Wednesday, 24 December 2014

Financial Management and Project Management in Banks

The Bank's Articles of Association/Agreement require that proceeds of loans' be used economically, efficiently and only for the purposes for which the financing is provided as described in the loan agreements.   Proper execution of this fiduciary responsibility is critical in maintaining the Bank's access to the capital markets.  Therefore, the Bank

(i) requires borrowers to ensure that financial management and accounting systems are adequate to generate timely and reliable financial information;

(ii)  requires and reviews periodic financial reports to be submitted regularly for each lending operation; and 

(iii) normally requires verification of such financial reports via regular audits.
 Accountability affects the Bank's relationship with external investors and its ability to borrow, as well as borrowing countries' credibility with the Bank and with internal constituencies.  By accountability, we mean:
•  every act or action is transparent - open to law, regulation and prudent judgment;
•  all participants are responsible for their own actions;
•  every act or action is subject to independent, professional, unbiased review (audit), and the
results made available to all concerned.
Borrowers need timely and reliable financial information to serve as an early warning system for problems in project implementation, and to allow corrective action to be taken to resolve difficulties before they become major problems.  This enables borrowers to better meet their own fiduciary responsibilities to their government, taxpayers, investors, beneficiaries, etc.


information to monitor a project's progress toward achieving its objectives.   For both parties — the Bank and the borrower -- reliable and timely financial information assists good decision-making to ensure that project objectives are achieved and the plans negotiated during project preparation and appraisal are followed.  A good financial information system is vital for a strong management information system.  Independent audits of financial statements provide faith and credibility to the Bank, its stockholders and members and to third parties including the parliaments, chief executive, and citizens of those national governments which are the Bank's owners and financiers.
The Bank's ability to fulfill its fiduciary responsibilities and the borrower's ability to implement a successful project are fundamentally affected by the quality of the financial management system used in project implementation.  This quality must be built in from the very beginning.   Once expended, financial resources can rarely be recovered. Without strong internal controls, there can be no assurance that financial resources are being used effectively and efficiently for project  purposes. Without a well-designed accounting system, the right financial data will not be collected and aggregated to provide useful and timely information for decision-making.  Without qualified staff, transactions may be recorded incorrectly, which could destroy the usefulness and reliability of financial reporting. A good financial management system will facilitate the last step of verification and establish the credibility of the information gained from the audit.  On the other hand, if an audit reveals inadequate financial management, it is almost certain that significant financial resources have already been lost.
A good financial management system produces information/reports with certain key qualities. The information must be understandable by the user, relevant to required decisions, reliable -- i.e. free from material error and bias -- and comparable with previous information.  To be comparable, the measurement and display of the financial effect of like transactions and events must be treated in a consistent way throughout an entity, within an industry, and over time. Timeliness is an important constraint on the relevance of information -- undue delays in reporting information cause it to lose its relevance and consequently, its utility.
Project   and  financial  management  are closely linked.  The financial management cycle of budgeting,  execution,  accounting,  and  financial reporting mirrors and provides basic support to the project cycle of planning, implementation, recording results, and reporting.  Financial management supports project management and helps assure that resources go towards the successful completion of the project and are not wasted.
A key element in the financial management system is budgeting -- the process in which the financial implications of planned activities or pro-grams are laid out and resources allocated. Budgeting, to be effective, must be integrated with ac-counting. If it is not; management does not receive the feedback necessary to adjust planned activities to expected resources.  Problems in project implementation can go undetected until it is either too late, or very costly, to fix them.  Similarly, if ac-counting is not tied to planned expenditures, the ifnancial information produced is limited in its usefulness for project management.The financial management system supporting a project should reflect the characteristics of the project.   The financial reporting for a dam construction project will be different from a rural development project -- focusing on different costs and producing different cost structures. Good financial management demands a solid understanding of the underlying "business."

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