BUDGET EXECUTION COURSE

1. BUDGET EXECUTION COURSE EXTERNAL ACCOUNTABILITY – NATIONAL AUDIT INSTITUTIONS November 4, 2003 David Shand OPCFM

2. INSTITUTIONAL DIFFERENCES BETWEEN COUNTRIES All national audit institutions generally perceived as a guardian of the “public interest” A wide variety of institutional arrangements – although they pursue similar objectives The European Tradition – Court of Accounts • prevalent in countries whose administrative tradition reflects Napoleonic influences • judges the actions and accounts of public officials • may also have a prosecutorial role • in some countries a tradition of ex ante “audits” – “audit” approval required before transactions can be entered into. Really “financial controller ” role • often no particular relationship with the legislature

3. INSTITUTIONAL DIFFERENCES BETWEEN COUNTRIES Cont’d The Auditor-General tradition • Prevalent in countries influenced by the United Kingdom • Generally as an officer of parliament, overviews the financial transactions and reports of the government • Close working relationship with financial committee(s) of the parliament • Generally ex post audits • Generally no prosecutorial role There are also other variations • US General Accounting Office, the review arm of US Congress • Audit boards, particularly in Asia, but generally similar to the Auditor-General approach

4. THE AUDITING PROFESSION • Auditing is a profession – has its educational requirements, professional rules and ethics etc • In most countries it is synonymous with the accounting profession •  Governed by accounting and auditing standards •  Also public sector specific accounting and auditing standards •  But the standards may vary between countries •  There are international auditing standards – but how enforceable ? •  Also INTOSAI standards, although these are not necessarily enforced • (see www.Intosai.org )

5. PFM and Auditing • Audit is a major component of the PFM system along with • budget development • budget execution and monitoring • external reporting • legislative review and follow up • These components should be mutually reinforcing or inter-dependent • For example to carry out a financial audit, timely financial reporting is necessary • For audit to have impact, strong legislative follow up is generally necessary • Audit can itself be regarded as an integrated system, viz - External audit (partly) relies on internal audit - Legislative follow up of external audit completes the audit chain

6. Where can audit add value to the PFM system ? • If systems are broken, priority must be to fix them • Audit may identify systems problems - and should propose remedies • But strengthening audit should not divert scarce technical resources (e.g. accounting and information technology skills) from fixing the problem • Audit generally adds more value where there is something to audit viz - a functioning PFM system, - including auditable financial statements

7. Where can audit add value to the PFM system ? • Reporting each year a litany of problems, which are already known, and which are not being addressed does not necessarily add value • Audit must support reforms, can be a catalyst for PFM reforms (and public sector reforms generally) • Audit pro-active review of the budget execution and financial reporting systems, identifying problems and suggesting solutions, may be particularly useful • Consider now the value audit may add through - financial auditing - compliance auditing - performance auditing - anti-corruption focus

8. Financial Auditing • Providing an audit opinion on the “fairness” of the information presented in the government’s financial statements • May be no adequate published financial statements – or maybe years late • what sort of accounting/reporting standards should govern the presentation of these financial statements • these statements are generally the historical public accounts, or budget execution documents. Generally no audit of the budget documents themselves • lending credibility to financial statements • as not all transactions can be checked; a systems based approach is used • which involves reviewing and commenting on the systems used to produce the financial statements • and possibly suggesting improvements

9. Compliance Auditing • A key aspect of improving PFM • Reviewing adherence to the financial control framework and the robustness of the framework • A priority focus in countries with poor governance • Internal audit has a key role here • The control framework aims to assist in budget execution, facilitate the correct flow of funds • And avoid divergence of funds through corruption or other factors • Many financial controls are established to guard against corruption or improper practices e.g procurement rules, payroll controls

10. Performance (Value for Money) auditing  • May vary significantly in scope and methodology • Review of effectiveness of programs, or only economy and efficiency ? • Preferable to focus on operational efficiency (“nuts and bolts issues” ?) • Not generally as broad as reviewing government “policies” • Perhaps expressing an opinion on reported performance indicators • What is the priority for full performance auditing in developing countries ? Should other institutions do it ? Are there sufficient skills. Is a performance management system needed first ?

