Strengthening Public Financial Management Through Internal Audit Reform

1. Strengthening Public Financial Management Through Internal Audit Reform The 1st ASOSAI-EUROSAI Joint Conference Istanbul, Turkey September 2011 Contributed by the Board of Audit and Inspection of Korea

2. Overview • Introduction • Road to the enactment of the Public Sector Internal Audit Act • Key elements of the Public Sector Internal Audit Act • BAI’s role in establishing the internal audit system • Some early outcomes and challenges

3. 1. Introduction • Objectives of Public Financial Management (PFM): • Fiscal discipline • Allocation of resources to priority needs • Efficient/effective delivery of public services • Despite numerous attempts to achieve the objectives, PFM system has not succeeded due to the lack of effective: • Control over the growth of expenditures • Prevention of the waste of public money • Response to the changing environment Public trust was jeopardized.

4. 1. Introduction (cont.) • The BAI’s leadership in restoring public trust -The BAI, as the Supreme Audit Institution (SAI) of Korea, initiated the enactment of a basic law for internal audit units (IAUs), ‘Public Sector Internal Audit Act.’ • Essence of the Act: - Re-establishment of the roles and functions of IAUs as a way of improving PFM 4

5. 2. Road to the enactment of the Public Sector Internal Audit Act Korea’s Internal audit system in the past: 5

6. 2. Road to the Enactment of the Public Sector Internal Audit Act(cont.) • The BAI’s efforts to unravel the status-quo of the internal auditing system: • In 2003, the BAI opened up discussion on establishing an overarching law governing a whole set of rules on internal audit functions in the public sector. • The BAI confronted strong opposition from public entities that were concerned that the Act might infringe on their management authority on organization and personnel. • To head off criticism, the BAI advocated the necessity of the law at public policy hearings and symposia attended by the National Assembly and other stakeholders. • After 7 years, the BAI succeeded in enacting the Public Sector Internal Audit Act in 2010. 6

7. 3. Key Elements of the Public Sector Internal Audit Act Mandating the establishment of internal audit units: - Legal basis: an IAU should be established within each public organization. Ensuring independence of internal auditing: - Independence in audit activities, organization, personnel, and budget. - Heads of IAU: recruited internally/externally (through an open competition) with a fixed term of office. Strengthening professionalism of internal auditors: - Heads of IAU may call on external experts for special skills/experiences, if necessary. - Heads of public organizations: may give incentives and/or promotion to internal auditors. 7

8. 3. Key Elements of the Public Sector Internal Audit Act (cont.) Standardized and transparent audit process: - Audit standards/ code of conduct - Auditors’ right to access documents and ask the parties concerned to appear and answer. - Publication release was encouraged. Cooperation between SAIs and internal auditors: - Establishment: a Joint Coordination Committee - Evaluation of IAUs on management, audit operation and audit performance. - Report of the evaluation to the National Assembly

9. 4. BAI’ s Role in Establishing the Internal Audit System • As a supervisor: • - Conducts a comprehensive assessment on the performance • of IAUs on a regular basis. • As a promoter: - Promulgates the audit standards, guidelines and manuals; - Organizes training workshops/seminars for internal auditors; and - Serves as an internal audit clearing house for the IAUs. • As a partner: - Communicates actively with the heads of IAU to seek cooperation for mutual trust (Joint Coordination Committee) 9

10. 5. Some Early Outcomes and Challenges 10

11. Thank you! The Board of Audit and Inspection of Korea