INTOSAI Task Force, Global Financial Crisis – Challenges for SAIs Actions to Minimize and Avert the Crisis (Subgroup 2a)

1. INTOSAI Task Force, Global Financial Crisis – Challenges for SAIs Actions to Minimize and Avert the Crisis (Subgroup 2a) Director for Performance Audit Hannu Rajamäki National Audit Office of Finland Vilnius 9th June 2011

2. Subgroup 2 a TOPIC: Actions to Minimize and Avert the Crisis; What Is Working and What Is Not – focus on financial markets PARTICIPANTS: Austria, Estonia, Denmark, Finland, Netherlands, United Kingdom, and United States BASIS FOR THE REPORT: To share information, to describe events and actions, and to present the SAI experience concerning key factors and lessons learned

3. Premises • INTOSAI Task Force on the Global Financial Crisis: Challenges to SAIs • Financial crisis will happen again • We need a system that • reduces the probability of financial crisis and • is well prepared to handle a crisis • The main aim is to consider to role of SAIs in supporting the creation and functioning of such a system • Reflect on the role of SAIs based on experiences from the 2007-2009 crisis • The role played by individual SAIs will depend on the extent of their mandate

4. Working method • Three meetings • Regulatory system and government action during a financial crisis was examined through five different phases: 1. Preparedness 2. Immediate response 3. The management phase 4. Exit 5. The Establishment of new order • Each member of the subgroup provided a country paper describing the events and actions in their country • The subgroup prepared a questionnaire on SAIs’ mandate and rights of access to relevant

5. Main content 1 Introduction 2 Phases of Financial Crisis – Overview of the key characteristics of the regulatory system and government action related to different phases of financial crisis – Based on existing literature and experiences from the 2007-2009 crisis – Focus on events in the financial markets and the related government action

6. Main content 3 Common assessment framework for SAIs – How can SAIs contribute to achieving a well functioning regulatory system for financial markets? – What kinds of issues related to crisis prevention and government action during a crisis are of special interest to SAIs? – Focus on the immediate reaction and the management of the crisis 4 Experiences of SAIs during the 2007-2009 crisis

7. Overseeing governments’ and central banks’ responses to the crisis • In relation to various policy interventions SAIs have an important role • in auditing the legality and compliance with the principles of good governance in accord with specific constitutional and legal mandates • in assuring the quality and reliability of financial information • in ensuring that the effectiveness of various support measures is adequately evaluated • to press for clear measurable objectives against which the success of the programs can be evaluated

8. Overseeing governments’ and central banks’ responses to the crisis • SAIs need to evaluate the due diligence undertaken by the government before it acquires assets or liabilities, assess the risks associated and the valuation attached to these assets and liabilities • Once exit takes place oversight of the sale of assets is needed • The proceeds from such sales will form an important basis for how large a gain or loss accrues to the taxpayer • Removing guarantees and liquidity support as part of an exit strategy may not provide many issues for auditors other than overseeing timing and coordination

9. Challenges for SAIs • Auditing and overseeing increasingly complex financial institutions, markets and instruments challenge the competence, skills and resources of SAIs • SAIs need mechanisms in place to leverage resources across its internal units so that it can pull together multidisciplinary teams with appropriate skills • SAIs also need to ensure that they have the necessary authority and access rights to provide oversight and accountability • Obtaining a temporary increase in resources to meet the new responsibilities may be needed, including any necessary augmentation of skills

10. The role of SAIs in crisis prevention • There are many actions SAIs can undertake to be alert to the probability of a financial crisis and be prepared to respond quickly and effectively to a crisis that does occur • Recent crisis has highlighted the importance of sound public finances during boom years • Audit of fiscal policy, and transparency and compliance with fiscal rules would be an important contribution by SAIs

11. The role of SAIs in crisis prevention • SAIs could have a role to evaluate the appropriateness of the regulatory structure and the adequacy of supervision carried out in the financial sector • Adequate control and risk management systems are in place • SAIs may also be alert to strategic risks and shortcomings in the supervisory system • SAIs will have an important role in overseeing the implementation of new financial regulatory standards within their countries

12. The role of SAIs in crisis prevention • The SAIs may consider playing a more active role in improving efforts to recognize an impending financial crisis • The SAIs could review the efforts of the national agencies charged with economic forecasting, assessing whether they have sufficient resources and expertise to carry out their mission • SAIs can also review the quality of their countries statistical agencies, striving to improve the quality and timeliness of national data

13. Summary of the INTOSAI survey • A questionnaire was prepared in the context of INTOSAI global financial crisis task force (subgroup 2a, chaired by Finland) on SAI mandates and rights of access to information related to the management of a financial crisis • Replies were received from 25 INTOSAI member states • Issues raised included the need for adequate and sufficient resources and competencies • Difficult to generalize results: SAI mandates and tasks vary between the countries

14. Summary of the INTOSAI survey • Preparedness • Before a crisis develops it is important that SAIs have access to information especially at the oversight and government levels • Immediate response • Once a crisis has been identified an efficient government has the appropriate tools in place and can execute them together with the central bank

15. Summary of the INTOSAI survey • Management of the crisis • In the management phase of a crisis it is important that the SAIs are authorized to audit government actions • Exit strategy • The SAI has a crucial role to play in presenting an independent assessment of the taxpayer’s gains and losses once the support is unwound

16. Case: The nationalisation of Northern Rock - United Kingdom • A mortgage bank with funding problems • Treasury`s guarantees amounted to 51 bln GBP • Audit conducted by the UK NAO of the Treasury`s actions • Immediate risk had been avoided, but the capacity had been stretched • Scenario testing had revealed weaknesses which had not been addressed Lesson learned: Importance of scenario testing and addressing detected weaknesses

17. Case: The sale of ABN AMRO units • The Netherlands Court of audit investigated a proposed sale within a week • Request made by the Dutch parliament • Flexible response from the Court, creation of a project organization • Cooperation of the Ministry of Finance was essential Lesson learned: Quick response illustrates the importance of the role SAIs can play to support decisions about state interventions

18. Case: Managing financial stability across the UK banking system – audit by the UK NAO • UK Government provided 850 bln GBP support to the banking system: share purchases, guarantees and loans • The UK NAO undertook an audit to explain the measures taken, the role of the Treasury, nature of the costs, risks and liabilities • The first clear assessment of the scale and nature of the support • Recommendations were made on the future management Lesson learned: SAI was needed to make an overall assessment

19. Case: Monitoring and oversight reports The Netherlands • semi-annual monitoring reports are published by the Court of Audit on the activities and interventions made by the Ministry of Finance in response to the financial crisis

20. Case: Monitoring and oversight reports United States GAO has received significant oversight responsibilities for TARP; reports are issued every 60 days on the status of TARP, including: 1) performance, 2) financial condition and internal controls, 3) transactions and commitments, 4) acquired assets, 5) efficiency, 6) possible conflicts of interest, 7) efficacy of contracting, 8) audits, 9) special reports as warranted