ATTACHMENT J.4_2. SOERA_Deliverable_2 - Gap Analysis.pdf

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TABLE OF CONTENTS

I. ACRONYMS AND ABBREVIATIONS ii

II. OVERVIEW 1

III. BACKGROUND 1

IV. PURPOSE AND SCOPE 2

V. SUMMARY OF FINDINGS 3

VI. ANALYSIS 8

VII. CONCLUSIONS AND NEXT STEPS 26

Appendix A: List of Documents Reviewed 28

Appendix B: List of Individuals Interviewed 30

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I. OVERVIEW

To this end, Deloitte Consulting LLP (Deloitte, we, or our) was engaged to conduct a comparative analysis, highlighting areas of relative strength and weaknesses of the processes by which the GOU monitors, verifies, reports on, and otherwise provides for the safeguards related to transparency and accountability and distill relevant gaps.

As a result of our analysis, we identified several opportunities to improve the safeguard mechanisms related to transparency and accountability . These include strengthening internal controls and audit capacity, and streamlining payroll processes and data quality. It is important to note that our analysis was conducted during a period when the GOU is at conflict with another sovereign state (Russia) which may have impeded the progress that the GOU may have otherwise made on areas noted in our report. Our report identified additional steps that USAID, The World Bank, and GOU can take to further safeguard funds

Going forward, we recommend that USAID consider providing additional technical support to the GOU. This support could enhance transparency and accountability mechanisms so that public and donor-provided resources can be allocated effectively, utilized to their fullest extent, and comply with expectations for reporting transparency. Enhancements include strengthening payroll processes and data, establishing a legal framework to strengthen the review and analysis of public expenditure that can lead to the identification and recovery of potential improper payments, and supporting the GOU’s ongoing efforts to increase internal control and internal audit capacity.

II. BACKGROUND

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it is critical to understand the current state of the GOU’s processes, procedures, mechanisms, and capacity to safeguard the funds and the ability to report on their use

. When compared against international standards, relevant gaps can be identified that would impede or present challenges to establishing appropriate levels of transparency and accountability.

III. PURPOSE AND SCOPE

The purpose of this report is to provide an overview and analysis of the strengths and weaknesses of the processes by which the GOU monitors, verifies, reports on, and otherwise provides for the safeguards related to transparency and accountability

. The analysis was conducted based on a desk level review of available documentation (see Appendix A) and interviews with select GOU personnel (see Appendix B). The review enabled Deloitte to gain an understanding of how the GOU applies the principles and practices outlined

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in the 2013 COSO internal control framework, in aspects relevant to USAID funding,1 the relevant sections of the USAID Public Financial Management Risk Assessment Framework (PFMRAF) and The World Bank’s Public Expenditure and Financial Accountability (PEFA) assessment. The scope of this work was carried out virtually via a 35-day sprint with input and support from Deloitte both CONUS and OCONUS, including team members.

Given its scope, this report is structured into several sections, including a summary of findings related to the safeguards for transparency and accountability (see Section – Summary of Findings), and a Summary and Analysis of (ii) Cash Management Processes, (iii) Internal Control and Internal Audit Practices, (iv) Accounting, Reporting, and External Auditing, and (v) Human Resources and Payroll.

In conducting this gap analysis, Deloitte did not perform testing of the operating effectiveness of the GOU’s processes and controls. Accordingly, Deloitte is not providing an attestation as described in the pronouncements on professional standards issued by the American Institute of Certified Public Accountants, and, therefore, Deloitte is not expressing an opinion or other form of assurance with respect to the services performed. Additionally, Deloitte relied on the GOU (and where relevant, USAID) to provide the full and accurate set of data, documents, and information related to the agreements, policies, procedures, processes, controls, and systems that effectuate safeguards for transparency and accountability. Furthermore, our review is limited to the description of internal controls and processes as described in effectuating procedures provided by the GOU (e.g., Procedures Operations Manual (POM) or by third party reports (e.g., The World Bank 2019 PEFA Assessment), or as described by GOU personnel.

IV. SUMMARY OF FINDINGS

The gap analysis has focused on understanding the GOU’s mechanisms and safeguards to facilitate transparency and accountability In consideration thereof, below is a summary of findings.

For further details, please see Section VI (Analysis) below.

Transparency

The World Bank defines transparency as a means to strengthening governance. In public finance, transparency is concerned with the availability of reliable, relevant, and timely information about the institutional arrangements for public finance. Transparency thus allows for the assessment of the government’s financial position, and the true costs and benefits of government activities.

Specifically, we observed:

1 The 2013 COSO internal control framework is the foundation for one of the analytical frameworks underpinning this analysis, the GAO Greenbook.

