Technical Articles

International Journal of Audit – April 2005

Harmonization in Overseas Audit Practices: A Joint Audit Approach to the Expenditure of Development Cooperation Funds

In 2000, a group of like-minded European donors1 committed themselves to working together to help eradicate global poverty by harmonizing and coordinating their aid programs. One of their main goals was easing the reporting burden on their partners in developing countries. In conjunction with this initiative, the SAIs of the same European donor countries started to discuss how they might harmonize their audit approach in situations where harmonized donor arrangements were in place. They called their project HOAP (Harmonization in Overseas Audit Practices).

By 2003, the donors, referred to as the Nordic+ group, had agreed upon a common framework for providing sectoral support, known as the harmonization in practice (HIP) approach, and Zambia was chosen as a pilot country. The HOAP SAIs2 issued several recommendations to further develop the audit structure within the HIP framework. They also decided to link up with the Nordic+ pilot by developing and testing, in cooperation with the Zambian SAI, a common audit approach to one sector of harmonized aid funding. The SAIs of Norway, the Netherlands, and the United Kingdom took the lead in this pilot joint review and, with the support of the Zambian SAI, successfully tested it in November 2004.

Harmonization in Practice

In the HIP action plan, the Nordic+ group embraced the use of joint agreements between multiple donor countries and the recipient country to promote complementary and operational harmonization of development cooperation. These joint agreements result in diverse aid systems that depend upon the developing country’s strength of governance, accounting and auditing systems, and record in managing its public finances. Direct sector support—known as the sector-wide approach (SWAP)—and direct budget support (DBS) have been identified as the preferred aid modalities.

With the growing tendency to use SWAPs and DBS, it is important that donor ministries obtain evidence of how the funds they have provided to recipient countries have been used. The donor ministry accounts must fairly present the flows of funds to recipient countries. If joint agreements are made between donor and developing countries using a common set of rules, audits on the expenditure of this money obviously also need to be harmonized.

The Role of the Local SAIs

SAIs are generally regarded as important elements in a country’s accountability and good governance chain. Donor SAIs have traditionally placed great reliance on the local SAI’s audit report in forming their opinions on whether donor ministries have obtained adequate evidence of the use of funds from donor countries. This is even more critical in cases of sectoral and direct budget support by donors when the funds of any individual country can no longer be tracked in the form of a specific project. It is therefore important to the donor countries that the local SAI’s report, and the audit work supporting it, be adequate to meet the expectations of the parliaments of both the recipient and donor countries.

If donor countries want to rely on the work of local SAIs, these SAIs need to be involved in the development of the joint agreements as part of the auditing structure. This has not always been the case. Some former joint agreements have included audit assignments for local SAIs without their concurrence or even their knowledge. Being obligated to carry out audits on donor funding infringes upon the local SAIs’ independence. It may even result in directing efforts away from important audits of locally financed activities or entities, as the total audits that can be carried out are dependent upon the SAI’s available resources. Therefore, the local SAI must have a prominent role in the accountability and good governance chain of donor-funded initiatives.

Harmonization in Overseas Audit Practices

The HOAP initiative grew out of the recognition that coordination can reduce the audit burden and improve the accountability for public funds in both recipient and donor countries. For recipient countries, it offers a potentially less time-consuming alternative to multiple donor reviews of the same evidence. For donor countries and especially the donor SAIs, the approach offers a more effective and efficient way of satisfying their audit objectives in relation to the accounts of the donor ministries.

The basic idea behind the HOAP approach is that one team carries out an audit on behalf of all the concerned donor SAIs. This team can be composed of one or several SAIs. For such a single audit approach to work, the donor SAIs need to agree upon a common audit standard and, most importantly, the recipient country SAI must agree to cooperate. For the past few years, the HOAP SAIs have been working on such a common audit approach. Representatives of the Zambian SAI, the World Bank, and the Organisation for Economic Co-operation and Development (OECD) have participated in meetings as observers.

Figure 1 summarizes the framework within which the HOAP approach is to be carried out.

Figure 1: Framework for Harmonization in Overseas Audit Practices (HOAP)

The approach developed and tested by HOAP can be summarized as follows:

1. Review of the donor files.

The donor SAI team reviews the donor files and discusses them with the ministry or local embassy staff. This provides the reviewing SAI team with valuable information on, for example, the purpose of the DBS or SWAP, the authorization and amounts paid by the donor, monitoring reports demonstrating that agreed-upon activities have been undertaken, and action taken on local SAI audit reports.

2. Review of the financial statements.

The donor SAI team reviews the financial statements that the recipient country has prepared to understand the accounting principles used and the financial and nonfinancial information disclosed.

