DRAFT- Performance Audit of

the Finnish Development Aid

to Kenya
Annex x –

Ministry for Foreign Affairs of Finland

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 Performance Audit of the Finnish Development Aid to Kenya
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Glossary

CRM County Resident Monitors

CTA Chief Technical Advisor
EUR euro
GoK The Government of Kenya
GoF The Government of Finland
J6P Joint 6 Programme
M&E Monitoring and Evaluation
MFA The Ministry for Foreign Affairs of Finland
PMT Project Management Team
RFM Result Frame Work
RBM Results Based Management
SA Service Agents
SvB The Supervisory Board
TA Technical Assistance
ToR Terms of Reference
WSTF Water Services Trust Fund

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Contents
1 Introduction 1

1.1 Scope and Execution 1

1.2 List of Interviewed Persons 2

2 Executive Summary 3

3 Background 5

4 Objectives, Indicators and Results Based Management 6

4.1 Performance and Results 6

4.2 Results Based Management 7

4.3 Sustainability 9

4.4 Consistency with Country Strategy 9

5 Financial Management and Internal Controls 10

5.1 Financial Management 10

5.2 Internal Control 11

6 Risk Management 15

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1 Introduction
1.1 Scope and Execution
Scope

The Assignment is based on the Framework Agreement and the Terms of Reference (ToR)
between the Ministry of Foreign Affairs of Finland (MFA) and KPMG Oy Ab. The objective of
the Assignment is to get an overall picture of the implementation of the projects and
programmes of the Country Strategy in Kenya. The target is to assess internal controls, risk
management and the results-based management. The complementarity of the instruments in
relation to the Country Strategy is also assessed.

The complete Assignment is conducted through reviews of the different instruments of the
Finnish development cooperation in Kenya including bilateral programmes and civil society
projects that are significant to the MFA’s development cooperation in Kenya. This report has
been prepared based on the work conducted on one of the selected projects/programmes and
is part of the complete Assignment.

This report covers the Support to Equitable Access to Quality Water, Basic Sanitation and
Enhanced Water Resources Management for the Underserved Communities in Rural Kenya,
J6P (the Project). The review focuses on following;

- how Kenyan Country strategy is aligned with the Project,

- how indicators have been prepared and are they in line with the indicators stipulated in
the Country Strategy.
- how program indicators have been used in country strategy programming.
- Result Based Reporting (RBM)
- how RBM have been included in the implementation

Additionally it is reviewed whether there are adequate internal controls in place, is risk
management adequate and how the management structure of the implementing organization
is organised. The review also assesses how MFA and the Embassy of Nairobi follows and
monitors the Project.

Execution

The Assignment was conducted by KPMG Finland. Anders Lundin, Authorised Public
Accountant and Kati Nikunen, Authorised Public Accountant were responsible for the overall
Assignment. The field work was carried out by KPMG Finland. The Assignment was performed
in good co-operation with all the parties involved. We would like to express our appreciation
for all parties involved.

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The report presents the main observations and risks identified during the Assignment as well
as recommendations to improve the management procedures. We have given all the
observations a risk & significance classification and a recommendation on the basis of the
prioritisation. Risks have been classified into four categories:

Critical Risk Corrective actions are required immediately.

Significant Risk Corrective actions are required as soon as possible.

Moderate Risk Correcting measures are to be carried out within a reasonable time.

Minor Risk Corrective actions are to be taken simultaneously with other relevant measures.

According to the agreement between the MFA and KPMG, the final audit report is for the MFA’s
internal use only.