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• The fundamental basis of reporting regarding payroll is not always easily traceable, which raises questions related to the allocation approaches. Specifically:

o The reporting on cash expenditures related to the payroll for government employees is based on verifiable data from the Treasury and therefore transparent. However, the percentage of salary add-ons such as bonuses (i.e., the variable part) in the total compensation is high relative to European Union (EU) standards and is not based on performance. This increases the risk of arbitrary allocation by heads of budget institutions, resulting in an inefficient and/or non-compliant utilization of public resources. In its Public Administration Reform Strategy 2022 – 2025, the GOU has identified certain steps to mitigate this risk, such as the implementation of a civil service job classification and salary reform, as well as further deployment of its HRMIS (Human Resource Management Information System).

o While the amount paid to doctors is verifiable, the controls and methodology that Ukrainian Healthcare Organizations (HCO) use to calculate and submit the portion of payroll financed from the Program of Medical Guarantees (PMG, which is a budget program dedicated to the provision of medical services to Ukrainian citizens) and other forms of financing (i.e., service-for-fee and fees received from local budgets) for reimbursement is unclear. As a result, the payroll component financed from PMG is not

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easily traceable and there is a degree of uncertainty around the allocation amounts when this data is submitted to the National Health Service of Ukraine (NHSU).

Accountability

The U.S. Government Accountability Office (GAO) defines accountability as “the appropriate spending of public funds in a lawful way with proper accounting.” Based on the definition, our analysis evaluated the extent to which there are documented accountability mechanisms over the use of USG funds by the GOU, and the accountability mechanisms in place. Based on our analyses, the GOU accountability could be improved to better align with international standards. It is also worth noting that the GOU has demonstrated its willingness to continue evolving and enhancing existing accountability mechanisms.

However, as noted above, due to the relationship and interdependencies between accountability and transparency, the lack of overall transparency is having an adverse impact on the GOU’s overall accountability assessment. Specifically, we observed:

• Based on GOU regulations, spending units (i.e., a budget institution that was assigned program budgets funds or allocations) are required to submit annual internal control reports to the MOF, which contain a description of the state of internal controls. According to EU best practices, self-certifications by budget institution leaders on the overall assessment of the effectiveness of internal controls can improve understanding of the internal control environment and enhancements thereto. Also, there appears to be a lack of clear methodology that leaders of budget institutions should follow to complete such assessments. The lack of accountability for the executive leader of a budget institution can make it difficult to confirm the status of the internal control environment and press for needed changes to the internal control environment.

• In line with industry leading practices, the Accounting Chamber of Ukraine (ACU), as a supreme audit institution, is entrusted with providing assurance on the compliance of government expenditure with the applicable laws, regulations and rules, analysis of Government reports on budget execution, and assessing the efficiency and effectiveness of public policies and programs.

The ACU is also responsible for external audit of financial reports of budget institutions, but the coverage of external audit is limited and currently there is no mandatory requirement to perform such external audits. This decision is at the sole discretion of the Accounting Chamber, which conducted four financial audits during 2021. Article 36 of the Accounting Chamber Law obliges the auditees to inform the ACU on the measures taken in response to audit conclusions and ACU publishes this on their website, but there is no clear mechanism to monitor how the recommendations of the ACU are implemented by the budget institutions.

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• The public accounting standards in Ukraine are generally consistent (i.e., 80%) with International Public Sector Accounting Standards (IPSAS). More work remains to fully align with IPSAS.

• Although the GOU has demonstrated progress in its internal audit capacity since 2015 (the prior PEFA assessment), work remains to increase internal audit capacity and effectiveness, particularly around reporting, staffing, competency, and quality to provide effective assurance regarding the control and use of funds. This remains relevant for the USG or any other donors’ funds. Specifically, the GOU is experiencing significant understaffing across its internal audit functions. For example, the average vacancy rate is 20% - 29.6% depending on types of government bodies according to MOF’s information for 2021. Additionally, many internal audit functions have only two-to-three employees, with others having no employees. Finally, the concept of conducting external quality assessments of internal audit functions by means of peer reviews, such as reviews conducted in the public accountability community in United States, does not exist in Ukraine. However, if such a concept and/or legal requirement existed, this could enhance quality assessment reviews in situations where internal audit functions are facing understaffing issues, and the Central Harmonization Unit is facing capacity issues to perform internal/external quality assessments with sufficient coverage.

• Like other EU countries, the GOU does not have a law or mechanism that requires the consistent measurement of improper payments (i.e., an incorrect payment) related to government expenditures3. By comparison, in the U.S., public agencies have implemented a government-wide effort to reduce improper payments4. By enacting a similar law, the GOU can better promote accountability and reduce the risk of fraud, waste, and abuse.

