History of Auditing in Ethiopia

1. Introduction

The main objectives of government auditing are to express opinion on financial statements and
related issues of legality, regularity and fraud as well as examining whether government
institutions are operating economically, efficiently and effectively. To achieve these objectives
every country establishes a supreme audit institution (SAI) whose independence is protected by
law. Read More Features of independence includes, the legal terms and conditions for appointing
and removing the head of the SAI, reporting freedom, operational and remuneration
independence as well as unlimited access to relevant information.

The existence of independent SAI can enable informed policy analysis, confident and credible
decision making in the process of national economic management. Quite apart from serving as
the basis for policy analysis and decision making, audit also ensures proper accountability and
enhances democracy in the execution of responsibilities conferred at different levels of the
decision making process. Accountability is the obligation to answer for responsibility entrusted.
It is also a relationship based on the obligation to demonstrate and to be responsible for
performance in light of agreed expectations. To ensure accountability in government, the relation
among the three branches of a government (i.e. the legislative, the executive and the judiciary)
needs management in terms of control and power sharing. The legislative approves various
budgets. The approved plans and budget is implemented by the executive body. In order to know
whether the approved budget and other planned issues are properly implemented or not, the
legislative needs accurate information. To obtain this information forming an independent
Supreme Audit Institution is very important. Accordingly, the Ethiopian SAI has been
established to discharge the above mentioned responsibilities though it passed through a lot of
ups and downs. The purpose of this article is to highlight the evolution of government auditing
and the history of the Ethiopian SAI.

2. Establishment & Evolution

The history of Ethiopia’s supreme audit institution (SAI) is related to the 1931 constitution,
which stated the importance of the proper collection of the government revenue and the necessity
of setting procedures to control expenditures. However, the constitution failed to stipulate the
need for government auditing and establishing a SAI. But latter, proclamation No. 69 of 1944
established the first legal audit institution called Audit Commission. Under this proclamation the
commission was responsible for the audit of the accounts of the Ministry of Finance, whereas the
financial transactions of other ministries were inspected and controlled by the Ministry of
Finance itself. The Comptroller and Auditor General who headed the commission was reporting
directly to the prime Minster. The main functions of the commission were:

• Verification of revenue collection through its inspectors.

• Ensuring appropriate implementations of laws regulations and guidance.
• Identification and detection of irregularities and fraud.
• Initiating legal proceedings against those who were involved in fraudulent activities and
irregularities.
• Submitting reports on its findings with recommendations.

Though the proclamation established sort of the first government audit institution, the
commission was not independent of the ministry as far as its professional freedom is concerned.
Besides, its audit coverage is limited to only to certain government departments. However, these
short comings were resolved after two years through the amended proclamation No. 79 of 1946.
The amended proclamation centralized the audit of all government accounts under one audit
department called the Audit and Control Department, under the leadership of the Comptroller
and Auditor General reporting to the Prime Minster. Although the power and duties of the
commission were substantially increased the commissioner still lacked independence from the
executive as he was reporting to the prime minister. The Audit and Control Department
continued to operate until it was amalgamated with the Ministry of Finance’s control department
without any legislative provision in 1952. This was a major setback in the process of developing
an independent national audit institution. But after three years, the revised constitution of 1955
established a relatively independent audit institution. Articles 120 and 121 of the revised
constitution of 1955 established a separate and independent audit entity accountable to the
emperor and to parliament. These articles required the auditor general to report regularly to the
emperor and parliament on the financial operations of the government. The articles also
empowered the auditor general to access all books and records pertaining to government
accounts. However, the constitution did not stipulated the detailed functions and reporting
requirements of the Office of the Auditor General until Decree No. 32 of 1958 which articulated
the functions of the office including reporting responsibility. Latter, an amended legislation was
issued as proclamation 179/1961. The new proclamation, in addition to defining powers and
duties, it laid down the conditions regarding the appointment and independence of the auditor
general as well as the reporting procedures. The provisions of this legislation was a mile stone as
the office of auditor general has acquired a higher degree of independence to carry out regularity
audits; but the proclamation lacked a mandate for expanding the scope of the office’s audit to
carry out performance or value for money audits. Accordingly, the office has to wait until
proclamation No. 164/1979. Proclamation N0.164/1979 increased the traditional power and
duties of the Office of Auditor General considerably by empowering the office to conduct
efficiency and effectiveness (performance) audits. However, the proclamation failed to
incorporate the reporting and remuneration aspects of independence which are part and parcel of
the basic necessities for effective operation of a SAI.