1.2 List of Interviewed Persons

Name Position Organisation

Angelina Were Senior Finance Advisor WSTF

Willis Ombai Investments and Programmes Manager WSTF
Edvin Korir Internal Audit and Risk Management Manager WSTF
Wesley Chelule J6P Programme Officer WSTF
Samuel Gitau Finance Manager WSTF
Isaac Kega Monitoring and Evaluation Manager WSTF
Priscilla Kinyari Rural Investments Programme Manager WSTF
Hugo Oosterkamp Chief Technical Advisor FCG
Mirja Kattelus JPO FCG
James Murage Technical Advisor FCG
Pekka Muuttomaa Councellor Embassy of Nairobi
Kamau Waithaka Project Coordinator Embassy of Nairobi

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2 Executive Summary
Results and Consistency with Country Strategy

The Joint 6 Programme (J6P) is funded by the governments of Kenya, Finland and Sweden.
The J6P aims to support water and sanitation projects in six counties in Kenya. The J6P is
managed and implemented by the Kenyan Water Sector Trust Fund (WSTF) established under
the Ministry of Water and Irrigation. WSTF provides funding to county level organisations and
monitors the progress of the water and sanitation projects. The J6P is one of the programmes
within WSTF and they are implementing similar projects funded by several donors. Annual
funding has increased rapidly and WSTF has not been able to finalize the water and sanitation
schemes (projects) as planned and there have been significant delays.

WSTF’s has challenges to report the J6P’s results adequately. Results Framework presented
in WSTF’s annual reporting retains WSTF’s overall results, and J6P part can’t be extracted
from the framework. In the annual report 2016-2017, the results of J6P were presented in a
follow-up of a work plan and a short narrative of activities conducted was provided. At the
moment WSTF’s result framework presented in the annual reporting can’t be directly used for
the Country Strategy reporting, but the relevant information needs to be gathered via other
communication with WSTF.

Financial Management

WSTF uses SAP software for accounting. It facilitates adequate financial reporting and allows
for project accounting and for example J6P specific reports can be generated. The system
does not however enable budget follow-up in the system. Currently the activities are planned
annually and disclosed in the annual work plans however the activities are not followed in the
accounting system. In general, adequate financial management processes are in place.
However KPMG observed that receive notes have not been documented in the accounting
documentation. It is a great importance to require signed receive notes from all equipment
distributed to counties to ensure they are in possession of WSTF and accounted appropriately.

Internal Control and Risk Management

WSTF has number of frameworks (including a structure and polices) complemented by a range
of adequate internal controls (including segregation of duties, authorisations and reviews).
However, since WSTF provides significant amount of funding to third parties, close monitoring
to the funds provided to third parties in county level is required. We conclude that mainly the
adequate internal controls are in place. However, the cost monitoring for the county level
projects need to be improved either by requiring more detailed financial reporting or by
monitoring the project expenses during field visits more closely. The challenges in county level
accounting have been identified also by the WSTF internal audits.

According to KPMG review, WSTF has adequate framework and structure established for
managing risks. The internal audit unit supports the risk management process through audits
conducted in WSTF and within third parties. However, the internal audit reports conducted for
the water projects should be improved, and add the amount of funding from WSTF. The internal
audit reports should also be dated to enable adequate follow up and to properly support the
risk management process. External auditor is also comprehensively used for donor funded
projects. According to our review, even though the risks related to inadequate capacity and the

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likelihood of ineligible costs in the projects are identified in the risk assessment, WSTF has not
addressed adequate capacity assessment and capacity strengthening efforts to third parties.

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3 Background
The project

Water Sector Trust Fund (WSTF) is a Kenyan trust, founded in 2004 under the Ministry of
Water and Irrigation. WSTF allocates funds to the water and sanitation projects in underserved
rural and urban areas. At the moment WSTF is implementing six programs financed by
different donors. The governments of Finland and Sweden are jointly supporting projects in six
counties through J6P Program (J6P). The support to the J6P projects is channeled through
WSTF management systems and WSTF has the full responsibility for implementation,
reporting and monitoring of the projects.

The total budget of J6P accumulates to 16.9 million euro from which Finland’s contribution is
7.0 million euro, Sweden’s 6.5 million euro and Kenyan Government 3.4 million euro. 3 million
euro of the Finnish contribution is for providing technical assistance (TA). The TA was procured
from Orgut but later it was merged to FCG. Programme period is December 2014 – December
2018.