• In the payroll sphere, there is some level of decentralization (i.e., no centralized system of HR management which is acknowledged by the GOU) and complexity with data and information across multiple systems within each budget institution, which does not facilitate full transparency. Specifically, budget institutions have clear and detailed rules and procedures for managing payroll information, however information on manning tables (a list of positions and number of workers), personnel, and labor remuneration is accounted for separately, and in some cases, manually. The decentralization and disparate processes, coupled with potential restrictions on the analysis of personal data that comprises HR data, decreases transparency of

2 The Personal Data law defines Personal Data to be information or a set of information about a natural person who is identified or can be specifically identified.

3 For context, the U.S. defines an improper payment as any payment that should not have been made or that was made in an incorrect amount, including an overpayment or underpayment, under a statutory, contractual, administrative, or other legally applicable requirement, and includes

(i) any payment to an ineligible recipient; (ii) any payment for an ineligible good or service; (iii) any duplicate payment; (iv) any payment for a good or service not received, except for those payments where authorized by law; and (v) any payment that does not account for credit for applicable discounts. (Public Law 116-117, The Payment Integrity Information Act of 2019).

4 The Payment Integrity Information Act of 2019 (the successor law to the Improper Payment Elimination and Recovery Act).

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payroll information and increases the risk of irregularities going undetected. GOU is taking actions towards centralization of payroll data and accounting, such as implementation of HRMIS to automate the human resources management, including payroll management. Currently, there are 91 government bodies already connected to the system.

• For payroll to HCO employees, NHSU has separate procedures for monitoring the accuracy of fees paid under PMG. This monitoring is based on risk indicators established by the NHSU and is conducted in the form of the review of documentation and onsite inspections. However, of the more than 30 medical programs that comprise PMG, risk indicators have been established for only four programs. Limited coverage of monitoring procedures hinders the quality and accuracy of fees paid, and ultimately the salary components paid to HCO employees.

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V. ANALYSIS

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SUMMARY AND ANALYSIS OF CASH MANAGEMENT PROCESSES

Governance

Summary of Analysis The Treasury is the main agency in charge of financial and funding controls. Based on documentation reviewed, there are checks and balances to verify

Alignment with Proposed Data Elements

Internal Controls (A.01, A.02); Audit (A.06); Accounting and Reporting (B.06); Exercise Oversight Responsibility (C.01); Control Activities (C.04)

The State Treasury Service of Ukraine (Treasury), which is directed and coordinated by the Cabinet of Ministers of Ukraine through the Minister of Finance of Ukraine, oversees the controls for funding. The Treasury manages cash balances, loans, receivables, and financial reports on a quarterly basis according to the national accounting standards. It also consolidates all cash balances daily, although it is unclear if consolidation occurred this frequently . Approximately 99% of all expenditure and revenue transactions for the Central Government are executed through the TSA.

For government and education employees, we understand that Treasury verifies the availability of adequate funds in the respective government institution’s account. Treasury is required to verify that payments and withholdings are appropriate. For healthcare employees, each payment request submitted to the NHSU by the PMG contains a budget spending code that allows for tracking. The Treasury enacts

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ex-ante controls (i.e., a review of forecasts) on payment requests and monitors total budget commitments.

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Segregation of Duties

Summary of Analysis The Treasury and MOF serve vital roles in verification of payment requests and review of reports by government agencies for government and school employees. The NHSU serves as a validating role for healthcare employees. The GOU seems to have a robust system in place for segregating duties.

Alignment with Proposed Data Elements

Internal Controls (A.01, A.03); Exercise Oversight Responsibility (C.01);

Enforce Accountability (C.02); Control Activities (C.04)

As described in the 2019 World Bank PEFA, for most procedures, the Verkhovna Rada of Ukraine (Ukraine Parliament) establishes requirements for segregation of duties for accounting and financial reporting, while for some procedures, segregation of duties is defined by the agencies.

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Tranche Cash Management Policies and Procedures

Summary of Analysis

Based on the policies and procedures we reviewed, the GOU standards align with international standards.

Alignment with Proposed Data Elements

Internal Controls (A.01); Budgetary Execution (A.05); Policy Based Fiscal Strategy & Budgeting (B.04);

SUMMARY AND ANALYSIS OF INTERNAL CONTROL AND INTERNAL AUDIT PRACTICES

Management’s Responsibility for Internal Controls

Summary of Analysis Executive leaders of budget institutions are not required to certify (i.e., self-attestation) as to the design and effectiveness of the institution’s internal controls program.

