in
a timely manner
 Written policies and procedures covering all routine
accounting activities
 Chart of Accounts is adequate to properly account for, and
report on, all project activities
 Supporting documents maintained for all transactions
 Advances retired within 2 weeks of completion of activity
 Periodic backup of accounting data
11

FM ARRANGEMENT
(Financial Reporting)
 Financial Reporting
 Unaudited Interim Financial Reports shall be prepared and
submitted to the World Bank within 45 days of the end of
each semester
 Content of Interim Financial Report (IFR)
a. Sources and uses of fund
b. Uses of fund by project activity and component
c. Special Account Activity Report
d. Bank reconciliation Statement for the period covered
e. Bank Statements for the period covered (all project
related account)
12

FM ARRANGEMENT
(Funds flow and disbursements)
 Authorized Signatories:
Two panels of signatories, Category A and category B. Each
category shall have a main and an alternate signatory. The
alternate shall sign only in the documented absence of the
main signatory.
 Mandate:
One signatory from each panel to sign.
The implementing entity must notify the Bank promptly of any
changes to its signatories.
13

FM ARRANGEMENT
Operating the Designated and Drawdown Accounts
 One US$ DA - to receive the initial deposit and
replenishments.
 One (Draw-down) Account in Naira to which draw-downs
from the DA is credited.
(Client Connection set up details we be provided later)
14

FM ARRANGEMENT
Disbursement Methods
 Advance
 Reimbursement
 Direct Payment
 Special Commitment
Advance: the Bank may advance credit proceeds into a
Designated Account of the borrower to finance eligible
expenditures as they are incurred and for which supporting
documents will be provided at a later date
Reimbursement: the Bank may reimburse the borrower for
eligible expenditures that the borrower has pre-financed. 15

FM ARRANGEMENT
Direct Payment: the Bank may make payments, at the
borrower’s request, directly to a third party (e.g., supplier,
contractor, etc) for eligible expenditures
Special Commitment: the Bank may pay amounts to a third
party for eligible expenditures under special commitments
entered into, in writing, at the borrower’s request and on terms
and conditions agreed between the Bank and the borrower
The Minimum Value of Applications for Direct Payment,
Reimbursement, and Special Commitment is USD 100,000
equivalent
16

FM ARRANGEMENT
Designated Account Type
 Segregated: An account of the borrower into which only
funds from the Bank’s financing account may be deposited
and can be tracked separately.
 Pooled: An account of the borrower into which the funds
from the financing account and the funds of other financiers
for the operation may be deposited.
The Designated Account for the project shall be segregated
17

FM ARRANGEMENT
Designated Account Ceiling
 Fixed Ceiling: The ceiling is established as a fixed amount,
and is appropriate when expenditures are expected to be
incurred evenly throughout the life of the project
 Variable Ceiling: a variable amount that is adjusted from
time to time during project implementation based on
periodic forecasts of cash flow needs.
 As stated in the Disbursement Letter, the DA ceiling for the
project shall be fixed at USD 3,000,000
18

FM ARRANGEMENT
Disbursement Procedures
 Transaction-based Disbursement, or
 Report-based Disbursement
The key difference between transaction based and report-
based disbursements are:
 (i) The timing of submission of supporting documentation;
and
 (ii) The nature of that documentation
19

FM ARRANGEMENT
Transaction-based Disbursement
Requires the submission of a Statements of Expenditures and
other documents specified in the disbursement letter during a
withdrawal application.
Report-based Disbursement
Requires the submission of an Interim Unaudited Financial
Report – IFR, and other documents specified in the
disbursement letter during a withdrawal application.
The transaction-based disbursement shall be used by the
project
20

FM ARRANGEMENT
21
Disbursement Method Supporting Documents
Direct Payment Copy of records
Reimbursement Statements of Expenditures
Designated Account
Advance Statements of Expenditures
Special Commitment Copy of Letter of Credit
 Ensure the project submits regular withdrawal application
for documentation of DA expenditures
 Ensure the USD DA and Naira drawdown accounts does
not hold large balances?