The aim of J6P is to support six rural counties in Kenya to enhance their capacity for improved
water resource management and provision of water supply and sanitation services. The project
works on the five outcome areas, including 1) county capacity enhancement 2) improved
management of water resources 3) sustainable access to water services 4) improved access
to sanitation services and 5) WSTF’s capacity enhanced.

WSTF’s implementing partners include water service companies, water resource user
associations and water utilities. Besides water and sanitation services, WSTF supports also
water resource management programs, which consist activities to conserve water catchment
areas. The implementing partners are in charge of the construction and deployment of the
water and sanitation services, while the main role of WSTF is to be the investor and the
monitoring agent.

Allocation of funds to the six counties are actualized in collaboration with the counties. J6P
funded projects’ design and procurements are managed at the county level, but the tenders
are reviewed and accepted by the WSTF. Monitoring is conducted by County Resident
Monitors (CRM), who are required to report monthly to the team leader of J6P. WSTF HQ
monitors the projects through financial reporting, and the disbursements are transferred to
projects´ designated bank accounts based on the progress made.

MFA has contracted TA consultant team to provide technical support to WSTF in

implementation of the J6P. Initial TA team was fully replaced with a new team in 2016.
According to interviews, the TA team was not delivering as expected and there were
weaknesses in team’s internal cooperation. Once the new TA team started, cooperation with
the WSTF has improved, however there are still challenges to get the TA resource fully
incorporated in the WSTF management and monitoring processes. Interviews indicate that
the TA team have been dismissed for instance in reporting process and they have not been
able to adequately provide support or to develop the monitoring processes in WSTF.

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4 Objectives, Indicators and Results

Based Management
4.1 Performance and Results
Performance and Monitoring

J6P has five Key Results Areas, which concentrates on county capacity development,
improved management of water resources, sustainable access to water services, sustainable
access to sanitation services and capacity development of WSTF. Majority of Finland’s aid (63
%) is allocated to the water service providers and 5 % is allocated for the sanitation service
providers. Currently 27 water projects, 25 sanitation projects and 10 water resource
management projects are being funded within the J6P. Four water projects have been
suspended, of which three due to the improper procurement and one due to jurisdiction issues
related to the new county structure.

J6P has been suffering delays. At the time of our review, according to information received
from WSTF, five projects are completed and three of them are running and serving water.
WSTF estimates, that the target for the population reached (300,000) can be reached if all the
27 water projects are to be completed in time.

The focal contact point for the ongoing projects are the County Resident Monitors (CRM’s).
During the construction phase, monthly reporting from CRM’s is required, although this is not
consistent in all the cases. WSTF has a reporting template for monthly reporting, but the
template allows only generic activity-based reporting, thus more in detail reporting happens
via email and alternative reporting sheets. Also technical monitoring by the Service Agents
(SA) team is conducted monthly. Output -type of information is not retrieved from the ongoing
projects (eg. number of beneficiaries), but some output type of results are reported by CRM
when the project is certified as completed.

Other monitoring instruments include WSTF´s operation monitoring that takes place yearly and
engages most staff in WSTF team for couple of weeks. The first operations monitoring was
conducted in 2016, and it covered all the projects funded by WSTF during 2012-2017. In 2017
the projects were monitored partly. Some extra monitoring activities are conducted by M&E
and programme officers by request, and the TA team conducts some individual monitoring
assignments. Monthly monitoring is conducted by the aforementioned CRM’s and SA team.
Despite of the many layers of the monitoring activities, there are deficiencies in WSTF’s annual
reporting and indicator building, and during our assignment WSTF had problems in describing
the main results of the J6P projects, for instance people benefiting from the water and
sanitation projects. That is, the monitoring activities are not necessarily contributing to the
Results Based Management of WSTF. At the moment monitoring activities make up to 8 % of
the total costs of the project.

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Observations, Risks and Recommendations

Observation WSTF reporting is based on the monitoring of the tasks and activities, and the
data gathered doesn’t always contribute to the outputs and outcomes.