Alignment with Proposed Data Elements

Internal Controls (A.01); Internal Controls (A.02); Exercise Oversight Responsibility (C.01); Enforce Accountability (C.02); Control Activities (C.04); Monitoring Activities (C.05)

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According to the Budget Code of Ukraine, the heads of spending units organize internal control and internal audit and oversee their implementation in their institutions and enterprises belonging to such spending units. Also, according to the Cabinet of Ministry of Ukraine (CMU) Order #1062 “On the key principals of internal control in spending units”, the heads of budget institutions organize, oversee, and are required to implement internal controls in accordance with the legislation and were required until 1 February, to submit to the MOF a report on the state of the organization and implementation of internal controls. The form of this report is established by the MOF by means of a questionnaire provided by the MOF that addresses the five components of internal controls (i.e., control environment, risk assessment, control activities, information and communication, and monitoring activities). Although the form contains certain questions on whether some aspects relevant to the five components of internal controls are introduced in a proper way, no certification/declaration on the overall assessment of the effectiveness of internal controls is provided by the head of the budget institution. The lack of such a certification creates an accountability gap because it makes it difficult to confirm the status of the internal control environment, nor does it establish a mechanism that would press them to address needed changes to the internal control environment (e.g., based on internal control deficiencies).

Internal Audit Capacity

Summary of Analysis We identified issues related to reporting, staffing, competency, and quality assessments, and recommendation follow up that could hinder the effectiveness and reach of internal audit, which is key mechanism for promoting accountability for and transparency of USG funds.

Alignment with Proposed Data Elements

Internal Controls (A.01); Internal Controls (A.02); Audit (A.06); External Scrutiny and Audit (B.07); Issues and Deficiencies (C.06)

In Ukraine, 420 internal audit units exist across government bodies (including territorial branches of government bodies) and other public entities. A key focus area for internal audit units is the evaluation of the functioning of internal controls of each government body or public entity. While conducting their work, internal audit units may report on findings and recommendations that require corrective actions.

GOU has made strides in improving its internal audit capacity and capabilities, and the government has enhanced internal audit’s focus on internal controls. Specifically, in 2019, the GOU shifted the focus of internal audit procedures from checking financial transactions and compliance of activities to risk-based planning and ongoing monitoring of internal control systems. Further, in its 2019 PEFA report, The World Bank concluded that GOU had made demonstrated progress in its internal audit capacity between 2015 and 2019. However, the PEFA report also noted that more work remained to be done even prior to the war—which has likely hindered the GOU’s progress in improving its internal audit capacity.

We identified several issues with the GOU’s internal audit capacity and how the internal audit function is executed in the country. Most notably, we were not able to identify definitive established rules regarding actions to be taken by government bodies or public entities because of the findings and recommendations contained in internal audit reports.

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Another issue relates to how the MOF collects and analyzes the results of each internal audit unit. MOF collects activity data from each internal audit unit, such as the number of auditors, number and types of engagements, number of findings, and status of implementation of recommendations. Based on this information, the MOF prepares an analytical summary—referred to as “Information on the State of Functioning of Internal Audit Units of State Bodies” and “Information on the main trends in the functioning of state internal financial control” — that are submitted to the CMU for consideration in determining which corrective actions should be taken. This summary is also available to the public.

However, there is currently no approved structure regarding the content of these summary reports as well as definitive rules regarding what actions should be taken because of the findings and recommendations.

A third issue deals with staffing in internal audit units. In its fiscal year 2021 report, “Information on the State of Functioning of Internal Audit Units of Sate Bodies” the MOF outlined concerns about the staffing of internal audit units. For example, in 5 public entities, internal audit has not been performed due to a 100 percent vacancy of internal audit positions, often for extended periods of time. Such staffing gaps may hinder the productivity and quality of internal audit.

A fourth issue involves quality control of internal audit activities. Generally, quality control of internal audit is performed via internal and external quality assessments. Effective quality control is critical to providing stakeholders with assurance that the internal audit unit’s work is rigorous, objective, and fact-based. Internally, periodic quality assessments are performed within each internal audit department and organized by the head of internal audit department. However, even when fully staffed some of these units are very small (2-3 persons in some cases) and their ability to conduct assessments—while continuing to perform day-to-day audit work—is limited. One way to mitigate this issue is through peer reviews which involve internal audit units conducting assessments of each other as time and resources allow, particularly for a unit that is experiencing under-staffing.

Regarding external quality assessments of internal audit units, they are performed by the CHU,8 which is an independent unit of the Ministry of Finance. These assessments are supposed to be done no more than once every three years, per MOF Order No. 480. The assessment is carried out in the form of a study. The scope of the external quality assessment includes planning, organization and implementation, and compliance with the requirements of internal audit standards. Based on the results of the assessment, the MOF provides any recommendations for improvement to the head of the government body or public entity; and they are required to inform the MOF on the status of and method for addressing recommendations. However, few external quality assessments have been conducted in recent years. Specifically, 4 (out of a possible 420) external quality assessments were conducted in FY’21 and FY’20 respectively. CHU is planning to increase the number of assessments, with 20 external assessments planned per year as part of the PFM 2022-2025 strategy. At the time of this report, CHU had yet to establish a methodology for determining which units to select for assessment.

