Chapter 7
Auditing and Auditors in Ethiopia
7.1. Historical Development of Auditing in Ethiopia
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, and compliance auditing, investigation auditing, project and
contract auditing.
Pre 1974: In Ethiopian context, auditing is relatively new phenomenon in earlier periods, the
responsibility to administer and control the country‘s revenue and expenditure was exclusively
performed by ministry of finance. Government auditing in Ethiopia dates back to the
establishment of an Audit Commission by proclamation No. 69/1944 during Emperor Regime.
Major power and function of the Commissions were as follows:
Responsible for the examination and control of the accounts of the Ministry of finance and
was directly accountable to the Prime Minister
The power to control and examine the accounts of all other Ministries was given to the
Officers of the Ministry of Finance.
7.2. The Establishment of Audit and Control Office
In 1946, proclamation No. 79/1946 was provided to centralize the audit control of all
government accounts in one department by establishing the Audit and Control office under the
direction of the comptroller and Auditor General who reported and was directly responsible to
the prime Minister. As a result of this proclamation, the powers and duties of the new office were
clearly defined and the scope of its activities expanded. According to the Revised Constitution of
1955 (1948 E.C.) provided even wider duties and a large measure of independence. Accordingly,
the Auditor General reported to the Emperor and the Parliament on the financial operations of
the government and was given access to all books and records of government accounts.
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Functions of Auditors General Subsequently, the functions of the auditor general were amended
by decree No.32 of1958 which was later renumbered as proclamation No.179/1961(1958E.c).
The major power and Functions of Auditor General were as follows:
Auditing the accounts of all autonomous bodies existing by virtue of Imperial charters
Conducting the audit of the chartered organizations, established to provide essential services to
the public, through its charted organizations.
The Commercial Code of Ethiopia: the Commercial Code of Ethiopia, enacted in 1960
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 cannot appointed as auditor. 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. 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 was committed by the client that affects the public.
1974 – 1991: Following a revolution in Ethiopia, a military government came into power in
Ethiopia in1974 and declared a communist ideology. As a result, private companies underwent
nationalization and the number of state-owned companies in the country increased. Following
this, international public accounting firms that have been operating in Ethiopia were closed.
However, beside the nationalization event an important landmark in the history of accounting
and auditing in this period was the formation of the Audit Service Corporation (ASC) by
Proclamation 126/1977 (Government of Ethiopia, 1977).
Functions of Audit Service Corporations (ASC): the ASC mainly had performed external audit
of public enterprises. ASC had render audit services to production, distribution and service
giving organizations of which the Government is the owner or majority shareholder.
Study Note
The process of auditing professionalization in Ethiopia appears to exhibit distinct patterns
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By Tefera the(PhD
threeCandidate)
epochs when the state followed capitalist-oriented (pre 1974),
Communist (1974 through to 1991), and then capitalist-oriented (1991 onwards)
7.3. Types of Audit in Ethiopia
There are three types of auditing in Ethiopia. These are Private/External auditing in Ethiopia,
Performance Audit and Compliance Audit
7.3.1. 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
commercial 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.
7.3.2. 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.
7.3.3. 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 taxpayer‘s 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
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ascertain whether the taxpayer has accurately considered revenues and expenses when
determining the taxes shown in the declarations as per the 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
taxpayer‘s understanding and awareness of the relevant taxes.
7.4. Types of Auditors in Ethiopia
7.4.1. 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
United 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 Proclamation.
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 in the history of the
country ushered in a system of financial administration based on the annual budget with all its
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attendant requirements for strengthened internal control in the budgetary agencies. This entailed
the formation of internal audit as an integral part 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.
7.4.2. 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 (Recently renamed as Ministry of Revenue) is
responsible for administering the federal tax laws. Thus, the authority‘s 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 authority‘s 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 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;
7.4.3. 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 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
government—owned organization, performs financial statement audit.
7.5. The Nature of Auditing In Ethiopia
In Ethiopia audits seem to be done primary on account of government regulation. For example,
NGOS are audited because the assets of the NGOS are deemed a “national asset,” the use of
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which is ultimately accountable to the government of Ethiopia.
Auditing in Ethiopia could be viewed in five main areas.
1. The office of the auditor general (OAG)
The powers and functions of the office of the OAG are given through the proclamations that
established it, its sphere of activity lies in government audit.
2. The audit service corporation. The duty and functions of this entity involve mostly
commercial audits of commercial and productive enterprises wholly or partially owned by
government.
3. Private audit firms.
4. Ministry of finance audit and inspection. Auditing activity in this area includes audit of
ministries and government departments by MF auditors and inspectors, including tax audit by
Inland Revenue authorities.
5. ‘Corporations’ and enterprises’ auditors. These are audits performed by internal auditors
within enterprise.
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