11. Auditing and Corruption • Corruption is a major impediment to good governance and poverty reduction • Audit does not exist specifically to prevent or uncover corruption - an expectation gap here ? • But good auditing will prevent and uncover corruption • Public sector auditing has a more pro-active focus on detecting and deterring corruption, than private sector • But is this more the role of specialized investigative or anti-corruption bodies ? • Forensic auditing – dissecting particular operations

12. WHAT AUDIT IS NOT Resolving expectation gaps - • Audit does not provide absolute assurance of correctness, probity, legality or whatever • Rather an opinion, based on the use of professional standards, or reasonable assurance • This is particularly so in the case of financial auditing, which adopts a risk management approach

13. KEY ISSUES IN AUDIT PERFORMANCE • Need to move from independence and beyond capacity to impact • ability to review and report in a timely manner • reports which are acted on by the government and which improve PFM - and public sector performance • but audit independence is important , as is authority, right to report and coverage of whole public sector • capacity is also important - quality of the diagnosis and recommendations and significance of cases and issues raised • and timeliness and quality of the audit reports, using professional auditing methodology and standards

14. KEY ISSUES IN AUDIT PERFORMANCE (Cont’d) A number of key attributes are regarded as necessary for good quality audits. Most are generic to all auditing • Independence Appointment and tenure of the head(s) of the audit institution   Arrangements for funding of the audit institution; not beholden to the Executive Adequacy of funding Autonomy from other government controls (e.g. perhaps civil service rules) Freedom to select topics for review

15. KEY ISSUES IN AUDIT PERFORMANCE Cont’d • Scope and authority Extent of coverage of the whole public sector (off-budget and secret accounts, government business enterprises, sub-national government) Right of access to all necessary information Powers to report publicly Is there an executive role ( e.g. power of surcharge against wrong doers) Is there a judicial (prosecutorial) role ?

16. KEY ISSUES IN AUDIT PERFORMANCE Cont’d • Procedures for audit reports Timeliness and availability of external audit reports Clarity of the audit opinion and relevance/significance of the issues discussed Capacity of the legislature to follow up audit reports and the extent to which follow up occurs Capacity of the media in follow up and the extent to which such follow up occurs Quality and relevance of management letters provided to auditees Adequacies of processes for pursuing legal actions which may arise from the audit

17. KEY ISSUES IN AUDIT PERFORMANCE Cont’d • Performance and accountability of the National Audit Institution To whom is a national audit institution accountable ? Independent audit and review of the audit institution Adherence to international auditing standards (which ones ?) Extent of self assessment of performance – existence of some measures of audit costs and impact, apart from merely formal institutional arrangements How “pro-active” or “hands on” should an audit institution be in recommending changes to improve financial reporting, legal compliance or performance (value-for- money) If the audit institution makes detailed recommendations for changes, will this compromise its “independence”, as it then must review its own recommendations (?)

18. KEY ISSUES IN AUDIT PERFORMANCE Cont’d • Appropriate relationship with other audit/review/inspection organizations and anti corruption bodies Clarity and appropriateness of relationship to internal audit institutions (controloria, general inspectorate of finance, internal audit units of line ministries) Clarity and appropriateness of relationship with anti-corruption bodies and related prosecutorial bodies Relationship with procurement reviews and procurement audits, procurement complaints authorities etc. Relationship with state “inspection” bodies

19. WHAT GOOD AUDITING LOOKS LIKE • Constructive engagement with the client, not "gotcha" approach • Correct diagnosis of problems and clear, timely reporting on them • Identifying significant systemic issues - focus on "road conditions, not traffic accidents“ • Materiality and risk, not just formality and legality • Audit institutions as a major source of information to government, citizens and donors on the functioning of the PFM system References The World Bank: Features and functions of supreme audit institutions PREM Note 59, October 2001 (See under www.worldbank.org/public sector/PREMnote59/pdf)

20. WHAT GOOD AUDITING LOOKS LIKE (cont’d) • feeding into PFM diagnostic studies (World Bank CFAAs and PERs, IMF Fiscal Transparency Reviews) • External audit respected as a guardian of the public interest • Internal audit regarded as eyes, ears and advisor of senior management • Audit as a supporter of reform and a catalyst for change