8 The Sector for Harmonization of Internal Audit and Financial Control (Central Harmonization Unit) is an internal organizational unit within the MOF tasked with coordinating the establishment and development of public internal financial control system which comprises financial management and control and internal audit.

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Payment Integrity Monitoring

Summary of Analysis Ukraine does not benefit from a law that requires the consistent measurement of improper payments. Such a law would better promote accountability and reduce the risk of fraud, waste, and abuse through enactment of proactive and detective controls around expenditure of budget funds9.

Alignment with Proposed

Internal Controls (A.01, A.03); Fraud Risks (C.03)

In accordance with the Budget Code of Ukraine, there should be controls that enable the effective and efficient management of budget funds throughout all stages of the budget process. The Budget Code, along with other legislation, helps to facilitate:

1) assessment of the management of budget funds (including conducting a state financial audit),

2) correct accounting and reliability of financial and budget reporting,

3) achieving savings of budget funds, their targeted use, efficiency, and effectiveness in the activities of managers of budget funds by making sound management decisions,

4) conducting an analysis and assessment of the state of financial and economic activity of managers of budget funds,

5) preventing violations of budget legislation and protecting the interests of the state and territorial communities in the process of managing state and communal property objects, and

6) reasonableness of budget revenue and expenditure planning.

Currently Ukrainian law does not provide explicit requirements regarding developing and reporting of performance indicators that could demonstrate the extent of how well an agency is succeeding towards effective budget spending. For example, certain improper payments in areas relevant to USAID financing (e.g., payroll to civil servants, spending of educational subventions onto payroll of pedagogical staff, payments under PMG) are regularly identified by different oversight bodies such as internal audit function, State Audit Service of Ukraine (SAS),10 and Supreme Audit Institution (SAI)/ACU. However, information about the rate of improper payments per different budget programs and agencies is not consistently collected, analyzed, reported, and acted upon. This contrasts with the US where the Payment Integrity Information Act of 2019 (PIIA), requires government agencies to identify, report, and reduce improper payments in the government’s programs and activities using implementation guidance in Appendix C of Office of Management and Budget (OMB) Circular A-123.

9 It should be noted that not all improper payments are fraudulent. However, having a law that mandates consistent program-by-program analysis of the expenditure of government funds would enable the GOU to better combat fraud, waste, abuse, and corruption and increase confidence that budget funds are effectively allocated and being used for intended purposes.

10 The SAS and ACU perform different types of audits (compliance, procurements, financial, effectiveness), however in some areas, there may be subject matter jurisdiction overlap of their audits, however Also, the SAS has the right to audit municipal budgets and state budget spending whereas the scope of ACU includes only state budget matters. Another difference is the subordination of these bodies - The SAS is the central executive body directly subordinated and accountable to the GOU via the MOF. The ACU (which may also be commonly referred to as SAI), is independent external financial control body subordinated and accountable to the Parliament of Ukraine.

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SUMMARY AND ANALYSIS OF ACCOUNTING, REPORTING, AND EXTERNAL AUDITING

Accounting Standards and Requirements

Summary of Analysis Ukraine’s national public sector accounting standards are largely consistent with IPSAS international standards, and Ukraine continues to make improvements and implement reforms that bring them closer to international standards, however more work is needed to fully align with

IPSAS.

Alignment with Proposed Data Elements

Accounting and Reporting (B.06)

Ukrainian accounting and financial reporting infrastructure are largely governed by the Law on Accounting and Financial Reporting in Ukraine of 1999 and the Law on Audit of Financial Statements and Auditing of 2017. These laws, passed by the Ukrainian Parliament, give the MOF the authority to establish, among other things, national accounting and financial reporting standards for companies operating within Ukraine. The Law on Accounting and Financial Reporting in Ukraine of 1999 was the beginning of Ukraine’s adoption of national public sector accounting standards consistent with IPSAS and international financial reporting standards. The 1999 law has since been amended to strengthen state and local government adherence to and adoption of international standards, however gaps still exist.

According to The World Bank’s 2019 PEFA performance assessment of Ukraine, as well as the Strategy for Reforming the State Finance Management System for 2022-2025, the country’s national standards are more than 80 percent consistent with the IPSAS established by the International Public Sector Accounting Standards Board (IPSAB) and more work is needed to fully align with international standards.

Accounting, Payment, and Reporting Policies and Procedures

Summary of Analysis Based on our review of documentation provided, the MOF/State Treasury has procedures for accounting, payment, and reporting, and over the last few years has transitioned to a risk-based approach to better understand its risks.