Current status of auditing in Ethiopia

Generally speaking, the status of auditing profession in Ethiopia is characterized with the
following:-
1 The accounting and auditing provisions in the Commercial Code 1960 need to be brought up to date with good
international practice.
The Commercial Code makes directors of companies responsible for preparation of financial
statements, including consolidated financial statements for group companies, and for ensuring
that an audit of the financial statements is conducted. However, the provisions for both
preparation and audit of financial statements require improvement. In provisions for preparing
financial statements, there is no requirement to comply with accounting standards, and the
financial statements required to be produced are only balance sheet and profit and loss account.
In provisions for audit, there is no requirement to comply with auditing standards, no specified
qualification of auditors, and no audit requirement for private limited companies with 20 or less
shareholders; and companies are required to appoint more than one auditor at a time.
2. Public Enterprises Proclamation 25/1992 requires state-owned enterprises to keep Books of accounts which is
the base for auditing following generally accepted accounting principles (GAAP).
However, within the Public Enterprises Proclamation, there is no requirement for state-owned
enterprises to prepare financial statements in compliance with any defined accounting standards
or for their auditors to comply with any defined auditing standards. Without definition,
interpretations of GAAP can vary widely. As to audits, the Proclamation states that the
provisions on powers, duties, and liability of auditors in the Commercial Code shall apply. The
Commercial Code does not require auditors to comply with any defined auditing standards.
3. The financial reporting requirements of NGOs are contained in the General Guidelines for the Implementation
of the National Policy on Disaster Prevention and Management.
There is no guidance for NGOs on the standards to be used in preparation and auditing of their
financial statements in the General Guidelines. The regulations require NGOs to prepare
financial statements; have the financial statements audited by chartered accountants; and file
annual audited financial statements with their supervising agency, the Disaster Preparedness and
Prevention Agency. However the regulations do not provide the NGOs with guidance on
standards to be used in preparation and auditing of the financial statements.
4. There are no extra requirements for banks and insurance companies for preparation of their annual financial
statements.
Banks and insurance companies are subject to regulatory laws and directives issued by the
National Bank of Ethiopia, but there are no extra requirements in these laws or directives for
preparation of annual financial statements. The applicable requirements for preparation of annual
financial statements for banks and insurance companies are those provided in the Commercial
Code. The Commercial Code has no requirement for compliance with any defined accounting
standards. Banks and insurance companies are public interest entities which should be subjected
to high standards of financial reporting.
5. Auditors for banks are required to be approved by the National Bank of Ethiopia.
On an annual basis, banks are required to send selected auditor’s name to the National Bank
of Ethiopia for the approval of the appointment of bank auditor. This is a legal requirement under
Proclamation for Licensing and Supervision of Banking Business No. 84/1994. When approving
auditors, the National Bank of Ethiopia ensures that only those auditors licensed by OFAG are
approved.
6. Auditors for insurance companies are not subjected to any additional requirements other than the provisions of
the Commercial Code.
The Proclamation for Licensing and Supervision of Insurance Businesses No.86/1994 states that
the auditors for insurance companies shall have powers, functions, and duties; and be subject to
liabilities and penalties under the Commercial Code. There are no other regulations for auditors
of insurance companies.
7. The number of professional accountants and auditors in Ethiopia is rather low in relation to the size of the
economy.
There are an estimated 200 professional accountants in the country. In comparison, Uganda and
Ghana, with economies less than Ethiopia, each have more than 1,000 professional accountants.
Kenya, whose economy is roughly 1.5 times that of Ethiopia, had 3,000 professional accountants
in 2001. Having a shortage of professional auditors means that there are positions in the private
and public sector that are filled by persons with lower qualifications resulting in low audit
quality.
8. The Ethiopian Professional Association of Accountants and Auditors (EPAAA), has no legal backing and is
not a member of International Federation of Accountants (IFAC).
The EPAAA was founded in 1972. From 1974 until 1992, EPAAA stayed dormant because of an
unfavorable political environment.
Following a change of government in 1991, EPAAA was revived. Now growing, it has increased
its membership from only 10 members in public practice in 1992 to 100 members (30 in public
practice) as of September 2007. It has membership in Eastern, Central, and South African
Federation of Accountants (ECSAFA).

EPAAA’s purpose is to further professional accounting and auditing in Ethiopia. However,

EPAAA is still far from being a strong association. It is not a professional certification
regulatory responsibilities. Second, EPAAA does not have IFAC membership.
IFAC sets standards for member professional bodies through its Statements of Membership
Obligations.

