1.1. In Cyprus, the increased volume of public works and projects and the large part of the republic's budgets allocated for their implementation have focused attention on the importance of the public sector auditing function, particularly technical audits. Cyprus is one of the few countries that have established a Technical Audit Service within the SAL
1.2. The purpose of technical audit is not to substitute or minimise the responsibility of the audited agencies, which remain responsible for the implementation and supervision of the public works and projects involved, but to ascertain whether the planning, design, award, construction and post-construction stages of the various undertakings are carried out in the most economical, effective and efficient manner.
The basic goals of public works and projects are the economic development of the island, the improvement of quality of life and the enhancement of living standards.
The main public works and proj ects audited by the Technical Services of S AI are the following:
4.1.1. Broad investment criteria are set out, in the form of guidelines, by the Central Planning Committee (CPC) through the five-year development plan. In forming these guidelines, the CPC (made up of the President and his ministers, the Permanent Secretary of the Planning Bureau, the Governor of the Central Bank and top government officials) takes into account various micro-economic factors, such as :
4.1.2. The five-year plan is prepared by the Planning Bureau, in co-operation with the Ministry of Finance and submitted to the CPC for approval. The annual Development Budget, which constitutes the Public Investment Programme, reflects the projections and objectives set for each year in this five-year plan. In evaluating the projects which fulfill the above broad criteria and ranking them in order of priority, the Planning Bureau has set out the following supplementary criteria:
The two basic principles of sound planning (cost-benefit ratio and internal rate of return) must indicate that a project is viable and beneficial. Of course, these indications cannot be meticulously applied in all cases. Also, in certain instances, major projects are undertaken only for political reasons.
Over the last ten years, it became apparent that, in order to safeguard the environment, it is important to study the impact of public works and projects on the environment. It is now necessary for an environmental study to be prepared at the planning stage, prior to the implementation of a project.
The process of authorisation consists of a number of committees and units functioning at different levels of authority, each one implementing specific functions. The different parts of this planning and authorisation process and their functions are :
(a) Central Planning Committee
This committee, which is the main planning arm of government, is headed by the President of the Republic and includes all members of the Ministerial Council and the Governor of the Central Bank as advisor. It has the overall responsibility for the formulation of the financial and social government objectives, the definition of the aims and targets of the Development Plans and the monitoring of the timely and co-ordinated implementation of the projects.
(b) Policy and Budget Planning Committee
This committee advises on the formulation of long-term planning and on the specific plans/ projects/programmes prepared by the various ministries and the Planning Bureau. The committee, which is also responsible for the preparation of the Annual Development Budget and the general oversight of its application, is headed by the Minister of Finance and in his absence, by the Permanent Secretary of the Planning Bureau. Other members are the Permanent Secretaries of the various ministries, the Accountant General and the Governor of the Central Bank.
(c) Planning Bureau
The Planning Bureau is the economic and administrative arm of the Central Planning Committee and the Policy and Budget Planning Committee. This bureau is independent and accountable to the President of the Republic. It functions through the Minister of Finance, who is president of the Policy and Budget Planning Committee.
The Permanent Secretary of the Bureau has overall responsibility for the preparation of general and sector development plans. He is also the co-ordinator of the development activities of ministries, departments, services and quasi-organisations and furthermore, the Secretary of the Central Planning Committee.
(d) Advisory Committees
There are thirteen advisory committees working in many fields of activity. The main duties of these committees are the submission of suggestions for economic development, provision of information concerning long and short-term production problems, investments implemented, the need for investments and assessment of market trends.
(e) Ministerial Co-ordinating Committees
The members of these committees, which are headed by the respective Minister, are the Permanent Secretary, the Directors of Departments of the Ministry and the Permanent Secretary of the Planning Bureau or his representative as advisor.
(f) Co-ordination Committee for the Planning and Preparation of Town Planning and Transportation Studies
This committee, which is headed by the Director of the Public Works Department, comprises senior officers from the Town Planning and Housing Department, the Planning Bureau and other departments and services as the need arises. The committee is of an advisory and coordinating nature, examining from their conception projects concerned with the planning and preparation of town planning and transportation studies in rural and urban areas, in areas of tourist development and also in areas where projects with legally binding conditions and where reservations are planned.
5.1. Budgeting for projects is carried out by the various organisations involved in the administration of the annual Development Budget, in accordance with the policies, objectives and investment targets set by the Planning Commission. Budget estimates are sent to the Planning Bureau for evaluation and detailed discussion with the Permanent Secretaries. Final proposals are then prepared and forwarded to the Ministry of Finance which in turn, prepares the draft Development Budget and submits it for approval to the Council of Ministers and the House of Representatives.