Alignment with Proposed Data Elements

Internal Controls (A.01); Budgetary Execution (A.05); Accounting and Reporting (B.06)

Based on our understanding, the MOF and State Treasury Service have supporting infrastructure for accounting, payment, and reporting with many areas of perceived strength. Financial data integrity is one such area of strength, as noted by the 2019 PEFA assessment. The State Treasury Service, which is directed by the Minister of Finance, manages public sector bank accounts and almost all expenditure and revenue transactions. This information is reconciled at the end of each day and uploaded to a central data warehouse, which allows the treasury to accurately produce daily accounting, operational and management reports. The Treasury checks these reports for accuracy and errors are reported and corrected as authorized by the Chief Accountant. Suspense accounts are managed with a similar level of

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scrutiny to the accounting, operational and management reports. The beneficiaries of funds in suspense accounts are only credited after ensuring the requisites of the beneficiary match those of the treasury. If there are discrepancies between the beneficiary and the treasury, the transfer of funds may be suspended up to four days while the information is reconciled. While the Treasury has a system of controls, until recently they were not risk-based. In December of 2018, the GOU introduced a new approach to auditing based on risk assessments. Based on documentation provided by the Treasury, there is evidence that several risk management activities have been implemented per the December 2018 resolution. The document states that Treasury performs risk identification and assessment and develops control measures aimed at responding to risks identified through this process. The Treasury reports risks identified during risk assessment and identification to management and performs reviews of identified risks in alignment with the 2018 resolution.

Financial Reporting, Ledger and Sub-ledger Reconciliations

Summary of Analysis Financial reporting is an area of strength for the GOU and is generally in line with internationally accepted standards, however more clarity is needed regarding the differences between national and international accounting standards and how they impact current reporting.

Alignment with Proposed Data Elements

Budgetary Execution (A.05)

The Treasury develops monthly and quarterly budget reports for the Ukrainian Parliament, the President, the Cabinet, the Accounting Chamber of Ukraine, and the MOF. These reports, and the transparency surrounding them are areas of strength as noted in the 2019 PEFA. The reports contain information including the revenues, expenditures, lending, financing, public debt, sovereign guaranteed debt and more, and are published on the Treasury’s website. There are clear guidelines established for the timely submission of these monthly and quarterly reports, which the Treasury strictly adheres to.

The Treasury services all budget transactions at the state and local level, allowing for regular monitoring verification, and cross-checking of financial information, leading to accurate reporting. Although all budget reports include planned and actual figures and unpaid commitments, they do not provide detailed information on budget commitments.

Annual reports similarly contain detailed information on assets, liabilities, revenue, expenditures, and cash-flow statements. These annual reports are submitted to the MOF and are publicly presented allowing for a level of transparency. These reports are submitted to the Accounting Chamber no later than three months after the close of the fiscal year. The Treasury utilizes national public sector accounting standards for the development of financial reports are generally in line with internationally accepted accounting standards and are applied diligently in the generation of financial statements. The financial statements developed by the Treasury note the standards that have been used in development, but gaps still exist where the difference between international and national standards have not been enumerated. While financial reporting is a strength, the GOU should focus on aligning national standards with IPSAS international accounting standards.

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External Auditing of Financial Reports

Summary of Analysis The Accounting Chamber of Ukraine (ACU), the state’s Supreme Audit Institution, conducts external audit of financial reports following its own standards, and is currently underway with efforts to align with international standards (INTOSAI) more closely. Currently, the number of external audits that are conducted is low relative to the number of government bodies that could be audited. Additionally, the system of monitoring of ACU’s implementation of recommendation should be further defined and strengthened.

Alignment with Proposed

External Scrutiny and Audit (B.07)

Based on our understanding, the ACU, which is the Supreme Audit Institution and the highest body of independent external financial control (audit), is an independent institution that conducts external audit of GOU financial statements. The independence of the ACU is enshrined by the procedure established by the Constitution. External financial statement audits are prepared based on national regulations (standards) of accounting in the public sector. However, for fiscal year 2021, the ACU conducted only four external audits of financial statements (in the previous fiscal year, they only conducted two external audits). The low number of such audits is not sufficient given the number of state bodies in Ukraine - 20 ministries, and more than 50 other executive bodies, including agencies, services, inspections etc.

Based on audit results, the ACU develops proposals and recommendations on measures to be taken to address weaknesses and shortcomings. Once the auditee receives the recommendations from the ACU, the auditee must inform the ACU on the measures taken to address findings within one month. If the auditee has not informed the ACU about actions taken, or if the ACU considers the actions taken by the auditee to be inadequate, the ACU is required to inform the relevant authorities. Also, the Verkhovna Rada must be informed about the status of audit findings within 45 days from the date of receipt by the ACU of information from the auditees.