Through these obligations, member organizations use their best endeavors at promoting,
incorporating, and implementing accounting and auditing standards, which are comparable to
good international practice, as well as monitoring of their members through quality assurance
and investigation and disciplinary programs.
9. Ethiopia does not have a quality assurance program for auditors.
A quality assurance program checks the auditors’ work at both partner and firm level, and
ensures that auditors conduct their duties with outmost professional diligence. The program also
identifies areas that become a source of designing training programs to improve the capacity of
auditors. Establishing a country-level quality assurance program is an international good
practice. Under this program, the professional accountancy body develops quality control
standards and relevant guidance, requiring audit firms to establish the quality control policies and
procedures necessary to provide reasonable assurance of conforming to professional standards in
performing services. To ensure that audit firms have effective quality control arrangements, a
mechanism of independent review must be in place. Such a review mechanism does not exist in
Ethiopia at the present time.

10. No legal requirement exists for auditors to have professional indemnity insurance.
Professional indemnity insurance is the means by which assurance is provided that auditors
would be able to meet liabilities in the event there are valid claims regarding their professional
conduct. Usually, the regulation will make it a condition for granting a license and for license
renewal every year. At present, there is no requirement for auditors to have the insurance in order
to get a practicing license. This is also an important area to be considered in strengthening
the country’s financial reporting infrastructure.

11. The big-four international audit firm networks are not present in the country.
Most of the major international audit firm networks had presence in Ethiopia prior to 1974.
When in 1974 the Government changed to a Socialist system, all the international audit firms
closed their offices in Ethiopia. Those audit firms have not yet returned to the country although
there is no law or regulation which hinders them to operate in Ethiopia. With this situation, the
auditing profession in the country may be losing exposure to international expertise.

12. The country has not yet experienced litigation on financial reporting.
There are no records of litigation dealing with financial reporting. However the study team
understands that the country has recorded minor litigation on governance issues; specifically a
case to do with director’s remuneration was cited by stakeholders in the legal field. As
sophistication of the economy increases, increased litigation would be more likely; hence the
need for good financial reporting infrastructure as well as overall good corporate governance
infrastructure.

13. Locally, there is neither a professional accountancy qualification nor training available for professional
accountancy.
All professional accountants hold foreign professional qualifications. The leading professional
qualification is Association of Chartered Certified Accountants (ACCA). It is estimated that
about 95 percent of the professional accountants in the country hold the ACCA qualification.
The ACCA has a branch in Addis Ababa. As for training, there is no institution that provides
professional accountancy training. Professional accountants get their qualification through
distance learning. However, the ACCA fees are considered too expensive by the majority of
Ethiopians.

14. The available accounting degrees and diplomas are said to meet the current demands of the business
community; however, the curriculum as well as text books may not prepare graduates well for enhanced financial
reporting requirements.
Stakeholders indicate general satisfaction with current requirements toward the accounting
degrees and diplomas available. However, there are areas that will have to be updated in order to
prepare graduates for enhanced requirements in accounting and auditing. The curriculum does
not include international components in accounting (IFRS) and auditing (ISA). Professional
values and ethics are not taught as a separate subject (as required by IFAC standards on
education) although a subject in the curriculum (Civics) covers general ethics. The textbooks in
use are not up to date with recent trends in financial reporting.
15. Higher educational institutions are losing well-qualified instructors because of low pay.
Most of the higher educational institutions in Addis Ababa indicate that they are losing well-
qualified and experienced instructors because of more competitive pay from the private sector,
NGOs, and other countries. The situation is much worse outside Addis Ababa. Brain drain in
universities has the long-term effect of eroding the quality in the education, training, and
research capabilities of the country on auditing and financial reporting in general.

16. There is no locally controlled practical training for accountants and Auditors.
The absence of a local professional qualification and a strong professional body has contributed
to the absence of a local mechanism for monitoring practical training requirements for
professional accountants and auditors. Controlled practical training is an essential part of
professional qualification that feeds into the quality in professional accounting and auditing. In
order to improve on the quality of professional accountants and auditors, a domestic mechanism
of ensuring quality control for the profession must be considered, planned, and established.

17,There is no domestic institution, which monitors and enforces continuous professional development (CPD).
The lack of a strong professional body leaves no domestic mechanisms for monitoring and
enforcing continuous professional development. The CPD programs are the means through
which professional accountants keep up to date with the local and international developments in
accounting and auditing. IFAC requires its member bodies attain CPD hours compulsory for all
professional accountants. Continuous professional development feeds into sustaining the quality
of professional accounting. The local Ethiopian office of ACCA in conjunction with local
institutions, the Federal Inland Revenue Authority, and other accountancy associations regularly
organizes seminars covering tax, governance, financial reporting, and auditing issues. The
ACCA courses are the main source of CPD for accountants in the country.

