INTRODUCTION TO PUBLIC FINANCE MANAGEMENT

Module 5.1 - External Scrutiny and Oversight

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Module map

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• Introduction to various kinds of audit (financial, performance, etc.)

• External audit function and legislature

• Importance of independence of Auditor General

• Role of the Public Accounts Committee and legislature

MODULE OUTLINE

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• Introduction to various kinds of audit (financial, performance, etc.)

• External audit function and legislature

• Importance of independence of Auditor General

• Role of the Public Accounts Committee and legislature

MODULE OUTLINE

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• Assurance to Parliament (and/or President) on:

• regularity and probity of financial transactions

• soundness of internal financial controls.

• Independent and objective review of financial transactions and financial reporting

• Certify the annual financial statements

• May provide view on efficiency, performance or value for money

What is External Audit?

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Accountability cycle

6Audit of budget implementation

Audit & oversight process

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Action taken

These may be the weak links

or Finance Committee

• Anti-corruption commission

• training

• advice on internal controls

• investigation and prosecution

• Inspector general of government

• ombudsman - complaints

Other review agencies

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• Introduction to various kinds of audit (financial, performance, etc.)

• External audit function and legislature

• Importance of independence of Auditor General

• Role of the Public Accounts Committee and legislature

MODULE OUTLINE

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• Review transactions (all?) to ensure that:

• the annual budget has been followed

• Financial Regulations have been complied with

• adequate records have been maintained

Improving the approach:

• Audit sampling?

• Problems found – solutions provided?

What Do External Auditors Do?

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Two aspects of public sector audit of equal importance:

• Traditional audit of legality and regularity of financial affairs is undisputed

• Audit of performance, effectiveness, economy and efficiency of public administration

• Up to each Auditor-General to determine their relative importance

LIMA declaration of INTOSAI (1977)

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• Auditing Standards (1992 and Code of Ethics - 1998) produced by INTOSAI

• 2002 - INTOSAI Auditing Standards Committeeto develop financial audit guidelines

• Practice Notes on the application of private sectorInternational Standards on Auditing or separate guidelines

International Audit Standards

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• Pressure to undertake performance work, but different skills are required

• An approach which requires careful planning and a gradual build up of skills.

• Priority is good probity, compliance and sound internal financial control

Problems with VFM audit

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• Independence from the executive

• Audit completed within 12 months of year end

• Annual audit report promptly made public

• Auditor-General responsible for the whole of the public sector

• Public Accounts Committee helps to ensure accountability & implementation of audit recommendations

Challenges for public sector audit

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• Introduction to various kinds of audit (financial, performance, etc.)

• External audit function and legislature

• Importance of independence of Auditor General

• Role of the Public Accounts Committee and legislature

MODULE OUTLINE

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• The existence of an appropriate and effective constitutional/statutory/legal framework and of de facto application provisions of this framework

• The independence of SAI heads and members (of collegial institutions), including security of tenure and legal immunity in the normal discharge of their duties

• A sufficiently broad mandate and full discretion, in the discharge of SAI functions

• Unrestricted access to information

Mexico Declaration (2007) - 1

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• The right and obligation to report on their work

• The freedom to decide the content and timing of audit reports and to publish and disseminate them

• The existence of effective follow-up mechanisms on SAI recommendations

• Financial and managerial/administrative autonomy and the availability of appropriate human, material, and monetary resources

Mexico Declaration (2007) - 2

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Autonomy in reporting – Developing CountriesFrom INTOSAI survey carried out in 2000 reported in 2001

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• The power of the President to appoint or terminate the appointment of the Auditor General

• Dependence upon a budget controlled by the Executive Branch of Government

• Interference as to the design and implementation of audit work plans

• Limitations on what reported and how quickly

What Undermines Auditor Independence?

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Primary Accountability

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• Auditor General – reports to Parliament through a Public Accounts Committee (UK)

• Audit Court– discharge for public accountants (France)

• Audit Board – members of college headed by a president, consensus rather than individual opinions (Germany & Japan)

• State Inspector General – appointed and reports to the state president (French sub-Saharan Africa)

Models of Supreme Audit Institution

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• Court of Accounts • Move from Chamber of Accounts of the Supreme Court ies

• Wide scope but limited remit (accounts of Public Accountants & Budget Out-turn Report)

• General State Inspectorate – Supreme Audit Institution in some African states

Francophone approach

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• Officers of the Legislature

• Wide scope and remit (Can examine any aspect except of execution of policy – but not policy itself)

• Reports directly to the legislature on Government and state activities

Anglophone approach

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• Public accounts of all public institutions including:

• Accounts of any and all public corporations established by parliament & bodies receiving public funds

• Local governments• Auditor General to have access to all documents, offices and staff necessary for audit

work

Scope of the Auditor General

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• the courts • the Central Bank

• subsidies • PPPs

• the security agencies • foreign embassies

• Audit opinions are typically classified as:

• Clean – OK

• Qualified – except for… - emphasis of matter

- Adverse - not OK

- Disclaimer – don’t know

Certification of Public Accounts?

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• Traditional opinion:

Subject to the observations contained in this report, the moneys expended were applied for the purposes for which they were appropriated by Parliament and the expenditure conformed to the authority that governed it

Audit opinion - 1

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• ‘Modern’ opinion:

In my opinion the financial statements provide a true and fair view of the state of the Government’s financial affairs on 31 December 201X and the transactions for the financial year then ending, subject to the observations contained in my audit report.

Audit opinion - 2

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• Introduction to various kinds of audit (financial, performance, etc.)

• External audit function and legislature

• Importance of independence of Auditor General

• Role of the Public Accounts Committee and legislature

MODULE OUTLINE

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• Audited financial statements and audit report to be submitted to parliament within 12 months

• KEY BENCHMARK FOR PFM

• Nine months (or before next budget passed to parliament) still challenging in some countries

• Audit report should be made public as soon as submitted to parliament

Timeliness of Audit Reports

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• Audit work plans include follow up on previous audit findings

• Line Ministries provide evidence of follow up

• Sanctions are applied (by management) for failing to implement corrective measures

Follow Up of Audit Reports

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Frequently the SAI may do little more than send its annual report to parliament… there is commonly little communication about its contents, the lines of investigation to pursue or the means of following up the findings

DfID (2005)

Public Accounts Committee – or Finance Committee

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• Member of opposition chairs the PAC

• Members have appropriate skills & training

• Meetings are publicised and usually open

• PAC recommendations implemented

• Sanctions for defaulters are followed-up

Commonwealth good practice

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• Timely review of audit reports

• Questioning of accounting officers where there are anomalies

• Follow up of recommendations made to the executive

Public Accounts Committee – or Finance Committee

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• Effective audit is key to public financial management

• Auditor General may provide good independent view of a government’s finances

• Publication of accounts and Auditor General’s report within a year of period end is VITAL

• Independence & relationship with Public Accounts Committee (or Finance Committee) are key

• INTOSAI provides standards and capacity building

KEY MESSAGES

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