5.2. The three main sources of finance for development projects are :
5.3. Foreign loans are aggregated with the Development Fund for controlling and accounting purposes, whereas the Loan Commissioners operate as a separate fund. Development project accounting is undertaken by the various departments involved in accordance with the Government Financial Instructions and Stores Regulations. The controlling officer of each vote (usually the Permanent Secretary of the ministry in question) has the ultimate responsibility for the use of funds. Unauthorised excess expenditure is illegal, with the controlling officer being held personally responsible. Excess expenditure may only be incurred where Supplementary Appropriation is approved by the House of Representatives or through properly authorised transfer of savings between budget votes.
Projects partly or wholly financed by foreign organisations, such as the World Bank for Reconstruction and Development and the Kuwaiti Development Fund are designed and partly supervised by consultants, as provided for in the loan agreement. In such cases, consultants are selected through tenders. Projects financed wholly by government are designed and supervised by the appropriate government department. Small projects are usually carried out by direct labour, with architectural competitions often used for more prestigious buildings.
6.2.1. Preparatory Work
The preparation of detailed designs, bills of quantities and tender documents is carried out as above. However, all works carried out by consultants is monitored and scrutinised by the relevant department.
6.2.2. Invitation and Evaluation of Tenders
International tenders are usually invited through the international press. In the case of projects financed by the government, the local press is used.
Evaluation of tenders is done by a departmental committee, the award being made by the Government Main Tender Board (MTB). Where international tenders are invited, the initial evaluation of the tenders is made by the consultants and is then referred to the departmental committee for further consideration and to the MTB for the award. Tenders in excess of C 1 million (C 1 = US.$2) are referred to the Ministerial Committee for tenders for final award.
Prequalification of international tenders is usually made by applying the two-envelope system, i.e. technical and financial. Under this system, an assessment of the technical capabilities, financial and other resources of the tenderer and the technical proposal is made and the financial part of the tender only of those firms passing the technical assessment is examined. Local contractors are legally classified according to their previous experience, plant, qualifications and number of personnel employed. All projects are classified into five categories, according to the estimated contract sum. Only approved contractors are eligible to tender. In the case of relatively small works, where direct labour methods are used, all materials supplies and hiring of plant are awarded through tenders.
6.2.3. Award of Tenders
The award of tenders having a price up to C 1 million is made by the MTB. Contracts in excess of this amount are submitted to the Ministerial Committee for Tenders, following a recommendation by the MTB. In both the MTB and Ministerial Committee for Tenders, the Auditor-General or his representative participates as an observer.
6.2.4. Supervision
In the case of international tenders, a consultant is appointed as the Resident Engineer. However, with local tenders an engineer is appointed from the relevant department. The Assistant Resident Engineers and other supervising staff are always members of the relevant departments. In order to safeguard objectivity, laboratory tests are carried out by government laboratories, in collaboration with the Resident Engineer.
As the majority of projects are contracted out, the financial accounting and reporting basically entails the preparation of architects, or engineers' certificates and payments against such certificates, prepared on site and agreed between the contractor and the Resident Engineer. In the case of smaller projects undertaken by the Public Works Department, the accounting and reporting is carried out in accordance with government procedures involving the cash basis of accounting.
The quality control of materials and works is conducted on site and in laboratories. Tests are designed to ensure compliance with the relevant Cyprus Standards and also internationally accepted standards, such as ASTM, B.S. or DIN.
In the case of large projects, a Project Manager is always appointed. His duties include the coordination of various services, overall supervision of the project and submission of progress reports at specified intervals, with the necessary recommendations for resolution of any problems arising. For the proper monitoring of projects, a clause is inserted in all contracts, under which the engineer must obtain the employer's approval before the issue of certificates for payment to the contractor and shall not, without the prior written approval of the employer, authorise any modification of the works involving any extra cost, fix new rates, grant any extension of time or approve any claim for additional payment. Usually, the employer is represented by a committee consisting of senior engineers and officials from the relevant department or Ministry. The Auditor-General or his representative participates in these committees as an observer.
In cases where construction machinery and equipment are to be incorporated in particular public works, such items are included in the bills of quantities for the project. In the procurement of construction materials, the required materials are purchased by the Department of Government Purchasing and Supply through tenders and are then issued to the relevant works.