Risk The risk for RBM is that unnecessary data is produced and, despite the reporting
requirements, actual data of the progress on output and outcome level is not
retrieved. Moderate

Recommendation Reporting structure should be revised and simplified by setting project-specific

targets and reporting should cover only the relevant targets of the project. Project
dashboards could be created and the data should be clearly available to the
WSTF staff.

Observation We identified five layers of monitoring activities conducted by different agents

(CRM’s, SA-team, monitors conducted by the M&E and programme staff based
on requests, TA team, annual operations monitoring). There is no
comprehensive schedule for these monitoring activities.

Risk Monitoring is not cost effective and is time consuming, and there is a possibility
for overlapping/gaps in the monitoring. Moderate

Recommendation Currently, both the CRM’s and the SA-team monitor the ongoing projects and
report on the technical progress, which may cause some overlapping in the
reporting. In the future, WSTF could consider merging some monitoring groups.
Setting clear targets for the monitoring activities and defining what kind of
information is crucial to receive from the projects would clarify the monitoring
framework.

4.2 Results Based Management

MFA applies Results Based Management (RBM) in all phases of its development projects. The
guiding principles for RBM advice that the project results targets are based on national
development priorities and ownership, the target-setting is clear at all results levels, the results
information is based on credible information and it’s used to enhance learning, managing and
accountability. The results-oriented culture is promoted through easy access to results data
and project’s short-term results are linked to the long-term changes.
In J6P Programme Document, Results Framework for the aforementioned five key results
areas have been presented. According to the information gathered during our review, WSTF
doesn’t use the Results Framework for the J6P results reporting, but the framework is used for
the reporting of the overall results of WSTF projects. At the time we conducted our review, J6P

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projects didn’t contribute to the results presented in the framework. Thus the Results
Framework is not in use for J6P programme.
Setting the valid indicators has also been a challenge. Result Framework includes almost 60
indicators, including some indicators that are not valid anymore due to institutional and legal
issues or are not actively advanced (in this case GESI indicators). Definitions for basic terms
such as “access to water” are yet to be defined, which causes problems when interpreting the
results. In many cases, baseline data hasn’t been available, and there is no knowledge about
the current service level in the counties.
At the moment, J6P results are presented as a follow-up on work plan and in a narrative form,
and these instruments include only a list of activities conducted, not output or outcome -level
results information. KPMG identified deviations of the results of the most important figures for
the J6P programme (indicator for the people gaining access to water), receiving some
contradictory information between different WSTF agents when asked for an estimation for the
indicator in question. At the moment, the annual report doesn’t contribute to the indicator, and
the information of the results needs to be gathered elsewhere.

Observation J6P results are not organized within the Results Framework provided in PD. The
narrative reporting on the results is weak, and the work plan presented provides
only activity-based information.

Risk In the scope of annual reporting, donors and stakeholders can’t monitor J6P and
the progress made. Significant

Recommendation In order to gather some relevant results from WSTF, Embassy could
communicate the most important indicators to WSTF and demand for a
comprehensive explanation of the results and on how the indicators have been
formed and data collected.

Observation There is no clear understanding on what type of data is included to the indicators.
Indicators with different values are provided.

Risk Indicators are not unambiguous. Moderate

Recommendation Basic definitions for indicator values and clear instructions what to include in the
indicators needs to be formed.

Training in Results Based Management

Interviews indicate that some trainings on the Results Based Management has been provided
to WSTF staff. Since almost all of the WSTF staff are conducting the annual operations
monitoring tasks, it would be crucial to provide adequate training of the results based
management and make the monitoring framework more clear and simple.
.

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4.3 Sustainability

WSTF as an organization can be considered sustainable. WSTF have many donors, and it is
supported bythe Government of Kenya. WSTF is about to transform to an investment fund,
which is going to invest to the water projects based on the performance of the water utilities.
WSTF has been proactive in fundraising and the new CEO has highlighted the fundraising as
their key objective. However, at the moment WSTF is dependent on donor funding and private
funding sources are limited.

