BUDGET EXECUTION COURSE

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BUDGET EXECUTION COURSE

• EXTERNAL ACCOUNTABILITY
• NATIONAL AUDIT INSTITUTIONS
• November 4, 2003
• David Shand
• OPCFM

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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

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INSTITUTIONAL DIFFERENCES BETWEEN COUNTRIES Contd

• 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

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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 )

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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

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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

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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

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Financial Auditing

• Providing an audit opinion on the fairness of
  the information presented in the governments
  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

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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

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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 ?
•  

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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

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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
  

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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

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KEY ISSUES IN AUDIT PERFORMANCE (Contd)

• 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

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KEY ISSUES IN AUDIT PERFORMANCE Contd

• 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 ?

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KEY ISSUES IN AUDIT PERFORMANCE Contd

• 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

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KEY ISSUES IN AUDIT PERFORMANCE Contd

• 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 (?)

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KEY ISSUES IN AUDIT PERFORMANCE Contd

• 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

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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)

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WHAT GOOD AUDITING LOOKS LIKE (contd)

• 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