There is no separate procedure for monitoring the implementation of audit recommendations of the ACU (e.g., a database like TeamCentral used by some US Inspector General Offices). At the same time, certain steps on improving the system of monitoring the implementation of the recommendations of the ACU and informing stakeholders about its results for appropriate response is being addressed by the Development Strategy of the ACU Chamber for 2019-2024.

SUMMARY AND ANALYSIS OF HUMAN RESOURCES AND PAYROLL

Human Resources Management

Summary of Analysis The GOU has prioritized public administration reform since 2016 with numerous accomplishments that strengthen systems related to human resources; however, further improvements are needed to attract qualified

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civil service candidates, regulate variable / flexible pay, and provide for the training of civil servants.

Alignment with Proposed Data Elements

Human Resources and Payroll (A.09) and (A.10); Information Technology (A.12)

The GOU, led by the Public Administration Reform Coordination Board11, implemented the Public Administration Reform Strategy 2016-2020 under the EU-funded programme Support to Comprehensive Reform of Public Administration in Ukraine. The strategy accomplished several achievements related to human resources governance, including approving uniform ministry structure criteria with clearly divided internal functions and extending a web portal for vacancies (career.gov.ua) to all categories of civil service positions.

The Support for Improvement of Governance and Management Programme (SIGMA) assessment found that Ukraine demonstrates alignment with many European principles, especially the comprehensiveness and clarity of legislation framework for civil service, separation between civil service posts, political posts, and other jobs in public institutions. While the procedure for competitive recruitment in civil service is generally in compliance with the European standards, further improvements are needed, including increasing the attraction of qualified and skilled candidates. According to the SIGMA opinion in March 2021, Ukraine had fully implemented 18% of Baseline Assessment recommendations, with 66% in process of implementation and 16% not started.

The Cabinet of Ministers approved the Concept of Civil Service Salary Reform by Ordinance No. 622 in May 2020, but implementation remains the most challenging issue. The mechanism for salary calculation continues to be non-transparent due to unregulated and unlimited salary add-ons and the share of flexible/variable pay (e.g., bonuses) is high relative to EU norms. According to the SIGMA, variable pay is distributed to most staff based on criteria other than performance. This increases the risk of arbitrary allocation by managers, resulting in an inefficient and/or non-compliant utilization of public resources. In its Public Administration Reform Strategy 2022 – 2025, the GOU has identified certain steps to mitigate this risk. Additionally, a single integrated HRMIS across government has not been fully built and rolled out.12 Implementation of civil service job classification and salary reform and further deployment of HRMIS in public institutions are key for further progress and meeting the European principles of public administration.

Performance management processes in civil service were introduced in 2018 and annual performance appraisal of civil servants continues to occur based on pre-identified tasks and key performance indicators. During the previous phase of public administration reform, a series of measures were introduced to facilitate planning and implementation of civil service training, such as training needs assessment, competition between state and non-state education providers, and establishment of the Ukrainian School of Governance. Civil service training system financing remains insufficient; therefore, 11 The Public Administration Reform Coordination Board was a temporary advisory body of the Cabinet of Ministers of Ukraine, established to ensure the coordination of measures to develop projects and implement the State Administration Reform Strategy. Its main tasks were to (1) provide assistance in the coordination of executive action related to the development of projects and the implementation of strategies, as well as the implementation of action plans for their implementation, (2) conduct an analysis of draft legislative acts aimed at creating a legal framework for reforming public administration, and (3) prepare public administration reform proposals.

12 The HRMIS pilot was launched in 19 central executive bodies and now contains data on over 20,000 employees.

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the system does not deliver on-time training on future priorities in the development of public administration.

Low effectiveness of planning activity of central executive bodies remains a challenge, especially in the effort to focus on results rather than processes. The main drivers are outdated state planning and accountability legislation, as well as suboptimal coordination with the public financial management reform with regards to planning and accountability of central executive bodies in the State Budget drafting and execution process.

Conduct and Anti-Corruption

Summary of Analysis Ukraine has made progress on implementing anti-corruption reforms.

Several regulations now address code of conduct guidance and requirements for all civil servants related to anti-corruption, including political neutrality, information protection, priority of interest, impartiality, and ethical standards; however, there is an opportunity to strengthen the code of conduct enforcement and anti-corruption, including appointment of senior leaders for anti-corruption strategies and full implementation of the newly passed National Anti-Corruption Strategy.