WSTF monitors the sustainability of the projects when conducting the annual operations
monitoring task, where its objectives include ensuring that five years after commissioning 95%
of all infrastructures are still fully operational and in good technical and operational condition.
Within the monitoring of the water and sanitation utilities the operational status is checked and
reported. Nevertheless, a clear follow up and plan for uptaking correctional tasks is lacking for
the non-operational units.

The lack of capacity in the county level, especially in the water utilities (WUs) that are CBO’s
in practice, causes challenges to sustainability. The issue was raised also in the J6P
Management Review report from 2017. According to the J6P Management Review report, the
provision of capacity building for CBO-run schemes needs to be arranged urgently, given that
the programme is due to end in December 2018.

The management structure and decision making in WSTF is highly centralised. According to
our review, this reflects the fact that WSTF operating structures have been established to follow
governmental organisations structures with centralised decision making and little delegation to
lower level management. This has partly delayed processes. Also at county level, very limited
power has been given to County Resident Monitors which has caused heavy two-way reporting.

4.4 Consistency with Country Strategy

The results targets set for the J6P programme are aligned with the Kenyan Country Strategy.
Water and sanitation projects constructed within the J6P will contribute to Country Strategy
targets. At the moment GESI-related targets have been all postponed and no advancements
are being reported. Reaching of sanitation targets will depend of the behavioral changes of the
households and the villages, and these issues will be promoted together with devolved health
sector.
The challenge is, that at the moment the reporting of the J6P Result Fremwork doesn’t
contribute to the Country Strategy but the results need to be drawn elsewhere. WSTF doesn’t
report of J6P programme with indicators that would be compatible with Country Strategy’s
indicators. Compatible indicators were initially planned, but since the Results Framework is
utilized for the overall results and J6P part can’t be extracted, there is no possibility to track
J6P results from annual reporting. Additionally, the information provided in the Kenyan Country
Strategy is not systematical. In 2017 Result Framework for the result 1.2 “Number of people
(disaggregated by sex) provided with safe and sustainable water supply” was reported 140,000.
KPMG was provided calculation from WSTF that indicate 31,373.

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5 Financial Management and Internal

Controls
5.1 Financial Management
The J6 Progamme is managed within FSTF financial systems. Currently there are 6 staff
members working in the daily financial management team at WSTF. The Finance Manager
acts as the team leader. Financial guidance is stipulated in the WSTF Finance Policy and
Procedures Manual dated June 2016. The accounts are kept in the SAP system. The system
enables project accounting and recognizing each project expenses separately. The funds
received from the governments of Finland and Sweden to J6P are channeled through separate
bank accounts. Fixed assets register is adequately maintained, however we observed there is
no adequate receiving notes attached in the accounting documentation of the assets handed
over to counties. The funds disbursed to the projects (third-parties) are recorded as receivables
and expensed against financial reporting.

Financial Reporting to Donor

The financial reporting of J6P is done from the information received from the SAP accounting
system. The financial reporting is derived from the accounting, however we observed
expenses are not reported against annual budgets and the system doesn’t allow comparison
between budget and realised costs. Budget follow-up from the beginning showing the
remaining balance is not presented in the financial reporting, neither the annual actual
expenses per activity are not reported. In the Annual Report only the work plan for the particular
year indicating budget for each activity is presented, but without a cost follow-up.

Flow of Funds

MFA submits the Finnish contribution to the Kenyan Treasure in euros where they are
transferred to WSTF Finland designated bank account (Ksh). Most of the funds are further
disbursed to water and sanitation projects in county level. In 2016/2017, approximately 74 %
from the total expenditure was disbursed to counties. Since most of the funding is provided to
third parties, the financial reporting and cost monitoring should be emphasized in county level.

Observations, Risks and Recommendations

Observation When purchased fixed assets, there is no receiving notes attached to accounting
documentation.

Risk If receiving notes are not required for computers, mobile phones and other
equipment provided to County Resident Monitors, there is a risk to ensure the
equipment is received as planned and that equipment is occupied and
possessed by WSTF. Significant

Recommendation In all purchases, receiving notes must be required and attached to the accounting
documentation to ensure they are received by WSTF. The particular equipment
should be added to fixed asset register only after receiving note has been
received.

