1 - 9 PILOT ENVIRONMENTAL AUDIT OF SELECTED PROJECTS

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1. Project Summary and Relationship to China's Agenda 21

The purpose of this project is to carry out environmental audits and theoretical research, by study and analysing domestic and overseas experience in environmental auditing, China's own environmental auditing system can be established. The project aims to formulate auditing procedures and methods necessary for China's government audit institutions to carry out environmental audits. In the process, professional environmental auditors will be trained. This will contribute to China's environmental protection and sustainable development.

This project is based on programme areas 2A and 4D of China's Agenda 21, and is related to programme areas 4A, 12D and 14A.

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2. Background

Sustainable development and environmental protection have become important issues in the social and economic development of every country. In order to supervise the implementation of the government environmental policy, capital input on environment protection, promote rational utilisation of resources and enable global development on a sustainable basis, government audit institutions, as the integrated economic supervisory body of government management, find it imperative to carry out environmental audits. The 15th International Conference of the Supreme Audit Institutions (INCOSAI) which was held in September 1995 in Cairo, Egypt, included auditing of the environment and sustainable development as one of its themes. The Cairo Declaration points out that with regard to the importance of environmental protection and improvement, the International Organisation of the Supreme Audit Institutions (INTOSAI) encourages the Supreme Audit Institutions (SAIs) to consider environmental issues while carrying out their auditing functions.

However, as is the case with many other developing countries, China is experiencing serious challenges in co-ordinating the relationship between the environment and development. The current environmental situation in China is not optimistic. On the one hand, China has a fraguile environment and is vulnerable to natural disasters. On the other hand, the irrational production and consumption patterns existing in some areas has further worsened the natural environment. While the Chinese government has increased its annual spending on environmental protection in recent years, the rationale and benefits of the funding require supervision by independent audit institutions. In addition, it will be necessary for audit institutions to supervise the implementation of environmental regulations and management systems as well as improvement of air pollution, water pollution and hazardous wastes.

The implementation of this project should have great significance for the two fundamental transitions included in the Ninth Five-Year Plan and the Long-term Targets for the Year 2010. The National Audit Office of China (CNAO) has listed environmental auditing as one of its priorities in its integrated departmental planning.

CNAO has carried out environmental audits in 20 cities such as Lanzhou, Chongqing, Guangzhou, etc., in 1985 and 1993 respectively. These audits played a positive role in rationally utilising environmental protection funds and reducing pollution, which were focused on auditing in conformation (i.e., the collection and utilisation of waste disposal charges). Owing to the limitation in resources, no audit has yet been carried out in the implementation of government environment policies and the effectiveness of environmental protection. Therefore, it has become a top priority to develop environmental audit in China. Relevant approaches include drawing upon the experience and techniques in the international practice of environmental auditing and applying it to China's specific situation.

During the 13 years since its establishment, CNAO has accumulated experience in government auditing in areas of finance, regulation and its performance as well as the environment. With a team of 80,000 auditors, CNAO should have sufficient human resources for this project. As a central government department, CNAO enjoys significant administrative authority in the area of government auditing and considerable experience in organising audits of large-scale projects. This provides organisational assurance for the implementation of this project. In addition, higher education institutes and research centres have provided a considerable number of experts in environmental science and ecology. These scholars are a favourable external basis for the implementation of this project.

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3. Objectives

3.1 Long-term Objective

To establish China's environmental auditing system. This includes completing the standardisation of China's environmental auditing and gradually carrying out environmental audits all over the country. In addition, the project aims to increase the government departments' awareness of environmental costs and benefits before decision-making. These would help the government and the whole society to become aware of environmental protection and environmental laws and regulations.

3.2 Immediate Objectives

• To produce effective environmental audit reports. These reports would raise objective criticism and feasible recommendations for the audited projects, which would enhance related environmental protection measures;
• To research techniques and methodologies applied in environmental auditing assignments, summarise environmental auditing cases and compile an environmental auditing manual based on the experience gained in conducting pilot environmental audits;
• To train a core group of environmental auditors, strengthen international co-operation and improve CNAO's capability in the participation of sustainable development.

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4. Outputs and Activities

4.1 Pilot Environmental Audit of Water Works. Since the Three Gorge Reservoir Project is China's largest water project, the CNAO would complete an environmental audit as an example.

• To audit the process and result of the disposal of solid wastes in the Three-Gorge Reservoir area;
• To carry out a thorough audit on the utilisation and effect of the environmental protection component of the immigration funds for the Three-Gorge Reservoir area;
• To review and evaluate the environmental situation of the immigration area;
• To submit audit reports relating to the above projects;
• To summarise techniques and methodologies of auditing water works, and thereafter produce research reports.

Monitoring Indicators: audit report on the environmental protection of the Three-Gorge Reservoir area; environmental audit techniques and methodologies for key water work and the related research report.

Implementing Agency: CNAO

Time Schedule: January 1997 - December 2000

4.2 Pilot Environmental Audit in the Area of Environment Pollution Control. The environmental audit on Dianchi Integrated Ecological Improvement Project as a sample would be completed.

• To carry out a performance audit, evaluating the economy, efficiency and effectiveness of the Dianchi Project;
• To review the utilisation of environmental protection funds allocated for the implementation of water pollution control measures and the construction facilities for the disposal of polluted water;
• To audit the fund utilisation and the effect of integrated ecological improvement of the Dianchi Project and to produce a relevant environmental audit report;
• To summarise the content, techniques and methodologies in the environmental audit of pollution control, and thereafter produce a related research report.