18,Except for implication in provisions of the legal mandate of OFAG and ECSC, there is no institution with a
specific mandate for setting accounting and auditing standards.
In the case of OFAG, the relevant provisions state its objectives (“make efforts in cooperation
with concerned organs to promote and strengthen accounting and auditing professions”) and its
powers and duties (“issue directives, in cooperation with other offices concerned, regarding
accounts and property auditing procedures and standards”). In the case of ECSC, the relevant
provisions state one of the objectives (“to formulate standards and certify professionals”) and
one of its powers and duties (“to formulate standards and based on such standards
confer professional certification in auditing and accountancy”).

19. There is no accounting and auditing standards set in Ethiopia.

For accounting Standards, there is no law or regulation that has set or requires accounting
standards in Preparation of financial statements. Some laws require GAAP to be applied.
However, in all cases, GAAP is not defined. For auditing standards, in the year 2003, OFAG
directed all auditors to conduct audits in compliance with ISA. However, the directive met
resistance from auditors. One of the arguments for resistance by the auditors was that it is
impossible to apply ISA in the absence of accounting standards. The directive was subsequently
withdrawn.

20. Every auditor determines their own standards.

In the absence of practical authoritative guidelines, auditors use their knowledge and best
endeavors in conducting audits. Some apply ISA, while others apply generally accepted auditing
standards.

21. The Commercial Code provides for punishment of auditors for failing to deliver their obligations.
The Commercial Code states that an auditor shall be punished for knowingly confirming an
untrue report concerning the position of the company; and for failing to inform the public
prosecutor of an offense that is known to have been committed. The punishment for these
offences is provided in the Penal Code. For the first offense, the punishment is a fine not
exceeding Br 20,000 and rigorous imprisonment not exceeding 10 years. For the second offense,
the punishment is a fine of Br 500 or 3-month imprisonment.
Business entities required by law to produce audited Financial Statements in Ethiopia
Commercial Code of Ethiopia 4 (1960) governs the formation and operation of private
companies in the Country. The Revised Public Enterprises Proclamation 25 (1992) governs the
affairs of public enterprises (hereafter, State-owned enterprises or SOEs). Financial reporting and
external audit requirements of both private companies and State-owned enterprises are mainly
guided by the Commercial Code of Ethiopia. Legal documents and regulations specifically
concerning internal audit include the Federal Auditor General Proclamation (Government of
Ethiopia 1997), the Federal Government of Ethiopia Financial Administration Regulation
(Federal Government of Ethiopia 1996), the Ministry of Finance and Economic Development’s
(MoFED) IA manual (MoFED 2004), and Privatization and Public Enterprises Supervisory
Agency5 (PPESA) Regulations (Privatization and Public Enterprises Supervisory Agency 2004,
2005). The Auditor General Proclamation monitored internal audit in both SOEs and ministry
organizations from 1987 to 1996. Since 1996 (Federal Government of Ethiopia 1996), MoFED
monitors IA in Government ministries and PPESA monitors internal audit in SOEs (Dessalegn
Getie Mihret, 2009).

The Office of the Federal Auditor General (OFAG) of Ethiopia is responsible for external audit
of Federal ministries. The regional states also maintain auditor general offices. Furthermore,
OFAG monitors the professional practice of accounting and auditing in the Country. In the
business sector, the Audit Service Corporation conducts external audit of State-owned
enterprises and private audit firms undertake external audit of private companies (Ibid).

2. Take any public undertaking /enterprise organization and consider its

external audit report of last year.
2.1. Evaluate the component of the audit report of financial statement.

We evaluate the external audit report of awash international bank in 2022, Audited by The office
of the federal auditor general audit service corporation. We evaluated the component of the audit
report of financial statements as follows.
1. Report title; the audit report of awash international bank contain “The independent auditors
report to the shareholders of awash international bank share company. Report on the audit of
the financial statement at 30 June 2022.
2. Audit report address; the report is addressed to the shareholders of awash international
bank.
3. Introductory paragraph; the audit report of awash international bank includes the
introductory paragraph clearly.

"We have audited the financial statement of Awash International bank Share Company (the
bank), which comprise the statement of financial position as at 30 June 2022, and the statement
of profit or loss and other comprehensive income, statement of changes in equity and statement
of cash flows for the year then ended, and notes to the financial statements, including summery
of significant accounting policies".

Responsibilities of the Directors and Those Charged with Governance for the Financial
Statements
“The Directors are responsible for the preparation and fair presentation of the financial
statements in accordance with IFRSs, and for such internal control as management determines
is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Group’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern
and using the going concern basis of accounting unless management either intends to liquidate
the Group or to cease operations, or has no realistic alternative but to do so. Those charged with
governance are responsible for overseeing the Group’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but
is not a guarantee that an audit conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial statements.”