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Observation In the annual reports provided to MFA, budget follow up and the remaining
balance of the total J6P is not presented.

Risk When expenses are not reported against approved budget, there is an
associated risk to follow whether funds have been used according to the budget.
This hinders monitoring of MFA. Moderate
Recommendation PSG / Embassy should follow that project reporting includes annual budget
comparisons and total budget follow up from the beginning should be presented.

Observation Annual work plan and budget is presented in the annual report, however actual
realisation of the budget has not been presented in the work plan.

Risk If actual expenditure is not reported against the annual work plan and budgetin
the work plan, MFA cannot assess whether activities have been implemented as
planned. Moderate
Recommendation MFA should require that in the work plans the actual expenses per particular
activity are reported against approved activity plan and budget.

WSTF should establish a system to follow expenditures on activity level.

5.2 Internal Control

Financial guidance is stipulated in WSTF Finance Policy and Procedures Manual dated June
2016 and in the policies for procurements in the Procurement Manual. The organization has
also adequate operating manuals for rural investments. According to our review, the above
mentioned policies give adequate framework for internal controls. The organization has
adequate segregation of duties stipulated in the policies.

There have, however, been indications of challenges related to finance management and
accounting systems. DANIDA is currently providing a financial consultant working in the WSTF
to identify weaknesses in their financial management and support to improve the identified
weaknesses.

Most of the programme funding is channeled to county level organisations. In 2016/2017

approximately 74% was provided to water,sanitation and water resource improvement projects
at county level and 26% was incurred by WSTF. The funds are disbursed to counties against
approved project proposal and payment request. The proposal process is to ensure that the
project have been adequately planned and that the technical design is viable. The projects
report their expenditures to WSTF simultaneously with short progress reporting. In the
expenditure form is indicated incurred expenditures against nine budget lines. According to
our review, the expenditure form is not very detail and informative, and taken into consideration

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that the financial management capacity in counties is weak, WSTF should establish a system
to ensure and monitor that the expenditures are properly accounted for.

Internal Audit

WSTF has an internal audit unit. In the unit is working four persons including the Head of
Internal Audit. All of the auditors are financial specialists. Interviews indicate that the unit is
recruiting one internal auditor with water technical background.

The internal audit unit operates based on the annual audit plan. The Audit and Risk Committee
approves the annual audit plans. Biggest risk that is recognized relates to county government
counter funding and challenge to monitor costs in the counties. According to interviews,
auditors visit frequently in the counties. Their work includes reviewing the project accounts as
well as technical progress of the projects.

According to the internal auditor’s reports, the most common challenges in the counties relate
to inadequate accounting and bookkeeping for project funds. This observation has been done
recurrently. We observed that in the internal auditor’s reports, the amounts paid to particular
organisation has not been indicated or the expenses reported to WSTF. Also there is no
reconciliations done for WSTF and County funding designated bank accounts. All internal audit
reports were not dated which hinders the follow up of the audit and do not properly enable
audits to support the risk management.

Programme Audits

According to the Agreement between MFA and WSTF, the J6P will be separately annually
audited. The ToR for the audit will be approved by the Embassy/MFA. The Agreement also
stipulates right to conduct additional audits such as procurement audits or forensic audits.

PwC has audited annually J6P Fund Account Statement (FAS). The FAS is included in the
annual reporting provided to MFA. We observed that there are small differences in the FAS
provided to MFA and in the FAS indicated in the auditor’s report.

We observed that J6P is included in the joint annual Harmonized Financial Audit of WSTF
Rural Investments. The Rural Investment audit is conducted by PwC and it includes visits to
county level. The report issued by PwC on 7 March, 2018 includes projects that are funded by
all donors. Government of Finland funded projects are from three counties and includes eleven
projects. In the audit report is presented detailed findings from each project.