Alignment with Proposed Data Elements

Internal Controls (A.03); Human Resources and Payroll (A.09) and (A.10);

Fraud (C.03)

The GOU has a body of laws that govern the conduct for civil servants, including Chapter VI of the Law of Ukraine “On prevention of corruption” which documents mandatory rules and principles of conduct for a wide range of civil servants included in the scope of this law as determined by the National Civil Service Agency of Ukraine (NCSAU), Article 22 of the Law of Ukraine “About civil service” which establishes a requirement for annual performance evaluations of civil servants, as well as compliance requirements for the rules of ethical behavior, and other regulations and resolutions which cover training and evaluation

Transparency International gave Ukraine a score of 32 (out of 100 points) in their 2021 Corruption Perceptions Index. The low integrity scores are the result of a combination of multiple factors and inconsistencies. For example, while Ukraine has created multiple anti-corruption institutions and taken steps to improve public procurement, it has demonstrated inconsistency in its commitment to anti-corruption in other area such as the length of time it took to appoint a new head of Specialized Anti- Corruption Prosecutors Office (SAPO), and the appointment of National Anti-Corruption Bureau of Ukraine (NABU) leader. Additionally, the National Agency for Corruption Prevention Ukraine (NACP) National Anti-Corruption Strategy was pending in Parliament for two years and only recently adopted in June 2022 due to the EU accession agenda.

The GOU’s inconsistent messaging and actions on anti-corruption, the increased risk of corruption caused by the flow of humanitarian aid, coupled with other aforementioned areas for improvement (e.g., payment integrity monitoring and regulating civil servant variable pay), indicates there are opportunities to strengthen anti-corruption enforcement and evaluation.

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Payroll Infrastructure

Summary of Analysis Every component of teacher salary, including allowances and add-ons, are regulated. According to the Recovery Plan of Ukraine published in August 2022, MoES plans to implement adjustments to the payroll calculation approach for educational employees. An in-depth analytical review of the current system of remuneration of pedagogical workers and the existing pedagogical activity of the teacher is currently in process.

The strategic objective of the MoES Automated Information Complex of Educational Management (AICEM) is to provide information support for management decisions to improve the quality of education, manage funds and monitor cost-effectiveness, and improve the competitiveness of educational institutions in general. It will be important to understand what controls exist within AICEM, including how data are entered and verified, to properly assess the impact of changes in payroll infrastructure.

Alignment with Proposed

Human Resources and Payroll: A.09, A.10; Information Technology (A.12)

Salary calculation (e.g., rates, allowances, adjustments) and reporting is also described in law. Salary is a separate budget category with a specific budget code, making it clearly identifiable within budget reports and by the Treasury when proceeding with the payments.

The amount of the transfer to each local budget is determined by a formula13 that considers the number of students, type of school, class size and other variables calculated using data entered by education institutions into the MoES AICEM system. To ensure control over state and local budget funds expenditures, the Treasury implements controls in the process of paying the budget spending units bills.

MoES currently uses a complex system of remuneration for teaching staff that does not motivate professional development nor encourage the involvement of young teachers. A new payment system was developed to increase the weight of the rate salary (position salary) and radically reduce the number of additional payments and allowances to be more aligned with EU practices. The new salary system for teaching staff will be extended to all types of general secondary education institutions with periodic review planned from January 2026 through December 2032 with appropriate changes to the concept and/or regulation incorporated as identified.

GOU is working towards roll-out of a centralized HR management IT system, where salary rates, payments schemes, and title position are collected and managed centrally. The HRMIS pilot was launched in 19 central executive bodies in 2021 and further roll-out is planned as part of Public Administration Reform for FY22-FY25.

13 Approved by the Resolution of the Cabinet of Ministers of Ukraine of December 27, 2017.

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Integration of Payroll and Personnel Records

Summary of Analysis Integration of payroll and personnel records remains a challenge (scoring a D on the most recent World Bank PEFA assessment) as information on manning tables, personnel and labor remuneration is accounted for separately.

Alignment with Proposed Data Elements

Audit (A.06 and A.07); Human Resources and Payroll (A.10); Information Technology (A.12)

Each GOU agency is responsible for maintaining its own payroll accounting system. The HR unit within each agency maintains records of employees and the accounting department manages all payments to employees in accordance with staffing tables. Information about the payroll is recorded in a computer accounting system and information on personnel can be accounted for both manually and in a separate computer system. Information on manning tables is recorded manually. The GOU acknowledges that the lack of a HRMIS is creating a decentralized approach to HR management. The degree of decentralization makes it difficult to calculate payroll information and increases the risk of payroll irregularities going undetected.14 However, the GOU is taking actions towards centralizing payroll data and accounting, including the implementation of HRMIS to automate the human resource management processes, including payroll management. As of September 1, 2022, there were 91 government bodies already connected to the system.

The State Audit Service (SAS) and the ACU, via regular inspections, monitor the eligibility, timeliness, and completeness of salary payments. In 2018, there were UAH 110.9 total revealed violations out of 690 inspected entities.