For plant, machinery and equipment, records are kept by government departments, showing the working hours, the spare parts used for maintenance and repair and the costs. For roads and dams, performance records are kept based on state of the art methods. Maintenance is carried out through sub-contracting.
In Cyprus, there are no state-owned companies which compete with private contractors for public works and projects.
There is no programme of privatisation of public works and projects.
10.1. Although there are no special audit arrangements and obligations in relation to foreign- funded projects, funding agencies are involved in the approval of bids. These agencies usually insist on being kept informed of all developments, especially during the evaluation and award of tenders. Periodic visits are made by funding agency officials during construction.
10.2. It is normal for the funding agencies to request regular financial statements in respect of the projects they finance. Such financial statements usually also have to be audited and reported upon by the Auditor-General. One such example is the Fourth Highway Project which is under construction. This project covers a range of undertakings (construction, strengthening and maintenance of roads and installation of traffic control equipment) which are jointly financed by the government of Cyprus, the World Bank for Reconstruction and Development and the Kuwait Fund for Economic Development. Annual financial statements in the form of a Receipts and Payments Account are submitted to the two foreign agencies.
11.1. The Auditor-General is the Head of the Audit Office of the Republic, which is an independent office. Pursuant to article 116 of the Constitution, the Auditor -General, assisted by the Deputy Auditor-General, controls on behalf of the Republic all disbursements and receipts and audits and inspects all accounts of moneys and other assets administered and of liabilities incurred by or under the authority of the Republic. In addition to the audit of the public accounts, the Auditor -General is responsible for the audit of the financial statements of public corporations, special funds and local authorities, as provided by special legislation or by administrative agreement.
11.2. The powers and duties of the Auditor-General are exercised either by himself or by his officers who act according to his directions. The constitutional and statutory provisions provide that the Auditor-General shall examine the financial and other activities of government services, public corporations and local authorities, in order to satisfy himself that:
The audit of public works and projects is assisted by the Audit Office's own in-house team of technical auditors, consisting of three engineers and three technicians, who conduct audits in a programmed and systematic way. The purpose of this audit is to verify that the various undertakings have been carried out in accordance with the technical terms and specifications and generally, in the most economic way. It is furthermore verified that the projects have been planned, designed and executed satisfactorily. The audit includes, inter alia, the examination of the procedure for invitation and award of tenders, site inspections of the various projects, the examination of interim payments, in addition to the final accounts of .the public works and projects involved.
13.1. Construction proj ects are usually large, expensive and complex and thus require various advance construction methods. Because most projects are designed and supervised by consulting engineers, auditors must have specialised knowledge and expertise to understand, evaluate and comment constructively on the various aspects of a project. Absence of this specialised knowledge tends to create communication difficulties with the audited agency. Auditors should also possess the expertise to recommend alternative methods.
13.2. With the assistance of engineers and technicians, the audit team does not confine itself to conventional audit techniques which focus only on the legal and financial aspects of project administration. Rather, the audit team can undertake comprehensive audits covering the planning, design, tendering, construction and post-construction stages of public works and projects.
13.3. In determining the stage to select for audit, it is necessary to consider the type of project, its scope and the principles adopted. Other factors in determining the stage to select for audit are the strengths and weaknesses of a particular department or public enterprise and the likely benefits to accrue to a particular project from the results of audit.
13.4. Because of the increasing number of projects, in relation to the audit resources available and the complexity of individual projects, the number selected for audit is necessarily limited. This, of course, does not preclude routine audits, as these act as a deterrent.
13.5. Sound planning for all public works investments is very important. Misconceptions in the absence of sound planning may have serious negative economic effects and therefore, waste public money. The audit should confirm that the project is really necessary and that the selected solution is the most appropriate.
13.6. Although the two basic principles of sound planning, cost-benefit ratio and internal rate of returns are indispensable for the audit of the planning stage, these cannot always be meticulously applied. Also, in certain instances, a major project may be undertaken for political reasons. In such a case, there is always the question as to whether the Auditor-General as the SAI is in a position to carry out the required audit.
13.7. In this regard, the auditor will be concerned with terms of reference of the engineering consultants (if applicable), circumstances in which the project was conceived, project appraisal, compliance with Stores Regulations (Standard Government Bid Procedure), compliance with planning concepts and evaluation of proposals by the relevant government department. This is the most problematic stage to audit as in some cases, the audit findings may directly conflict with political decisions. Therefore, the findings must be handled discreetly by audit managers. In such cases the auditors' role is limited to ensuring that decision-makers know all relevant facts.
