For Capable Local Institutions
Uphold Self-Governance's Spirit

THE LOCAL Self-Governance Act has come into operation. However, several provisions of the Act are yet to be implemented or operationalised. The implementation of the Act is constrained due to several overlapping sectoral legislations that prevail over it.

Key Problem

The prevalance of the sectoral legislations infringing upon the Local Self Governance Act has been considered as one of the key problems jeopardising its implementation. Local bodies have raised voices for the immediate measures to bring about amendments in the major sectoral and functional laws to establish a semblance of harmonisation with the provisions of the Local Self Governance Act.

Though some initiatives are underway towards that end under aegis of the Association of the District Development Committees (ADDC/N), they are not going to make any significant dents in the process. It seems that the government is hesitant to spearhead the move regarding the amendment of the core laws to sharpen the cutting edge of the Local Self Governance Act.

There is ample scope for making local governments more effective and functional event within the ambit of new legislation should the provisions be put into operation. The Local Self Governance Act and the Rules themselves have enshrined some crucial provisions that can lend impetus to the efficiency and effectiveness in the activities of the local government. However, local governments lack either proper infrastructure or preparedness to implement the provisions of the law.

DDCs have been given the widened scope and authority to assert as the legitimate and efficient local government since they have a major coordinating and controlling role especially in planning district development.

However, due to one or the other reasons, the capacity and authority of DDCs to influence, command and coordinate local development planning process have not fostered. They seem to be playing some ceremonial roles as usual from a narrowed and limited perspectives, not in a way to lend impression of the local government.

The internal organisation of DDS is ad hoc based and inept sustaining on the traditional bureaucratic lethargy while elected DDC officebearers perform the role of political actors. Moreover, Ilaka members seem not taking up their roles as envisaged in the local self governance act that can keep them engaged most of the time of the year. This is not being carried out.

The only elected official occupied with the functions and responsibilities in the DDC is seemingly the DDC president. However, the functions of DDCs Presidents in many districts are limited to attending functions or representing DDCs in agency sponsored Gosthis (seminars). A professional oriented DDC supported by hardworking and properly motivated personnel is the need of the day. But DDCs have to go a long way to establish themselves as the major institution of local governance considering the current snail paced progress.

The situation of VDCs is worse though there are several VDCs that have created exemplary precedents for others to emulate. While the performance of the VDCs in the remote and sub-Himalayan region is understandable, it is disconcerting to note that the VDCs even in the near and developing districts are yet to understand the provisions of the Local Self Governance Act. The only provision that has become operational is relating to the certification and recommendation.

Many VDCs have started to certify the relationship based on kinship that provides basis for authorities to decide about the disputes or other issues filed in the district administrative offices or the court of law. The Local Self Governance Act has endowed VDCs with regulatory power of greater import but they are yet to get operational value and realisation. VDCs are mandated to frame rules and bylaw within the limits prescribed by the law but very few VDCs seem to have grasped the significance of the responsibilities entrusted to them.

For small local matters they can frame bylaws in governing and regulating them.They should not wait for the orders and instructions of the central authorities and agencies. Acquiring capacity and demonstrating willingness to govern local affairs and providing appropriate responses to popular issues has been the essence of the local self governance. Institutions failing in upholding legal duty and articulating their own interests can not act in consonance with the spirit of the self governance.

Relevant

Attention should, therefore, be devoted to make the local government institutions capable to shoulder responsibilities and carry out the tasks befitting the spirit of local governance. Legal framework is not alone sufficient. The Local Self Governance Act should be exhaustively utilised to give more relevance and meaning to decentralisation process underway in the country.

Concurrent Audit: For Investors' Safety

By Janak Raj Gautam

FINANCIAL audit because of its inherent limitations cannot evaluate such factors as adherence to the policies, goals, targets, decision making process and its implementation through operational tool to assess the managerial capabilities of banks.

Poor Management

A number of dynamically growth-oriented sound banks and saving loan institutions have collapsed within the last half decade. Moreover, the state-owned enterprises have no brilliant performances because of slow movement, inefficiency, unproductive and poor management. Consequently, it decreases their economic and financial viability, increasing the amount of loan, bad debts and non-performing assets over the long run. Furthermore, this audit is, as a part of a management process, integral to the establishment of sound internal accounting functions, effective controls and setting the tune for a vigilant internal audit to preclude the incidence of serious errors, misappropriations and manipulation of transactions. Therefore, the bank management needs to give serious attention to the implementation of various aspects of the system such as selection of branches, coverage of business operations, appointment of auditors, appropriate reporting procedures, preparation and execution of operational flow charts, follow-up and monitor, rectification process and appropriate use of feedback for proper and timely management decisions.

Concurrent audit is an examination of contemporaneous occurrence of transactions in tandem. It endeavors to lessen time internal between a transaction and its examination by an external auditor or bank's own independent officials, but not involved in its documentation process. There is an emphasis in favour of substantive checking in key areas of aforesaid operations. The leading role of concurrent audit is to supplement the efforts of the bank in carrying out simultaneous internal check, other verifications and compliance with procedures of the transactions apropos credit, international banking, fund management, investment, financial management, inspection and internal auditor. In this connection the scope is wide enough to cap certain fraud-prone areas like handling of cash, deposits, safe custody of securities, investment portfolio, overdue bills, exercise of discretionary power, sundry and suspense accounts, inter-branch and head office reconciliation. Concurrent audit does not often become effective without adequate facilities in terms of space, availability of records and composit set of skilled and professional manpower. For improving the effectiveness of concurrent audit, banks should arrange for periodical process both for the banks' own staff when entrusted with the concurrent audit and for the external auditors appointed for this separate duty. All relevant internal guidelines, important references as well as relevant circulars issued by the auditor general, central bank, stock exchanges, finance ministry, some mission statements from other regulating bodies should be made available to the concurrent auditors for the verification process.

External firms of chartered accountants are appointed on certain terms of reference for the concurrent audit and their remuneration may be fixed by banks considering the time to complete nature of assignment, volume of work and transactions, scope, coverage and also discretion of bank management. Audit committee of the board of directors is not in existence up to now in the Nepalese corporate and banking sectors. Keeping in view the aforesaid factors as well as coverage of areas, the quality of work expected, the number of people required for the job, number of hours to be spent on the job and other parameters of compliance may lead to fix the remuneration for the concurrent auditors.

If a bank has engaged its own officials as concurrent auditors, they should be experienced, skilled and professional. The staff engaged in concurrent audit must be independent of the branch where the audit is being conducted. Concurrent auditors submit the report of their work to the highest level of management. No constraints or restrictions should be placed upon their work by management and they should be free from operating responsibility and to communicate fully to the external auditors. The work of concurrent auditors appears to have been performed with due professional due care, proper planning, audit programme, working papers, audit note books, audit manuals, supervision by competent audit authority, auditors' engagement letter and management representation letter.

Selection of effective audit team should consist of persons of solid track record, untainted reputation, extensive experiences, committed professional ethical standard, complementary set of skills and knowledge. The size of the team should depend upon duration, volume of transactions, coverage, functional activities of banks, and organisational structure. The team members should be trained regarding concept, skill, techniques methods and the process of audit. The success of concurrent audit depends upon proper use of audit report by the management through board and shareholders' meeting.

The concurrent audit report should be given high priority by the controlling office and audit department without any loss of time on the follow up action of this report. Whenever fraudulent transactions are detected, they should immediately be reported to audit department, to the chief vigilance officer as well as the branch manager. There should be proper reporting on objections of the concurrent auditors within a frame of structured formats. The major deficiencies and aberrations noticed and a quality review consisting significant features during audit should highlight a quality review a special note and given immediately to the branch controlling office or audit committee of the Board of Directors.

The Nepalese context: The concept of concurrent audit in Nepalese banks has not been practiced yet because of the lack of awareness, required tools, clarity in the process, and sensitiveness to the audit report. Immediate measures to address the problems faced by Nepal Bank Ltd. and Rastriya Banijya Bank and to improve their managerial efficiency is the need of the hour. Now they both have billions of rupees in bad loans and non-performing assets. NBL has 31.63 per cent of loans in default category. RBB and NBL are almost collapsing but immediate measures are necessary to help them become properly competitive. They are denying the KPMG-Barnet report commenting that they failed to reflect there exact financial situation. Though the auditors report would not alone serve as the final basis to declare the banks' bankruptcy. For the betterment of the operational performance of the two old domestic banks there is an urgency to improve the bottomlines and margin through the practice of concurrent audit. According to the report a considerable sum of RBB and NBL property has turned into negative worth. The ripple effects of banking failures have been disastrous making national economy fragile. The consequences of failures are economic slowdowns, depressed property market and nosedives in the stock market.

Award

The government has recently decided to award the management of the country's oldest commercial banks to foreigners offering applications from abroad. The world bank has also suggested immediate improvement in the management. In other corporate institutions concurrent audit is also a must to save the investors timely. Similarly, Nepal Rastra Bank should immediately issue some conceptual and procedural framework for concurrent audit for all the commercial banks and other financial institutions' performance on time so as to create a hassle-free environment for investors.