| This paper elaborates the methodology for auditing projects relating to Halon Flurochlorohudrocarbon phase out. |
Today the words "ozone layer protection" and "Montreal Protocol" are familiar phrases to performance auditors in China, and it might be surprising to learn that only six years ago the first performance audit of environmental protection project was initiated in China. Much has happened in the last six years. Ever since 1998 when the National Audit Office of China (the CNAO) carried out its first environmental audit project, the Executive Committee of Montreal Protocol, the World Bank, United Nations Environment Program (UNEP), United Nations Development Program (UNDP) have given positive and complimentary appraisals of the efforts undertaken by the CNAO. With the contributions made by the CNAO, China shows its willingness to be at the forefront of protecting ozone layer and improving living environment for humankind. From that stand, performance audit of environmental protection projects is believed to be a rewarding experiment in China, the world’s largest developing country.
Strategic Plan for the National Audit Office of China: 2003-2007 has put forward that" in the following five years since 2003, performance audit would be carried out in an active manner in China for improving the management and utilization of financial resources in view of efficiency and effectiveness; audit priorities would be placed equally on ensuring the truthfulness and compliance of revenues and expenditures of public finance as well as on the performance audit; half of audit resources would be oriented to performance audit by the year of 2007." In accordance with the explicit stipulations of Strategic Plan and entrusted by the World Bank and State Environmental Protection Administration of China (SEPAC), the National Audit Office of China (the CNAO) has been engaged in performance audit since 1998 over the phase-out projects for ozone-depleting substances (ODSs) financed by the grants of Montreal Ozone Projects Multilateral Trust Funds. In 1998, the CNAO carried out only one performance audit over HAL (Halon) phase out project in fire-extinguisher Industry while in 2002, the CNAO finished four performance audit projects such as audit of HAL (Halon) phase out project in fire-fight Industry implemented by the World Bank, audit of CFC phase out of production project in Chemical Industry, audit of ODSs phase out project in Vehicle Refrigeration Industry as well as audit of ODSs phase out project in Solvent (SOL) Industry implemented by United Nations Development Program (UNDP).
The Worldwide emissions of certain substances have significantly depleted and otherwise modified the ozone layer in a manner that is likely to result in adverse effects on human health and the environment like greenhouse effect and other climatic and eco-environmental effect. The ozone layer hole problem has been the concerns of governments around the world. Through a great deal of research, it has been recognized that mass production and consumption of ozone-depleting substances has increasingly damaged the ozone layer. In dealing with productions of ODSs include REF (Refrigeration), Fire-extinguisher, SOL (Solvent), FOA (Foam) and tobacco industries all over the world, an Ozone Secretariat was set up under United Nations Environment Program (UNEP) designed to address this arising global environmental problem. China agreed to join the international efforts by signing the Vienna Convention for the Protection of the Ozone Layer in 1989 and the Montreal Protocol on Substances that Deplete the Ozone Layer (amended and adjusted version) in 1991 respectively. The Chinese government committed to progressively phase out the production and consumption of Ozone-Depleting Substances (ODSs) like Halon and fluorochlorohudrocarbon by 2010 and as a result, set out a National Plan and Timetable for Phasing Out ODSs in China. As a developing country party of the Montreal Protocol, China is entitled to enjoy financial assistance from Montreal Ozone Projects Multilateral Trust Funds to better comply with the provisions of the Montreal Protocol. Up to the end of 2002, grants for China from the Multilateral Trust Funds have accumulated to nearly 200 million US Dollars.
SEPAC, the responsible agent of environmental protection projects of Chinese Government, implements various environmental protection projects in cooperation with competent state authorities. Taking Halon phase out project in fire extinguisher Industry as an example, SEPAC and the Fire-Fighting Bureau under the Ministry of Public Security(FFB) are jointly responsible for the organization, management and execution of this project in China. The project includes technological assistance, progressive phase out of production of Halon fire extinguisher, exploitation and production of substitutes for Halon.
According to the requirement set by the Executive Committee of the Montreal Protocol and the World Bank, an independent audit institution should conduct performance audit over the implementation of Environmental Protection Projects as well as revenues and expenditures on an annual basis during the period of project execution and issue performance audit report accordingly. The Chinese government also made an explicit commitment in the project agreement that a performance audit shall be carried out annually by an independent contracted audit institution. The performance audit report issued shall be submitted to the World Bank and the Executive Committee of the Montreal Protocol and the audit findings shall be used as evaluation basis for assessing the implementation effects of environmental protection projects. The Executive Committee shall be entitled to take further actions to certify the audit findings and impose sanctions accordingly. In case the government failed to conduct the performance audit or the implementation effects fell short of the requirements stipulated in the project agreement, the Executive Committee of the Montreal Protocol would immediately stop payment of grants. If the progress of phase-out plan failed to reach the target specified in the project agreement, sanctions such as non-confidence motion, decrease or stop payment of grants would be applied. If the audit findings were classified into general problems of non-materiality, a statement of explanation should be given or measures of rectification should be taken by implementing party of environmental protection projects.