Statutory Audits

WSTF financial statements are annually audited. For the financial year 2015/2016 and
2016/2017, the audit was conducted by PwC. In 2015/2016 PwC provided qualified opinion.
The auditor made following observations in 2015/2016 audit which are the reasons for the
qualified opinion:

• Receivables, Kshs 572,000,871 (approximately 4.5 million euro) included Kshs

1,776, 342 receivables from staff from which Kshs 329,169 (appr. 1300 euro) from
ex-staff and the recoverability of those is unlikely.

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• Receivables included long outstanding advances to projects which have become to

an end. The recoverability of the advances is doubtful. According to the auditor,
recoverability of the receivables could not be ascertained.
• Auditor could not ascertain correctness of non-current assets since in the fixed asset
register included items that have been written-off several years ago. Also in
depreciation has not been followed as policy stated in the financial statements.
• The auditor could not ascertain the accuracy and completeness of cash and cash
equivalent balance at 30 June 2016. Kshs 2,213,520 have been kept in bank
account for over three years without earning interest.

In 2016/2017, the auditor provided unqualified opinion. However, the audit indicated there were
questioned costs from current and past audits amounting to 25,691,157 Ksh (approximately
200,000 euro). In the 2016/2017 audit report is presented follow-up (annex 2) for the previous
year’s observations. Status of the previous observations is, according to our opinion,
adequately followed.

Observations, Risks and Recommendations

Havainto In the external auditor’s reports is presented significant observations that have
not been adequately followed.

Riski If auditor’s observations and recommendations are not followed up

systematically, there is a risk that WSTF will bear the costs. Significant

Suositus ALI-20:n and Nairobi Embassy should follow that auditor’s recommendations are
appropriately and followed without delays by WSTF.

Observation The project’s financial reporting does not provide adequate information for cost
monitoring for WSTF. Reporting indicates only expenditures against budget
lines. Through reporting or monitoring WSTF cannot ensure the reporting is
derived from the accounting.

Risk If project costs in the counties are not closely monitored, there is an associated
risk that ineligible costs incur. Significant

Recommendation WSTF should establish a system to adequately ensure the project costs have
been incurred and properly accounted for before writing them off from receivable
account. WSTF should, for example, require projects to provide ledger and/or
supporting documentation for the costs that are reported.

Observation The Internal Audit reports do not indicated the amount of expenditures under
audit to be verified and difference that have not been adequately accounted for.

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Risk If internal audit reports do not indicate the amount to be verified, there risk to fail
later on follow up of the accounts. Significant

Recommendation Internal audit report should indicate the amount of expenditures under audit to
be verified and difference that have not been adequately accounted for.

Observation Internal Auditors reports do not indicate the time when audit was conducted.

Risk If audit reports are not dated, they do not adequately support WSTF risk
management process. Significant

Recommendation In the internal audit reports should be indicated the time when audit was
conducted.

Observation The FAS included in the annual report 2016/2017 had slightly different figures
that the FAS that was audited.

Risk If the reported figures do not align with the audited figures, there is a risk that
reporting has errors. Moderate

Recommendation WSTF should report to MFA the J6P Fund Accountability Statement that has
been audited.

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6 Risk Management

MFA guidance for risk management

According to the MFA Results Based Management (RBM manual) manual, to minimize the
likelihood or impact of the risks, risk management includes i) identification of risks, ii)
assessment of the level, likelihood and impact of risks, and iii) development of risk response
measures to be applied to act on the risks that have been identified and, iv) risk monitoring
and reporting. According to the manual, an initial risk analysis, consisting of identification and
assessment of risks, is carried out at the identification phase. After identification, the
formulation consultant should include risk analysis in the project document. The risks are
analyzed and updated during the formulation process. The RBM manual indicate the financial
capacity and governance structures of the proposed partner organisations should be part of
the risk assessment.

As part of the risk management, during the identification phase, the identification team will
assess whether the partner organisation primarily responsible for project implementation has
the necessary systems and capacities (e.g. financial management systems, internal controls,
staffing) to successfully manage the implementation. According to the RBM manual, this
preliminarily assessment is based on analyses of the institutional structures, and capacity and
governance of the institution(s) and the evidence needs to be collected from various sources,
e.g. references of the institution’s experience in similar kind of projects, evaluations of previous
projects or audit reports. The identification team may also apply specific tools developed for
institutional capacity assessments.