13.8. All bid documents for the contracts of major projects are sent to the Office of the Auditor- General in accordance with Government Stores Regulations. Smaller projects, which are carried out by the various departments or public enterprises on a direct-labour basis, come to the attention of the Auditor- General through the invitation of bidders for the supply of materials or execution of part of the work. This information is contained in the monthly financial statements of the relevant ministry or monthly location lists of the foremen involved.
13.9. Contract documents for the various public works and projects are examined by the Office of the Auditor-General, which makes suggestions for improvements where necessary to the relevant department or public enterprise. These improvements may affect the design, instructions to bidders, conditions of contract, general specifications or particular specifications. Comments on improvements are made early enough for the implementing agency to issue the relevant addenda to all bidders or make the necessary alterations to the documents. The auditors pay special attention to contract documents originating from departments with known weaknesses or lacking experience in the particular construction area involved.
13.10. Because the detailed review of design work and bid documents is not practicable, the auditors must have reasonable confirmation that all appropriate procedures and standards have been followed and that all relevant factors have been considered. To this end the Auditor- General has established technical committees consisting of at least three departmental officers, who review the design work and bid documents before submitting them to the Auditor- General for comments.
The audit of this stage of project implementation is a continuous process performed by the Auditor-General at the Main Tender Board and Ministerial Committee for Tenders. The auditors establish whether all actions and procedures followed are lawful, impartial and efficient. This audit includes the:
The purpose of this audit is to ascertain whether the project management system ensures that the work is properly and effectively supervised and executed and that there is accountability throughout this stage. The method followed in the audit of the construction stage depends on whether projects are constructed by :
15.1.1. Head Office or Site Office Audit. This first part of the audit of construction by contractors involved the following aspects :
15.1.2. On-the-Spot Audit or Field Audit. This second part of the audit of construction by contractors involves the following aspects :
A number of problems are encountered with public works and projects carried out by the direct labour force. These stem mainly from errors in estimating works and project expenditures and the lack of a detailed designs and specifications. The first problem can usually be attributed to the lack of detailed, accurate and objective estimates based on standard cost elements (preliminaries, labour, plant and materials). As regards the second problem, the relevant government departments and public enterprises have accepted the need for detailed designs and specifications and have taken positive steps to remedy the previous position.
On the instigation of the Auditor-General some ten years ago, a clause was included in international contracts for public works and projects which ensures that the government department or agency always approves any extra costs to be incurred by the contractors. This clause requires that the engineer (usually consultants) obtain the approval of the government department or agency before the issue of certificates for paying the contractors. It also provides that the engineers may not fix new rates, grant any extension of time, approve any claim for additional payment or make any modification of the works involving extra cost, unless they obtain the prior written approval of the government department or agency which is usually represented by a Technical Committee, consisting of at least three departmental or agency officers.
All variations, new rates, extensions of time and claims throughout the construction stage come to the attention of the Auditor-General either through the Ministerial Committee for Tenders or the Government Main Tender Board. The Auditor -General or his representative sits as an observer on both.
The completed project is examined by the Auditor-General to determine whether it is being properly used and maintained, with and whether its objectives are being achieved. However, the audit resources presently allocated to this area is relatively small because among other considerations, the time horizon for the full operation or use of such projects tends to be a long-term matter. Auditing of this stage of a project includes a thorough check of final payments to contractors and of any settlements made or claims submitted. Also the original project objectives are reviewed to establish whether these have been achieved and to what degree the project has been successful. This latter investigation is useful to the extent that past problems can serve as lessons for the future.
In accordance with the Constitution, the Auditor-General prepares an annual report which is submitted to the President of the Republic for transmission to the House of Representatives. The Auditor-General's findings, together with his comments, are initially reported to the audited agencies and the annual report is basically prepared from these sources. The draft paragraphs of the annual report are sent before finalisation, to the ministers, heads of independent services, chairmen of public corporations and other relevant organisations and local authorities for comments.
Quarterly reports are also sent to ministers in order to brief them on the major points raised as a result of the audit of the accounts and activities of the agencies under their jurisdiction. Copies of these reports are submitted to the President of the Republic and the House of Representatives. In this way, both the executive and legislature are promptly briefed on the most important matters raised during the audit of the accounts of government, local authorities and public corporations.
The problems and limitations involved in auditing public works and projects in Cyprus include: