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Introduction
The term auditing has been defined by different authorities. There is no universally
accepted definition of auditing.

The process of auditing professionalization in Ethiopia appears to exhibit

distinct
Patterns during the three epochs when the state followed capitalist-oriented
(pre 1974),
Communist (1974 through to 1991), and then capitalist-oriented (1991
onwards) ideologies.

Auditors in Ethiopia are classified in to external (Independent) auditors

which are performed by certified and authorized private auditors,
internal auditors and government auditors.

The Commercial Code of Ethiopia contains articles that are related to the auditing practice in
Ethiopia.

There are also different types of auditing in Ethiopia. These includes:-

Private (External) auditing, internal auditing,performance

auditing,compliance auditing,Investigation auditing,project and contract
auditing.
The Office of Auditor General Plays key roll including a development,
management and administration of auditing in Ethiopia. It is the
responsible organ for auditing in Ethiopia.

Generally,there are six pillars that make up a strong financial reporting infrastructure: statutory
framework, profession and ethics, education and training, enforcement mechanisms, accounting
standards, and auditing standards. However these pillars are not developed or implemented in
Ethiopia resulting in week auditing system or status at all.

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Auditing In Ethiopia

An overview

1. Historical Development and The General Concept of

Auditing

1.1 Historical Development 0f Auditing

The term audit is derived from the Latin term audire, which means to hear. In early days an auditor
used to listen to the accounts read over by an accountant in order to check them Auditing is as old
as accounting. It was in use in all ancient countries such as Mesopotamia, Greece, Egypt. Rome,
U.K. and India.
The original objective of auditing was to detect and prevent errors and frauds.
Auditing evolved and grew rapidly after the industrial revolution in the 18 th century with the growth of
the joint stock companies the ownership and management became separate. The shareholders who
were the owners needed a report from an independent expert on the accounts of the company
managed by the board of directors who were the employees.
The objective of audit shifted and audit was expected to ascertain whether the accounts were true
and fair rather than detection of errors and frauds.

With the increase in the size of the companies and the volume of transactions the main objective of
audit shifted to ascertaining whether the accounts were true and fair rather than true and correct.
Hence the emphasis was not on arithmetical accuracy but on a fair representation of the financial
efforts.
The later developments in auditing pertain to the use of computers in accounting and auditing.
In conclusion it can be said that auditing has come a long way from hearing of accounts to taking the
help of computers to examine computerized accounts

1.2 The General Concept of Auditing

The term auditing has been defined by different authorities

According to Spicer and Pegler: "Auditing is such an examination of books of accounts and
vouchers of business, as will enable the auditors to satisfy himself that the balance sheet is properly
drawn up, so as to give a true and fair view of the state of affairs of the business and that the profit
and loss account gives true and fair view of the profit/loss for the financial period, according to the
best of information and explanation given to him and as shown by the books; and if not, in what
respect he is not satisfied."

According to Prof. L.R.Dicksee. "Auditing is an examination of accounting records undertaken with a

view to establish whether they correctly and completely reflect the transactions to which they relate.

2. Auditing in Ethiopia

2.1 Development of Auditing In Ethiopia

The process of auditing professionalization in Ethiopia appears to exhibit

distinct

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Patterns during the three epochs when the state followed capitalist-oriented
(pre 1974),
Communist (1974 through to 1991), and then capitalist-oriented (1991
onwards) ideologies. This section examines the auditing professionalization
processes in the Country during the past periods.

It is apparent from the foregoing quote that performance auditing in a

rudimentary sense
was started for the government system of Ethiopia in the early 20th century explains that the
contribution of foreign advisors to the kings of Ethiopia during the period
from the 1890s through to the 1970s led to the issuance of government
regulations and proclamations. Some of the proclamations and regulations
continue to define or at least strongly influence the legal basis of accounting
and audit practice in Ethiopia to this date. Examples include the 1960
Commercial Code of Ethiopia (Government of Ethiopia 1960), the Audit
Commission Proclamation of 1944 (which was the foundation for the Auditor
General proclamation of 1961), and the Audit Service Corporation (ASC)
Proclamation of 1977 (Government of Ethiopia 1977).

In discussing the contribution of foreign advisors to the development of

accounting in
Ethiopia, Kinfu (1990) considers as initial contributions the role of consultants
during the
Construction of the Ethio-Djibouti railway in the 1890s and of the legal,
military, and foreign affairs advisers in the 1930s. The author then attributes
developments of accounting from 1934 to the early-1970s to the Anglo-
American legal and financial advisors to Emperor Haile Silassie I (1928-
1974). The first substantial development during this period was the issuance
of Ministry of Finance directives in 1942 (Argaw 2000a; Kinfu 1990; Kinfu,
Negash & Merissa 1981). This was followed by the formation of the Audit
Commission by Proclamation No. 69/1944 to undertake external audit of
accounts of the Ministry of Finance (Government of Ethiopia 1944), which
was subsequently mandated to conduct external audit of other budgetary
institutions as well. This marks the start of todays Office of the Federal
Auditor General of Ethiopia (OFAG), which, amongst other duties, monitors
and regulates the accounting and auditing profession in the country.

In about the same time frame, the Ethiopian Highway Authority and
Ethiopian Airlines
were established. In addition, the Ethiopian Telecommunications Corporation
and the Ethiopian Electric Light and Power Authority became autonomous
state-owned enterprises. These phenomena led to involvement of foreign
companies as partners, financiers or consultants to the Ethiopian state-
owned enterprises. Consequently, internal audit was introduced in these
enterprises with a view to strengthening internal controls.

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As a consequence of the growth of demand for trained manpower in

accounting and
auditing up to the early-1940s, the Addis Ababa College of Commerce was
established in 1943. The Colleges of Business were then established at Addis
Ababa University in 1963 and Asmara University in 1969. These institutions
have played essential role in the development of the accounting and auditing
profession in Ethiopia by producing trained manpower (Argaw 2000a; Kinfu
1990).

Other significant developments in the history of accounting and auditing in

Ethiopia took place in the 1960s. Firstly, the Commercial Code of Ethiopia
was proclaimed in 1960 (Government of Ethiopia 1960). This Code contains
accounting and external auditing provisions, which still serve as the legal
basis for financial reporting and external audit of companies (Argaw 2000a;
Kinfu 1970; Kinfu, Negash & Merissa 1981; World Bank 2007). The code
contains some requirements for financial accounting, reporting, and external
auditing of companies that operate in Ethiopia. Limitations that possibly
constrained the codes contribution to the development of accounting and
auditing in the nation include that it does not: (a) specify the accounting
standards to be followed in financial reporting; (b) define the qualifications of
an auditor; (c) require compliance
with professional standards on auditing; or (d) impose an audit requirement
upon private limited companies with less than 20 members (World Bank
2007). The second development was the formation of the Office of the
Auditor General (OAG) in 1961 by Proclamation 199/1961(Government of
Ethiopia 1961). This proclamation accorded the OAG greater authority than
was provided in the 1944 proclamation that established the Audit
Commission (Argaw 2000a; Kinfu 1990). The proclamation has subsequently
been revised three times, in 1979, 1987 and 1997. The 1997 version of the
proclamation is the legal basis for external audit for government
organizations in Ethiopia to date of writing.

1974 1991
Following a revolution, a military government with a communist ideology
took power in
Ethiopia in 1974. Subsequently, private companies were nationalized and the
number of state owned enterprises in the country increased. As a result of
these changes, international public accounting firms, i.e., PriceWaterhouse
Peat & Co. and Mann Judd & Co., closed their Ethiopian branches.

Nevertheless, formation of the Audit Service Corporation (ASC) (Government

of Ethiopia 1977) to conduct external audit of public enterprises was an
important landmark in the history of accounting and auditing in this period.

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This development was a result of the need to fill the gap created by the
closure of
international accounting firms. Furthermore, internal audit as a separate
function appeared during this period (in 1987) when the Auditor General was
mandated by Proclamation No. 13/1987 to monitor and regulate internal
auditing in government offices and state-owned enterprises. This
proclamation also gave the auditor general the authority to issue minimum
requirements for recruitment of internal auditors, provide training to internal
auditors, and require reports on internal audit of government organizations

As this period is generally considered as a time when the development of

accounting and auditing was directly or indirectly constrained, limited
achievements were made in terms of development of audit profession.

Post 1991
Post 1991 was a period when Ethiopia shifted back to a free-market
economic system
after being structured as a command economy for seventeen years. This
shift led to a number of public enterprises being privatized. The resulting
new corporate governance structure in the private sector would be expected
to enhance the importance of financial reporting and external auditing.
Change of government and the type of government tend
to be important influences on the development of the accounting and
auditing profession in ethiopia.
The free-market system has been considered as one of the signals of hope
for a better
future for the accounting and auditing profession. Matching this expectation,
the ethiopian government has been undertaking financial reforms in the
areas of financial reporting and internal audit in the public sector.

3. Types of Audit and Auditors in Ethiopia

3.1 Types of Audit in Ethiopia

The Commercial Code of Ethiopia

The Commercial Code of Ethiopia contains articles that are related to the auditing practice in
Ethiopia. The Commercial Code of Ethiopia contains provisions requiring partnership and
corporation (Share Company) to keep books and accounts, related to corporations specifically
about appointment of auditors, competency of auditors, professional secrecy and liabilities of
auditors. Furthermore, the code specifies persons who are founders and beneficiaries of a
company or its subsidiary, persons related by blood to the fourth degree, or persons who receive
remuneration from company founders it also states that directors are not to engage in auditing
that company. (Principle of Independence)
In addition, according to the code, an auditor is liable for breach of professional secrecy,
for negligence in the performance of professional services, and for breach of contract.

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According to the Commercial Code, auditors are liable to client and third party for losses
they cause, for issuing inappropriate report, for failure to inform the law for any offences
that they knew were committed by the client that affects the public.

3.2 Private (External) auditing in Ethiopia

Private auditing practice was started with the opening of a branch office of Price Waterhouse
Peat & Co. in Addis Ababa, following the establishment and growth of multinational British
companies like A. Bessie & Co., Mitchell Cotts Ltd., and Shell; and the issuance of the
cmmercial Code of Ethiopia in 1960. The demand for commercial audit has increased, as the
Commercial Code of Ethiopia required the multinational companies to present audited financial
statements for renewal of trade license. The Office of Auditor General audits or causes to be
audited the accounts of the Federal Government offices and organizations. On the other hand, the
Audit Service Corporation provides auditing services to public enterprises.

The private businesses also need audited financial statements for various purposes such as for
bank loan and for tax purposes. Thus, private auditing firms provide auditing, accounting
services, tax services, and management advisory services on fee basis primarily to the private
businesses. The type of audit conducted by private auditing firms is financial statement audit.
You can open a private auditing firm and provide auditing services to the public if you meet the
requirements of the Office of Auditor General. The Office of Auditor General issues license to
private auditors.

3.3 PERFORMANCE AUDIT

In Ethiopia performance audit is mostly done in governmental organizations

by both internal and external private auditors. However some private
organizations and nongovernmental organizations also employ external and
internal auditors and undertakes performance audit. In Ethiopia it is the
least developed type of audit. In Ethiopia there is no law which enforces
privately owned organizations to undertake performance audit.

3.4 compliance Audit

Compliance Audit in Ethiopia mostly focuses on tax audit

done by tax auditors of Ethiopian government.
A tax audit is a systematic examination of business`s relevant commercial
system to determine whether a taxpayers declaration states the tax liability
correctly and complying with the provisions of the tax laws and related
subsidiary legislations. Auditing involves examination of financial statements,
books of accounts and vouchers of a taxpayer by Tax Auditors so as to
ascertain whether the taxpayer has accurately considered revenues and
expenses when determining the taxes shown in the declarations as per the

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requirements of the tax laws. It also involves other approaches such as

observation of premises, direct monitoring of receipts in cash businesses, use
of mark-up techniques and analysis of key ratios.

The overall objective is to improve the compliance of taxpayers, whether they

declare the correct amount of tax and paid at the right time. The expectation by
a taxpayer of an audit should have a deterrent effect and encourage the
taxpayer to declare as far as possible a credible tax return. It also improves the
taxpayers understanding and awareness of the relevant taxes.

4. Types of Auditors in Ethiopia

4.1 internal Auditors

The history of the development of internal auditing in Ethiopia dates back to

about the
middle of the 1940s just about the time when internal audit was evolving as
an organized profession in the Untied States. Internal audit in Ethiopia, had
its early legislative root in the Constitution of 1923 which authorized the
establishment of an Audit Commission (Articles 34); and the Audit
Commission itself was established much later by Proclamation 69/1944 to
audit the accounts of the Ministry of Finance.
The same Proclamation mandated the then Ministry of Finance to audit other
budgetary institutions as a measure of internal control over the financial
operations of the budgetary institutions. It appears that this early practice of
internal auditing as per Procl. 69/1944 was, in fact, to be the root of what the
Inspection Department of the Ministry of Finance and Economic Development
(MoFED) continued to perform to this day, until the recent reorganization.
The latter part of the 1940s witnessed the establishment of internal audit
functions in
key public sector institutions such as the national defense, education, road
construction, and other non-budgetary public sectors, which included the
Ethiopian
Airlines, Telecommunication and the financial sector consisting of the modern
layer of
the Ethiopian economy. These institutions in one way or the other had
external links
or financing operations, which created awareness of the need for internal
controls to
sectarian appropriate financial management and to safeguard organizational
assets.
The period of the early 1950s, marked the introduction of a budgetary
system in
government. The commencement of an annual public budget in 1955 for the
first time

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in the history of the country ushered in a system of financial administration

based on
the annual budget with all its attendant requirements for strengthened
internal control
in the budgetary agencies. This entailed the formation of internal audit as an
integral
apart of the budgetary internal control system.
The establishment at the time of the Addis Ababa Commercial School and
the Addis
Ababa University College supplied with limited but better informed
manpower, for
some key institutions in the economy.

4.2 Current status of Internal Auditing In Ethiopia

The Scope and Practice of Internal Auditing in Ethiopia
In order to assess the state of internal auditing in the country as a basis for
further
action to strengthen the function, a survey was conducted by the Office of
the Auditor
General in 1991. The main purposes were to determine the service quality,
methodology and educational and skill content as well as organizational
structure of internal auditing. The survey was carried out by means of
questionnaires developed by an ad hoc committee.
Although the questions were widely distributed the analysis was based on
the 362
responses obtained from 312 different ministries, government departments
and 50
public enterprises. In other words, 86% of the responses were obtained from
public
bodies.
The survey indicated that there was a serious lack of internal audit education
and
training. An accounting background has been seen as the most important
requirement
for entry into the internal auditing work. Such a requirement, however, does
not
provide internal auditors with the knowledge of adequate analytical tools
necessary for
carrying out their professional responsibilities. Hence the findings of the
survey at the
time indicated that the scope and professional content of internal auditing
work was
severely limited to:
1 Low-level financial and compliance audits,
2 Pre-audit
3 Non-audit work such as witnessing the hand-over of stores, cash and

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personnel transfers

The prevalence of such limited scope of work of internal auditing was

attributed to a
number factors, which included:
1 The low level education, training and experience of internal auditors
2 The lack of management awareness about the functions and contributions
of
internal auditing
3 The prevalence of weak internal control systems in organizations in which
internal audit is an integral part.
4 The absence of a professional organization to cater for the professional
development of internal auditing in the country for a long time.
Presently, Government has taken the initiative to improve upon some of the
above
enumerated weaknesses and to reorganize and strengthen the internal
auditing practice
both in public bodies and fully and/or partially Government owned
enterprises; to this
effect, not only did Government provide for the necessary legislative
framework by the
Financial Administration Proclamation of the Federal Government
(Proclamation
57/1996) and the Council of Ministers Regulation (Regulation No. 17/1997) as
well as
directives issued by MoFED but also taking measures to reorganize and
strengthen
internal auditing in these organizations.
Need to Adopt the Professional Practice Framework of the Institute of Internal
Auditors (IIA)
1 The framework consists of a common body of knowledge most thoroughly
researched, authoritative and globally accepted for the training and practice
of internal auditing.

3. Internal Audit studies, qualification exams are based on the contents of

this Framework and this would assist Ethiopian candidates to familiarize
themselves with the basic materials.
4. The Framework is made up of best practice guides for modern day
internal auditing profession and it is expected that any development and
modernization of internal auditing

Internal auditor is employees of the companies they audit. This type of auditors
involved in an independent appraisal activity, often known as internal auditing
within an organization as a service to the organization. The objective of internal
auditing is to assist the management of the organization in the effective
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discharge of its responsibilities. The attainment of this overall objective

involves such activities as:

Reviewing and appraising the soundness, adequacy, and application of

accounting, financial, and other operating control at a reasonable cost.
Ascertaining the excellent of compliance with established policies, plans
and procedures,
Ascertaining the extent to which company assets are accounted for and
safeguarded from losses of all kinds:
Ascertaining the reliability of management data developed writhen the
organizations:
Appraising the quality of performance in completing assigned
responsibilities;
Recommending operating improvements;
The scope of the internal audit function extends to all of the
organizations activities (Internal auditors are primarily involved in
compliance and operational audits).

4.4 Governmental Auditors

Government auditors are employed by various local, state, and federal

governmental agencies. At the federal level, the three primary agencies are the
Office of Auditor General, the audit service corporation, and the federal Inland
Revenue authority. The office of Auditor General is a federal organization headed
by the auditor general. This office is responsible for conducting financial statement
audit, compliance audit and operational audit of various Federal Government
offices. The regional governments have also their own regional audit bureau with
similar functions.

The Federal Inland Revenue Authority is responsible for administering the federal
tax laws. Thus, the authoritys auditors audit the returns of taxpayers for
compliance with applicable tax laws. That is, the auditors examine the tax returns
of the taxpayer to ensure that it is prepared in accordance with the tax laws and
regulations. The authoritys auditors are known as tax auditors.

Another government organ that performs audit is the audit Service Corporation.
The Audit services corporation audits the financial statements of the public

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enterprises. Thus, the type of audit performed by the audit service corporation is
financial statement audit.

Governmental Units that provides auditing service in Ethiopia includes

4.4.1 The Office of Auditor General

In 1942, a financial regulation was issued prescribing modern financial and accounting
responsibilities of government ministries and control, and audit of government receipts
and payments including budgeting. Subsequent to this requirement, the audit and control
department was established by proclamation 69/1946, under the Prime Minister headed
by the Auditor General.
In 1958, a separate Auditor General's Office was established. This proclamation to
establish the Auditor General's Office has been revised continuously with the change in
government the last one being the 1997 proclamation. According to the proclamation
Number 68/1997, the Office of the Auditor General is established has the following
objectives:
. Strengthen an audit system required for reliable information necessary for the proper
management and administration of the plans and budget of the Federal Government.
. Ascertain that all receivable money and property of the Federal Government are allocated,
preserved and used properly in accordance with the laws and the regulations of the Federal
Government, and report same to the council;
. Undertake financial and performance audits of the offices and organizations of the Federal
Government;
. Make efforts, in cooperation with concerned organs, to promote and strengthen accounting and
audit profession;
. Give professional assistance and advice to Regional and Federal civil servants and
organizations engaged in accounting and audit professions
. Draw up a standard of auditing by which accounts of the offices and organizations of the
Federal Government shall be examined and follow up the implementation of same. The Federal
Auditor General is appointed by the Council of Peoples Representatives upon recommendation
of the Prime Minister. The Deputy Auditor General is also appointed through the same procedure
(Art 5).
The Federal Auditor General is accountable to the Council of the Peoples Representatives, and
between sessions, shall be accountable to the President of the Federal Republic. Each regional
state has also its own Audit Bureau with functions similar to those of the Federal Office of
Auditor General.
According to Art 7 of proclamation Number 68 of 1997, the Federal Office of the Auditor
General has the following authorities and duties:
. Audit or cause to be audited the accounts of the Federal Government offices and organizations;
. Audit or cause to be audited accounts involving budgetary subsidies and any special grants
extended by the Federal Government to Regional Governments;
. Audit the accounts of private contractors relating to the Federal Government contractual work,
which involves a sum exceeding Birr 500,000 (Birr five hundred thousand);
. Carry out or cause to carry out as may be necessary program and efficiency audit or
performance audit in order to ensure that the performance of Federal

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Government offices and organizations is in accordance with the law, economically sound, and
has attained the desired objectives;
. Report audit findings to the head if the audited Federal Government office and organization, as
the case may be, the result of the audits performed in accordance with sub- articles, (1), (2), (3),
and (4) of this article, the result of the audits performed shall be immediately submitted to the
Council of the Peoples Representatives, where it indicates the commission of crime;
. Issue directives, in cooperation with other offices concerned, regarding
accounts and property auditing procedures and standards;
. Issue certificates of competence to internal auditors to be employed by any
Federal Government offices and organizations;
. Where it deems it necessary, require internal auditors of any Federal Government offices to
audit the accounts and property of their offices and report the findings;
. Where it deems it necessary, train internal auditors in cooperation with concerned organs;
. Where it has to believe that any account has been kept in a criminal and dishonest manner,
impound such books, documents, ledgers, vouchers and other materials related to such account;
. Give necessary advice on the financial and accounting regulations to be prepared by the
Ministry of Finance.
. Make efforts in cooperation with other concerned government offices with a view to promoting
the accounting and auditing profession, take appropriate measures to ensure that the development
of the accounting and auditing profession of the federal government is in the right direction;
. Maintain a close contact and cooperation with the audit and control offices of regional
governments with a view to enhancing the development of auditing;
. Issue, renew, suspend, and cancel certificates of competence of private auditors and
accountants who provide auditing and accounting services.
. Charges fee for the issuance and renewal of such certificates in accordance with regulations
issued by the Council of Peoples Representatives;
The Office of the Auditor General performs financial, program, regulatory and efficiency
audit. Both are statutory audits. Audits conducted by the Office of Auditor General do not
have the same objective as audits conducted by private audit firms. This can be clearly
understood from the following brief objective of the audit conducted by the Office of the
Auditor General.
The main objective of audit of Office of the Auditor General is to conduct operational
and compliance audit.
The auditors of the Office of Auditor General perform their duties in accordance with
international auditing standards and according to the financial audit manual prepared by
the office. In the following paragraphs you will see the professional standards followed
by the auditors of the Office of the Auditor General. The commercial type accounts
should be prepared in accordance with the commercial accounting
standards.
These standards include going concern concept, the accrual concept, the
consistency
with the government accounting standards. These standards focus on the principle of
accountability based on budgetary appropriations.
One of the auditors responsibilities in auditing either the commercial type entities or the
central government accounts would be to ensure that the financial statements are prepared
in accordance with the accounting standards discussed above.

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All audit staff engaged in Office of Auditor General (OAG) audits are required to plan,
control and record their work. Moreover, auditors have to evaluate the internal control
system of the client to determine the extent of reliance they could place on such internal
controls. To arrive at reasonable conclusion, the OFAG also requires auditors to gather
sufficient, relevant and reliable audit evidence using various techniques including review
of financial statements.
The OAG requires all auditors to be professionally independent, to possess the professional
knowledge, skills and discipline necessary for the proper performance of audit. The standards of
due care and professional secrecy or confidentiality are also included in the ethical standards of
Office of Auditor General (OFAG).
The ethical standard of OFAG indicates that auditors should have good communication skills.
This helps the auditors to gather evidence tactfully and communicate findings effectively.
Moreover, auditors should conduct themselves at all time in a manner consistent with the good
reputation of the profession.
4.4.2 The Audit Service Corporation
As stated earlier the Office of the Auditor General was given the sole responsibility to
audit or cause to be audited all the government enterprises. However, the small number of
trained manpower, especially after the 1974 revolution, when the Ethiopian government
nationalized a number of private enterprises, the office could not satisfy the need for
audit with in the country. Thus, there was a need to establish a semi-independent audit
services corporation under the aegis of the Auditor General. Therefore, the Audit Service
Corporation was established in 1977 pursuant to Proclamation 126/1977. According to
Proclamation 126/1977, the objective of the corporation was:
. To render audit services to production, distribution and service giving organizations, of which
the government is the owner or majority shareholder.
. To render management consultancy services to the organizations specified above.
. To find way and means for further development of audit profession and try to make Ethiopia
self-sufficient within a short period, with respect to audit profession.
The corporation was established as an independent entity with powers to sue and be sued,
enter into contracts, determine terms and conditions of recruitment, as well as to charge
fees for its services.
The objective of audit rendered by the audit service corporation is the same as that of
private auditing firms. The audit service corporation audits public enterprises to examine
if their financial statements present fairly the true picture of their activities. The audit is
conducted on fee basis. The end result is an audit report that contains the expression of
the auditor's opinion. Thus, the type of audit rendered by the audit service corporation is a
financial statement audit.

4.5 Independent (External) Auditor

An independent auditor, also known as certified public accountant or external
auditor, has no connection to the organization being audited. Independent auditor

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conducts the audit on a fee basis, and is primary responsible to third parties-
creditors and shareholders. The type of audit carried out by an independent auditor
is financial statement audit. In Ethiopia, the authorized auditors perform financial
statement audit. In addition, the Audit service corporation a governmentowned
organization, performs financial statement audit.
5. Current Status of External Auditing profession in Ethiopia

There are some notable efforts in Ethiopia aimed at improving the quality of financial
information. One is aimed at establishing accounting and auditing standards for the private
sector under the auspices of the Office of the Federal Auditor General (OFAG). Another is
aimed at improving the capacity for public finance management under the auspices of the
Ethiopian Civil Service College (ECSC). Work is also ongoing on revision of the Ethiopian
Commercial Code under the auspices of the Ministry of Justice .

The Office of the Federal Auditor General and the Ethiopian Civil Service College
have been given some legislative authority for regulating the accountancy profession.
OFAG was established by Proclamation No.68/1997 by which it was set up to make efforts, in
co-operation with concerned organs, to promote and strengthen accounting and auditing
professions. OFAG has other broader responsibilities as provided for in the countrys
Constitution. Article 101 (2) of the Constitution states that The Auditor General shall audit and
inspect the accounts of ministries and other agencies of the Federal Government to ensure that
expenditures are properly made for activities carried out during the fiscal year and in accordance
with approved allocations and submit his reports thereon to the House of Peoples
Representatives. The ECSC was re-established through Council of Ministers Regulations
No.121/2006. One of its objectives, as set out in these regulations, is to formulate standards and
certify professionals. The ECSC is also given powers and duties, to formulate standards and
based on such standards confer professional certification in auditing and accountancy. For
these purposes, the ECSC has established a Institute for Certifying Accountants and Auditors
(ICAA). The ECSC already has broader responsibilities of responding to capacity building
needs of the civil service.
There are efforts by the Ethiopian Civil Service College (through its Institute for
Certifying Accountants and Auditors - ICAA) to certify accountants and auditors, focusing
initially in the public sector. The ECSC was initially established in 1995. In the first 10 years
of its operations ECSC designed and offered diploma and degree programs in accounting,
economics, management, law, and urban development. The ECSC was re-established in 2006
with new focus. The focus is now on special needs of the civil service, including specialized
programs that have never been properly offered by other institutions. It has dropped a few
diplomas and degrees in accounting, economics, and law, which are available in other colleges
and universities. The ECSC has been tasked to undertake certification of accountants and
auditors. For this purpose, ECSC has already set up the Institute for Certifying Accountants and
Auditors (ICAA) and is designing its programs and operations. Initially this effort was in
response to the capacity requirements of the public sector, but it is planned that it will expand to
deal with the private sector needs as well. This also, the ROSC team believes, is a useful step in
the right direction. But it needs to be well coordinated with the other related initiatives. These

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various initiatives need to be brought together to holistically deal with establishing strong
financial reporting infrastructure for the country.

OFAG issued a Code of Ethics for Professional Accountants in the country in January
2004. While the Code is tailor made for practice in Ethiopia, it is modeled on the Code
of Ethics for Professional Accountants issued by IFAC and the International Organization of
Supreme Audit Institutions (INTOSAI). Since issuing the Code, OFAG has investigated a
serious complaint, which resulted in disciplinary measures being taken against two auditors.
OFAG circulated the resulting disciplinary measures to the profession, regulatory bodies,
companies and other institutions that engage auditors.

Regardless of these efforts, currently there is no requirement for compliance with accounting and
auditing standards both in the Commercial Code 1960 and other laws and regulations for specific
sector entities. Some laws require compliance with generally accepted accounting principles and
generally accepted auditing standards, but these terms are not defined. The Ethiopian
professional Association of Accountants and Auditors (EPAAA) is not a professional certification
or regulatory body, does not have legal backing and is not a member of the International
Federation of Accountants (IFAC). The Office of the Federal Auditor General (OFAG) regulates
the accountancy profession but has other broader responsibilities. There is no quality review of
auditors work and no local legal requirement for auditors to have professional indemnity
insurance. There is no local professional accountancy qualification. Enforcement mechanisms of
financial reporting requirements are nonexistent because of lack of capacity in regulatory
institutions and the absence of penalties in the regulations.

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
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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 auditors 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

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an unfavorable political environment.14 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).
EPAAAs 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 countrys 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
directors 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.

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13.Locally, there is neither professional accountancy qualifications 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

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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.

14. There are no set penalties for noncompliance with the requirements on
accounting and financial reporting which affects auditing. In the Commercial
Code, there are no penalties for noncompliance with provisions for keeping
accounting records, preparing financial statements, or filing and publication
of the financial statements. Likewise the laws and regulations for banks,
insurance companies, state-owned enterprises, and NGOs have no penalties
for noncompliance with accounting and other annual financial reporting
requirements.

15. There is no mechanism providing assurance on the quality of work being

conducted by auditors. With absence of a program for quality review of auditors,
there is no mechanism for ensuring that auditors conduct their work diligently.

16.Appointment of auditors is usually through bidding process with hardly any regard
to technical expertise. Most auditors complained that the audit fees in the country are very low,
mainly caused by a practice where most appointments for auditors are done through a bidding
process, with little or no regard of professional expertise. This is indicative of little appreciation
of high quality audit services.

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17.Banks do not rely on financial statements for lending. The lending culture is largely
based on collateral security. If anything, financial statements play a small secondary role.

To sum up there are six pillars that make up a strong financial reporting infrastructure: statutory
framework, profession and ethics, education and training, enforcement mechanisms, accounting
standards, and auditing standards. However these pillars are not developed or implemented in
Ethiopia resulting in week auditing system or status at all.

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