Before the commence of audit, the World Bank would prepare annual strategic plan for performance audit in line with the progress of environmental protection projects. This strategic plan would also be used as main guidelines for ascertaining priorities of performance audit and preparing audit assignment plans. The Audit Law of the People’s Republic of China shall be followed when studying the performance of environmental protection projects.
Organization of Audit
In 2000, CNAO organized 22 provincial audit institutions to conduct performance audits over the implementation of Halon and Fluorochlorohudrocarbon phase out project and sub-projects in China, The auditees included 85 Halon fire retardant plants, fire extinguisher plants, Fluorochlorohudrocarbon plants as well as other entities offering technical assistance for the phase out project. Provincial audit institutions were responsible for the audits of sub-projects and issue audit reports of sub-projects respectively. CNAO carried out the audit over operating entities such as SEPAC, FFB under the Ministry of Public Security, State Administration of Petroleum and Chemical Industry and China Chemical Industry Construction Corporation and issued two consolidated audit reports, namely "Performance Audit Report of Halon Phase Out Project in China" and "Performance Audit Report of Fluorochlorohudrocarbon Phase Out Project in China".
Before the commencement of the audit, in accordance with the project agreement signed between the Chinese government and the World Bank, as well as the Strategic Plan for Performance Audit of the Year of 1999 prepared by the World Bank, CNAO drafted two specific Performance Audit Assignment Plans for Halon Project and Fluorochlorohudrocarbon Project respectively and distributed them to all provincial audit institutions.
CNAO and SEPAC also jointly held a nationwide training course for the auditors participating in the projects. Senior auditors from CNAO as well as project officers and technical experts from SEPAC and FFB under the Ministry of Public Security shared their experiences and information with field auditors. Helon Chen, a Senior Project Officer from the World Bank also took part in the training course.
After the approval of the World Bank, CNAO engaged two technical experts nominated by SEPAC to join the audit team and provide technical assistance. In accordance with Audit Assignment Plan, the technical experts prepared Expert Testimonial for Halon Production and Work Report of Technical Experts, both of which were included in the performance audit reports.
Audit Priorities and Methodology
Performance auditor shall decide the audit priorities according to the focus of attention by audit report users and contents of project management. As for the projects in 2000, the World Bank, as the audit report user showed its concerns for output of Halon fire retardant, compliance of output quota, removal of production equipment and utilization of project funds. The Chinese auditors then extended audit scope to cover consumption of main raw materials, average unit consumption of raw materials, sales turnovers, unit sales price, production to quota parity, fixed assets revaluation, cost-benefit analysis, utilization and performance of project funds.
During the course of audit, various measures were adopted to accurate important figures. For example, in order to verify the output volume of Halon fire retardant in certain plant, auditors checked the following subjects:
Production records: including production records of workshops, operating journal of machines and roll book of workers to ascertain actual production volume.
Sales turnover:
Inventory check: Auditors designed some charts to reflect the above-mentioned key figures in the forms of actual numbers and relative ratios, which were easy to be understood and analyzed by report users. Experts from various international organizations like the World Bank gave high appraisal for these self-designed charts.
Audit Evaluation Standards
Audit evaluation plays an important role in benchmarking performance audit. When an audit evaluation is concerned, evaluation subjects and standards need to be settled in the first instance. Evaluation subjects shall be set in the light of audit priorities and requirements of audit consignors. In the case of the Halon fire retardant plant, auditors should make audit evaluation upon the following subjects: whether the production volume of this year has exceeded the quota; whether the removal and destroy of production equipments were implemented in a complete and timely manner; whether the collection, utilization of project funds were in compliance with the project agreement. In this case, audit evaluation standard should also be ascertained to include quota permits, project agreements, annual strategic plan approved by the World Bank and generally accepted economic performance assessing indicators.
When conducting audit evaluation, auditors should give an explicit opinion, stating whether the auditee has met the standards. Ambiguous expressions such as "comparatively" and "basically" are not allowed to use in the audit report.
Evaluation of Compliance is one of the main evaluation types in performance audit, which is normally expressed in a negative way. That is, only items of irregularities would be disclosed in the audit report under this kind of evaluation and no comments on compliance in the audit report is generally regarded as giving a confirmative opinion for the auditee.
Contents and Format of Audit Report
In the case of Halon and fluorochlorohudrocarbon phase out projects, performance audit reports were prepared in a flexible manner and auditors are free to re-design them for catering to different contents of various audit reviews and evaluations. Generally speaking, an audit report should include audit procedure, overview of project implementation, key audit findings, notes for discrepancy and special items, audit evaluation standards, audit opinions and recommendations. Audit reports for various sub-projects should follow the same format for the convenience of future users.
The expression of the audit report should be clear and straightforward, comprehensive but easy to understand, providing glossary for specific terms and key data indicators. Tables and forms could be used where necessary to be more informative to report users in various levels. In the case of Halon phase out project, auditors have designed certain tables such as Summary Table of audit findings for Halon Fire Retardant, Table of Consumption of Raw Materials and Table of Payment of Grants. Some tables are used as annex to the audit report while others are used as part of the report text.