4. Scope paragraph:
The scope paragraph is a factual statement about what the auditor did in the audit. This
paragraph first states that the auditor followed international standards on auditing. The remainder
briefly describes important aspects of an audit.
“As part of an audit in accordance with ISAs, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one resulting from error,
as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control. Obtain an understanding of internal control relevant to the audit in
order to design audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Group’s internal control.”

5. Opinion paragraph:
The final paragraph in the standardized report states the auditor’s conclusion based on the results
of the audit examination. This part of the report is so important that frequently the entire audit
report is referred to simply as the auditor’s opinion. The opinion paragraph is stated as an
opinion rather than as a statement of absolute fact or a guarantee. The intent is to indicate that the
conclusions are based on professional judgment. The phrase “in our opinion” indicates that there
may be some information risk associated with the financial statements, even though the
statements have been audited. The opinion paragraph is directly related to the first and fourth
generally accepted auditing report standards. The auditor is required to state an opinion about the
financial statements taken as a whole, including a conclusion about whether the company
followed generally accepted accounting principles.
The audit report of awash international bank contains opinion part and it has presented as
follows:
“We have audited the consolidated financial statements of awash international bank (the Bank)
and its consolidated subsidiaries (the Group), which comprise the consolidated and the Bank’s
statements of financial position as at 30 June 2022, and the consolidated and the Bank’s
statements of profit or loss and other comprehensive income, consolidated and Bank’s statements
of changes in equity and consolidated and the Bank’s statements of cash flows for the year then
ended, and notes to the consolidated and the Bank’s financial statements, including consolidated
and the Bank’s summaries of significant accounting policies…”

6. Name of the audit firm:

The name identifies the audit firm or practitioner that has performed the audit. Typically, the
firm’s name is used, since the entire audit firm has the legal and professional responsibility to
make certain the quality of the audit meets professional standards.
In the Awash international bank report the name of the audit firm is stated as Audited by:
“Federal Auditor general audit Services Corporation”

7. Audit report date:

The appropriate date for the report is the one on which the auditor has completed the most
important auditing procedures in the field. This date is important to users because it indicates the
last date of the auditor’s responsibility for the review of significant events that occurred after the
date of the financial statements.

In the audit report of awash international bank, the date of the audit report is stated as “24
March 2023”. The financial statement is closed on “30 JUNE 2022” which shows the gap the
audit analysis has taken.

2.2. Critically examining the audit procedures followed by the audit and the comments
given by the auditor
The auditor’s firm runs through the following procedures

 Identify and assess the risks of material misstatement of the financial statements, whether due
to fraud or error;
 Design and perform audit procedures responsive to those risks;
 Obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion
and;
 Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the bank internal control.

2.3. Identifying the type of audited opinions given by the auditor and critically
examining the basis of issuing such audit opinion
The report has put its opinion as follows;

“In our opinion, the accompanying consolidated financial statements present fairly, in all
material respects, the consolidated financial positions of the Bank as at 30 June 2022 and the
consolidated and the Bank’s financial performances and the consolidated and the Bank’s cash
flows for the year then ended in accordance with International Financial Reporting Standards
(IFRSs).”

But we believe that one of the controversial parts of the auditor’s report is the meaning of the
term present fairly. Does this mean that if generally accepted accounting principles are followed,
the financial statements are presented fairly, or something more? Occasionally, the courts have
concluded that 88 auditors are responsible for looking beyond generally accepted accounting
principles to determine whether users might be misled, even if those principles are followed.
Most auditors believe that financial statements are “presented fairly” when the statements are in
accordance with generally accepted accounting principles, but that is also necessary to examine
the substance of transactions and balances for possible misinformation.

The auditing firm expresses the basis for giving the opinion as follows;

“We conducted our audit in accordance with International Standards on Auditing (ISAs). Our
responsibilities under those standards are further described in the Auditor’s Responsibilities for
the Audit of the Financial Statements section of our report. We are independent of the Group in
accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for
Professional Accountants (IESBA Code) together with the ethical requirements that are relevant
to our audit of the consolidated financial statements in Ethiopia, and we have fulfilled our other
ethical responsibilities in accordance with those requirements and the IESBA Code. We believe
that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.”

Hence the opinion is having assured that the auditing is conducted based on ISAs, we concluded
that the opinion given to the awash international bank regarding the 2022 audit performed by
The Federal Auditor general Services Corporation is a “qualified opinion”.