PracticeAuditEnsure aid is well spent

Ensure aid is well spent

The European Commission's experience of providing aid to the Palestinian Authority offers some salutary lessons about funding foreign governments.

OLAF, the EU’s anti-fraud agency, last week cleared the European Commission of funding terrorists in Palestine. An EC aid plan to the Palestinian Authority had prompted accusations that the money had been used to fund terrorist activity. But last week OLAF confirmed there was no evidence that this had happened.

The issue has raised compelling questions for international agencies about how their money is used. Does it go where it is intended, or is it diverted to fund arms or petty corruption?

But it also raises fairly critical questions for accountants too, who are at the forefront of providing answers for the aid agencies. Where uncertainties arise as to how money is being spent, it is auditors who are clarifying the situation, and it is auditors who are helping to develop proper controls in unruly regimes.

The Palestinian Authority (PA) donations raise many important issues that are relevant elsewhere. At its heart is the question: how can any auditor be sure where the money is going in such situations? How can anyone rely on the numbers? Can you do an audit?

To even ask that question is to jump ahead of oneself, says Emma Udwin, spokeswoman for the European Commission’s external relations department, which made the Palestinian donations. ‘When we started giving direct budgetary assistance at the end of 2000 we were dealing with a Palestinian Authority that had a very untransparent system of financial management,’ she says.

Only through the course of the donations has something approaching an audit become possible, she says.

Originally, the EC knew little about how the PA worked. Money was not paid into employee bank accounts. There was no consolidated budget. All of this had to be developed.

But, in a move that has been copied elsewhere, the EC made its payments (which were paid every month rather than longer periods to increase the EC’s bargaining power) conditional on improvements to accounting system.

The EC required the PA to develop a consolidated budget before it paid any money.

Every month, the EC got some idea from the International Monetary Fund of what was going into the PA budget, and what coming out. And each month, conditions of new and more transparent accounting techniques, such as requiring the authority to actually pass audit legislation, was attached to the money. The methods have now been adopted by the World Bank, and improvements to financial accounting are now becoming more common requirements for financial aid.

The problems arise most where countries tend to need financial aid. So though Israel can certainly be a dangerous place, it does not pose accounting difficulties, as it is a well-developed nation. Places like Iraq, Afghanistan and parts of Africa are more in the front line here, say those involved in international aid in the UK.

Primary concerns are with the level of petty corruption, but there is also the risk that money, which has been given for health budgets, is diverted to arms. In the past, the UK’s own Department for International Development has acted when this has happened. Clare Short, previously the secretary of state for international development, froze payments to Tanzania in 2002 when it decided to buy in an air traffic control system.

The system was regarded as over-priced and out-dated, but Short also objected to aid money being spent on defence projects.

It is no longer fashionable to tie money too closely to projects, it being thought that such aid interferes with countries’ autonomy. Now ‘budgetary aid’ is provided as part of what are known in the UK as ‘poverty reduction programmes’.

That is a move that, if anything, must make assessments of accounts even more pressing. Where there is no direct ring-fencing, only consolidated accounts and sophisticated accounting procedures can reveal where the money is going.

The work of auditors is now absolutely critical to evaluating the outcomes of international aid.

Often, such work merely encourages institutional reforms that might have been in the offing anyway, says Ms Udwin: ‘Often our requirements will give the financial controllers extra leverage in reforms they wanted to push through.’

Can you ultimately trust the numbers? Does any of this improvement, while welcome, mean that you can look at balance sheets and sign them off with absolute confidence?

Unfortunately, as so many cases like Enron and Parmalat prove, the answer to that must be that you can never be entirely sure.

In the case of the Palestinian Authority, similarly, the OLAF report concluded that it was ‘impossible to eliminate all risks of misuse from any financial assistance’.

The money could still have gone to terrorists. But as the EC points out, new accounting regulations have had one important consequence, namely that Israel has agreed to fund the Palestinian Authority again.

If Israel can agree to contribute money to the PA’s budget, that says a great deal for what more sophisticated accounting procedures have helped achieve.

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