FM ARRANGEMENT
Eligible Expenditure
Eligible expenditure are the reasonable cost of goods, works,
or services required for the project to be financed and
procured, in accordance with the provisions of the financing
agreement.
 paid on or after the date of the financing agreement date,
and
 incurred no later than the closing date of the financing.
22

FM ARRANGEMENT
Ineligible Expenditure include the following:
 Expenditures outside the scope of definitions in the
financing agreement
 Expenditure declared ineligible on account of audit review
 Items not covered by the project and category descriptions
in the financing agreement
 Items not procured in accordance with the procurement
strategy and procurement plan and agreed procedures
 Expenditures for which the borrower has been unable to
provide sufficient and appropriate evidence
 Payments made or due for expenditures incurred after the
closing date
23

FM ARRANGEMENT
Ineligible Expenditure Red Flags:
 Falsified documents attached to PVs
 Non deduction and remittance of statutory taxes
 Non-retirement of travel advances
 Input vouchers not being authenticated by relevant authorities
 No competitive bidding processes
 Use of parallel market for conversion of currency
 Use of one PV for multiple payments
 No attendance sheets from organized events/trainings/workshop
 Payment meant for corporate organization raised and received by
individuals
24

FM ARRANGEMENT
Ineligible Expenditure Red Flags:
 Irregular reconciliation of bank accounts
 Payment vouchers without serial numbering and transaction dates
 No initiating memos from relevant quarters
 Frequent cash payments to beneficiaries
 Payments made to project staff on behalf of the beneficiaries
 inadequate supporting documents attached to the payment vouchers
 Missing payment vouchers
25

FM ARRANGEMENT
Ineligible Expenditure Green Flags:
 Adequate supporting documents should be attached to PV
 Every payment must be authorized and approved by relevant
authorities
 There must be initiation memos to support every expenditure and
duly supported by budget provision
 No expenditure is incurred without adequate provision in the work
plan and/or bank “NO Objection” where necessary
26

FM ARRANGEMENT
 Travel advances should be retired fully latest after 2 weeks of
conclusion of activities and excess funds returned where applicable
 Genuine air tickets and boarding passes should be attached to
retirements where applicable
 Payment of sitting allowances to committees of any category is
ineligible for financing in IDA unless otherwise stated in relevant
document
 Guard against uneconomical expenditure to avoid potential refund of
such expenditure
27

FM ARRANGEMENT
 Statutory taxes should be deducted and remitted to relevant
authorities to avoid payment of fines
 Monthly bank reconciliation and bank statement should be done as
part of other required reports
 Project Internal auditor should not only be independent but should be
seen to be Independent
 Ensure adequate control measures on use of office consumables e.g
Diesel, car fuel, cartridges, stationeries etc
 Avoid expenditure unrelated to the Project Developmental Objectives
28

FM ARRANGEMENT
(Internal Control)
 Internal Controls
 Ensure approval and authorization controls are in place with proper
segregation of duties
 There should be an FM manual where controls are documented. The
manual should be disseminated to all project staff
 Bank reconciliations should be prepared monthly, and by someone
other than those who process and approve payments. Unusual items
on the reconciliation should be reviewed and approved by a
responsible official
29

FM ARRANGEMENT
(Internal Control)
 Internal Controls
 Fixed assets should be recorded properly, assets tagged, and physical
inventory conducted at least yearly.
 There must be an effective internal audit function.
 Actions should be taken on audit findings
 There should be an adequate system of petty cash management for
its custody, recording, reconciliation, acquittal & cash count
 There should be a robust advances monitoring system
30

FM ARRANGEMENT
(Internal Control)
 Staffing
 There must be at least a Project Accountant and a Project Internal
Auditor
 The World Bank shall review nominations and provide no objection to
the positions of all FM staff;
 PA and PIA must be qualified and experienced staff
 The Bank requires a minimum of 3 years post-professional
qualification experience for Project Accountants and Project Internal
Auditors
31

FM ARRANGEMENT
(External Audit)
 External Audit
 Financial statements must be audited annually by an
independent external auditor (please refer to the list of
acceptable audit firms)
 The TOR for annual audit must be acceptable to IDA
 The annual audited financial statements shall be submitted
to the IDA not later than 6 months after the end of the
Government fiscal year.
 audit observations should be responded to and required
action taken in a timely manner
32

CLIENT CONNECTION
 Key Information
• Client Connection Profiling
• Client Connection Training (IFR and AFS submission)
• Disbursements in USD and commitment currency
• Withdrawal applications in process
• Undisbursed balance in commitment currency and
approximate USD
• Designated account/s information
• E-signatories information
• Category information
33

Financial Management Arrangements

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