3. Examination of the local SAI’s work.

The donor SAI team examines the audit report by the local SAI (or another independent auditor) covering income and expenditure under the DBS or SWAP. To form an opinion on whether the audit report has been properly prepared so that reliance can be placed upon it, the team uses a questionnaire based on the International Federation of Accountants’ International Auditing Standard “Using the Work of Another Auditor.” The local SAI fills in the questionnaire, and the results are discussed with the donor SAI team. There is no need to duplicate the audit the local SAI has already completed. Although donors and their SAIs do not have a right to access the local SAI’s working papers, the local SAI may be willing to discuss its audit approach with the review team and give insight into its working papers.

4. Discussion with aid recipients.

In addition to reviewing the monitoring reports, the financial statements, the local SAI’s audit report, and information on any actions the ministry has taken on the issues raised by the local SAI, the donor SAI team may want to gather more information from key aid recipients. A representative of the local SAI and the embassy should be invited to attend any meetings held to gather this information.

5. Forming an opinion and reporting.

The review team reports its observations and audit conclusions to the other donor SAIs and sends a copy of the report to the local SAI. In the report, the donor SAI team gives an opinion on whether there is sufficient relevant information to confirm that grants made by partner organizations under a DBS or SWAP arrangement have been used for the agreed-upon purposes. If necessary, the long version of the report may include observations and recommendations on the ministry accounts, the work of the local SAI, or donor monitoring.

All the donor SAIs are encouraged to share the opinion with their donor organizations. However, each donor SAI is free to determine whether there is sufficient evidence, within the context of its own country’s auditing and reporting requirements, to provide assurance to its parliament. It is theoretically possible that donors may disagree about whether there was sufficient evidence that grants have been properly spent.

Lessons Learned in the Zambia Pilot Review

In 2003, seven donor countries and the Zambian government agreed on a SWAP arrangement for the education sector. For this reason—and because there was a history of good cooperation between the Office of the Auditor General of Zambia (OAGZ) and several HOAP group members—Zambia was chosen as a pilot for the HOAP approach. In November 2004, a joint team drawn from the audit offices of the Netherlands, the United Kingdom, and Norway performed the audit. The goals of the audit were to

  • test the HOAP approach,
  • express an audit opinion on the education SWAP 2003 (a regularity audit of actual expenditure), and
  • advise the NORDIC+ group so that its members could refine and adjust their aid program in Zambia.

From the outset, the work in Zambia was recognized as both groundbreaking and innovative. The pilot showed that the HOAP approach is workable and that a group of independently minded SAIs can work together to produce a common audit report. The enthusiastic support and input of the OAGZ and personal commitment of the auditor general were critical elements in the review’s success. Local representatives from donor organizations and the Ministry of Education also provided significant support and backup for the review.

The pilot review team with Zambian colleagues in Lusaka, Zambia.
The pilot review team with Zambian colleagues in Lusaka, Zambia.

The review team identified the following key elements in the success of the methodology used in the pilot audit:

  • The review team identified the following key elements in the success of the methodology used in the pilot audit:
  • The pilot team and the OAGZ agreed upon a common approach to the review.
  • Working with the OAGZ provided opportunities for the review team and OAGZ to discuss audit experiences and practices.
  • The HOAP approach was a good basis for the audit opinion, and the other donor SAIs agreed with the audit report’s conclusions and observations.
  • Individual members of the NORDIC+ group welcomed the observations to refine and adjust their aid program for Zambia.

Next Steps in HOAP

The next challenge for the HOAP group is to test the methodology in other countries and extend the audit to cover multi-donor DBS arrangements—where evidence of the use of DBS grants will inevitably be more complex to assess. In the future, the HOAP group’s experience in auditing SWAPS and DBS could help to support the design of new funding agreements that anticipate and, wherever possible, avoid potential problems related to providing evidence on the use of grants. In this respect, the separation of roles between the donor ministries and the SAIs of donor countries must be maintained.

In their recent meeting in Copenhagen in February 2005, the HOAP group agreed to carry out a second review in a new country. If the next review is as successful as the review in Zambia, the next step would be to institutionalize the approach within INTOSAI so that it can be applied by SAIs worldwide. Recent developments, such as the proposed cooperation between SAIs on the audit of funds linked to the tsunami relief efforts, could also benefit from such a common methodology.

As members of the HOAP group, we are enthusiastic about the developments to date and hope that others will join us in this groundbreaking initiative. Let us work together to develop efficient and sound audit methodologies of mutual benefit to all concerned.

For more information, please contact the author: Jeroen van Wingerde, Netherlands Court of Audit (

The next meeting of the HOAP group is planned for September 2005 in the United Kingdom. The U.K. National Audit Office has agreed to provide the secretariat for this meeting. Please contact Robin Ball ( for additional meeting information.