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Cablegate: Update: Strengthening Afghanistan's Ability to Audit Future

VZCZCXRO6794
PP RUEHDBU RUEHIK RUEHPOD RUEHPW RUEHSL RUEHYG
DE RUEHBUL #2812/01 2590932
ZNR UUUUU ZZH
P 160932Z SEP 09 ZDK
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 1480
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0891
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEABND/DEA HQS WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 02 KABUL 002812

SENSITIVE
SIPDIS

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DEPT PASS AID/ASIA BUREAU
DEPT PASS USDA FOR FAS MICHNER
DEPT PASS USTR FOR DELANEY AND DEANGELIS
DEPT PASS TDA FOR STEIN AND GREENIP
DEPT PASS OPIC
CENTCOM FOR CSTC-A, USFOR-A

OSD FOR SEDNEY
TREASURY FOR MNUGENT, ABAUKOL, AWELLER, AND JCASAL
COMMERCE FOR HAMROCK-MANN, DEES, AND FONOVICH

E.O.12958: N/A
TAGS: EFIN EAID PGOV EAGR BEXP AF
SUBJECT: Update: Strengthening Afghanistan's Ability to Audit Future
Spending

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SUMMARY
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1. (SBU) Finance Minister Zakhilwal is pushing the Afghan Cabinet to
re-instate Article 61, which gives the Ministry of Finance internal
audit authority over line ministries, a matter of concern to
international donors. Afghan ministries' internal audit capacity
generally remains weak and hinders Afghanistan's long-term
development aims. Over the past five years, the Ministry of Finance
has strengthened its internal audit directorate through donor-funded
technical assistance and is positioned to take a broader role moving
forward. Embassy Kabul is working with the World Bank to coordinate
a plan-of-action to reinstate Article 61, including engaging Afghan
government decision makers. Once Article 61 is reinstated, the
Ministry of Finance will likely provide technical assistance for
internal audit (through its Civilian Technical Assistance Plan) to
key line ministries (e.g., Ministry of Economy), with support from
the World Bank and U.S. Treasury. End Summary.

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BACKGROUND AND CONTEXT OF ARTICLE 61
------------------------------------

2. (SBU) Article 61 of the Public Finance and Expenditure Law
stipulates that the Ministry of Finance will audit the financial and
accounting affairs of all central line ministries. In 2007, the
Central Audit Office (CAO) expressed concern that Article 61
impinged on the CAO's authority as set out under the existing
(communist era) legal framework. Former Deputy Minister of Finance
(and current Commerce Minister) Shahrani supported this view and
encouraged President Karzai to suspend Article 61, which he did.
Since then, we understand the CAO has retreated, realizing that
control over internal audit activities does not fit into its
independent monitoring role.

3. (SBU) The Ministry of Finance currently maintains nominal audit
control by setting guidelines for finance officers in the line
ministries and is still responsible for enforcement of the public
financial management law through revenue collection, cash
management, payments and financial reporting. While some line
ministries have a nascent internal audit function, such activities
are limited and do not function at an acceptable standard.

4. (SBU) In contrast, however, significant development has taken
place in the Ministry of Finance's Internal Audit Directorate over
the past several years. Assisted principally by a World Bank-funded
project, Internal Audit has grown from 15 auditors to more than 120.
The number includes several embedded training staff who are audit
and IT experts. While the Internal Audit Unit appears to have a
well-established sense of mission and a number of technical manuals
and handbooks available for use, additional capacity building is
necessary to ensure it is prepared to take on its government-wide
mandate under Article 61.

-----------------------------------------
STRENGTHENING INTERNAL AUDIT WILL IMPROVE
THE PREVENTION AND DETECTION OF FRAUD
-----------------------------------------

5. (SBU) According to an official at the World Bank, one of the
most significant problems with financial leakage occurs in
procurement. To address this concern, the Ministry of Finance is
working to strengthen the procurement law and establish a
government-wide, Cabinet-level Internal Audit Committee to
investigate allegations of procurement fraud or leakage within line
ministries. The committee would be part of a broader approach to
reduce corruption and increase financial transparency.

6. (SBU) The Finance Ministry will likely use money from the
Civilian Technical Assistance Program to hire local and regional
advisors to further develop its internal audit capacity. Key donors
in this area (World Bank and Treasury) will help establish a good

KABUL 00002812 002 OF 002


technical basis to move this forward. For example, Treasury's
Office of Technical Assistance is planning to place at least one
Advisor in the Ministry of Finance's Internal Audit Unit to provide
professional development and training, counseling and advice to
GIRoA auditors.

-------------------------------
EFFORTS TO RE-INSTATE ARTICLE 61
-------------------------------

7. (SBU) Finance Minister Zakhilwal agreed to add Article 61 as a
key benchmark of the World Bank administered Afghan Reconstruction
Trust Fund (ARTF) incentive program. As a result, the Government
must reinstate Article 61 (along with meeting several other
governance benchmarks) to qualify for ARTF discretionary funding.
The World Bank wants reinstatement of Article 61 complete by
November/December, although this may be delayed due to the still
on-going elections process. Minister Zakhilwal's staff have told
Embassy officials reinstatement of Article 61 is under review at the
Office of Administrative Affairs. Following this review, the
decision for reinstatement will go to the President for signature.


8. (SBU) COMMENT: Reinstating Article 61 would be an important step
towards a more robust internal audit system throughout GIRoA and the
Mission pushed hard to have Article 61 reinstatement added as a key
benchmark in the ARTF incentive program. International donors are
concerned that while the Ministry of Finance provides internal audit
for its expenditures which account for roughly 5% of total GIRoA
expenditures, the remaining 95% are under weak or no internal audit
systems. The economic and financial policy working group, in
particular Treasury elements, are coordinating a plan of action with
the World Bank, including technical assistance, outreach to the
Internal Audit Unit, and engaging GIRoA decision makers. Once
Article 61 is reinstated, we should consider ways for U.S. and other
country internal auditors to partner with Afghan-led initiatives to
promote information exchange and share best practices. End Comment.


EIKENBERRY

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