Monitoring indicators: environmental audit report for the Dianchi Integrated Ecological Improvement Project; the content, techniques and methodologies of conducting environmental audit of pollution control and the related research report.

Implementing Agency: CNAO

Time Schedule: January 1997 - December 2000

4.3 Pilot Environmental Audit of Economic Development Zones. The model will be the Yantai Economic Development Zone (hereinafter referred to as the Zone) with the metropolitan ecological system as audit priority.

• To audit the use of air, water, land and the disposal of solid wastes in the Zone and thereby evaluate the self-purification system of the metropolitan ecological system;
• To audit the consideration of environmental impacts in the course of major project decision-making in the Zone;
• To submit an environmental audit report on the Zone;
• To summarise the content, techniques and methodologies of the environmental audit conducted in the Zone and produce a research report.

Monitoring Indicators: environmental audit of the Zone; content, techniques and methodologies of the environmental audit conducted in the Zone and the related research report.

Implementing Agency: CNAO

Time Schedule: January 1997 - December 2000

4.4 Pilot Audit of Projects for Biodiversity Conservation. An environmental audit will be conducted at Xishuangbanna Nature Reserve in Yunnan province and the Shennongjia Nature Reserve in Hubei province.

• To audit the efficiency and effectiveness of the conservation of the natural environment and biodiversity;
• To review the utilisation of nature conservation funds in various production emission control techniques, cleaner technology and ecological model as well as the establishment of environmental protection standards and information systems;
• To submit an integrated audit report concerning the two projects for biodiversity conservation;
• To summarise and explore the effective approaches for conducting To environmental audit of large-scale public utilities projects.

Monitoring Indicators: an integrated environmental audit report about the two projects for biodiversity conservation; effective approaches and methodologies for conducting environmental audit of large-scale public utilities projects and the related research report.

Implementing Agency: CNAO

Time Schedule: January 1997 - December 2000

4.5 Research of Environmental Auditing in China. The purpose of the research is to explore a basic framework for environmental auditing in China. This can be achieved through studying the above pilot environmental audits in collaboration with experts in environmental engineering, environmental economics, ecology, sociology and statistics as well as studying international documents on environmental audits.

• To establish the basic model for China's environmental auditing system;
• To develop a set of evaluation standards and indicators for auditing performance;
• To explore the content and approach of conducting audits in finance, regularity and performance in the course of an environmental audit;
• To define and classify risks existing in environmental auditing;
• To design a standard format for environmental audit reporting.

Monitoring Indicators: a research report about China's environmental audit system; a research report about environmental audit in developed countries.

Implementing Agency: CNAO

Time Schedule: January 1997 - December 2000

4.6 China's Environmental Auditing Manual

• To hold two 3-month training courses each year, which shall train auditors involved in the project as well as auditors from audit institutions at various levels. The organiser would invite experts to give lectures about environmental economics, environmental engineering, ecology, resource economics, environmental regulations and auditing;
• To strengthen international co-operation by inviting international environmental experts to give lectures in China and sending Chinese auditors to learn environmental auditing in developed countries;
• To hold two international seminars on China's environmental auditing;
• To compile China's environmental auditing manual according to experience gained from various pilot environmental audits and the requirements of China's environmental rules and regulations. The manual would refer to advanced international environmental auditing procedures and would be based on the research related to China's environmental auditing system.

Monitoring Indicators: 100 trainees who are senior environmental auditors and who shall possess a high level of environmental audit theory and rich practical experience, compilation of China's environmental audit manual.

Implementing Agency: CNAO

Time Schedule: June 1998 - December 2000

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5. Inputs

5.1 Chinese inputs

Chinese inputs shall be used for project management, the payment of project auditing fees, environmental experts and technicians, the training of auditors and the development of environmental auditing standards.

5.2 International inputs

International inputs shall be used for inviting overseas audit experts to participate in project consultation, give lectures and attend auditing seminars in China. The international inputs will also include sending Chinese auditors abroad to participate study tour and receive relevant training as well as procuring audit facilities and materials necessary for the joint research and formulation of China's environmental auditing manual.

5.3 Budget

The total inputs estimated for implementing this project are about US$ 4.4 million. Chinese inputs will account for US$ 2.3 million, and international inputs are expected to be US$ 2.1 million.

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Table 1. Budget by Item (in million US dollars)

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Table 2. Budget by Output (in million US dollars)

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6. Benefits

This project will help to improve environmental protection in audited areas. In addition, through evaluating environmental policy, regulations and their corresponding implementation, the CNAO would be able to formulate appropriate techniques and procedures for environmental audits. The project would provide an opportunity to train CNAO staffs, which would provide a foundation for CNAO to continuously conduct environmental audits. This project will have significant impact on the promotion of government environmental auditing and the implementation of environmental protection policies in China. The project will promote economic, efficient and effective use of China's annual government appropriation for environmental protection. This project would make environmental auditing a routine procedure in governmental auditing. Furthermore, environmental auditing would make government departments and enterprises take environmental impact and cost into consideration in the process of decision-making and management. Lastly, the project would increase society's awareness of environmental protection.

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7. Risks

As CNAO was established only 13 years ago, it lacks experience in environmental auditing and is short of standardised environmental auditing procedures and methods. In the course of this project, CNAO would accumulate experience of environmental auditing whenever appropriate, improve its research level and draw upon practices of overseas colleagues. In addition, the majority of the 80,000 auditors are young people lacking auditing theory and experience and unable to satisfy the requirements of environmental auditing immediately. Therefore, it would be of great significance to strengthen the training of environmental auditors both prior to and in the course of the project implementation.

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