The projects funded through J6P are monetarily big, for example Nithi Water and Sanitation
Project budget is 39,539,348 Ksh. (approximately 300,000 euro). According to our review, the
capacity assessment of the projects have not been systematically included in the inception
phase.

Risk Management in WSTF

In the Risk Matrix presented in the J6P Programme Document, risks are categorized in
Security and Safety, Political and Social, Resources and Financial and Economic risks.
Violence, terror and vandalism have been assessed high as both in likelihood and impact. Also
provision of funds related to GoK was high both in likelihood and impact. Following the risk
matrix, risks have been indicated per each component. The most risks relate to inadequate
capacities in the county level. One risk relates to high questioned costs in the county level.
Although lack of county capacities have been assessed high, WSTF has not incorporated
capacity assessments of the county level organisations adequately in the proposal phase.

WSTF risk management procedures are stipulated in the WSTF Risk Management Policy and
Framework, dated January 2018. According to the Policy, the Board of Trustees and
management will focus on anticipation, prevention and early detection of risks and shall
facilitate fast and effective response in the case a risk materialises. According to the Policy,
risks related to WSTF internal operations are managed with direct control of WSTF
management including policies and procedures in place. Risks related to the performance of
the implementing partners are mitigated through detailed contracts, monitoring and oversight
arrangements, as well as capacity development for implementing partners on relevant matters.
According to the risk policy, risks are quarterly reported to the Audit Committee. According to
the Risk Framework, the Audit Committee is reported on quarterly basis on risks that have

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been flagged or emerged from complaints, their resolution and the progress and effectiveness
of the risk management system. We reviewed these reports on sample basis and noted that
flagged risk have been reported to the Audit Committee.

Within WSTF, the Executive and Risk Management Committee is responsible for coordinating
the assessment and prioritization of risks, for developing annual risk management plans,
detecting risks and taking appropriate response measures. In formulating the risk
management strategies, the Executive and Risk Management Committee will determine
whether risks will be avoided, passed to third parties controlled through an appropriate internal
control framework, or accepted. The Internal Audit and Risk Management Department is
responsible for monitoring the implementation of the risk management framework across the
WSTF departments and for briefing the CEO and the Audit Committee on the implementation
and effectiveness of risk management processes and measures.

During the planning of J6P, the government of Sweden assigned a consultant to perform a
System Based Review to WSTF. Aim was to assess WSTF internal controls, financial
management systems and processes for forwarding of funds. The review gave
recommendations especially for forwarding of funds process. It was recommended to perform
a due diligence during the proposal phase for the organisations applying funding from WSTF.
According to our review, the assessment of the sub-grantees financial management systems
have not been adequately incorporated in the proposal phase.

Observation and recommendation

Observation WSTF has assessed the lack of management capacity of the partner
organisation financial management as a high risk in its risk process. However,
the assessment of the sub-grantee’s financial management and capacity building
is not systematic conducted and documented.

Risk If financial management capacity of the sub-grantees´ is not systematically and

comprehensively assessed during the proposal process, there is risk that
implementation delays and financial reporting is not reliable. Significant

Recommendation WSTF should assess sub-grantee’s financial management capacity during the
proposal phase and ensure systematic capacity strengthening related to
recognised weaknesses.

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Contact us

Anders Lundin
Partner, Authorised Public Accountant
International Development Assistance Services
T +358 (0)20 760 3000
E anders.lundin@kpmg.fi

Carina Hedberg
Partner
International Development Assistance Services
T +358 (0)20 760 3000
E carina.hedberg@kpmg.fi

Kati Nikunen
Senior Manager, Authorised Public Accountant
International Development Assistance Services
T +358 (0)20 760 3000
E kati.nikunen@kpmg.fi

www.kpmg.fi

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