Compendium of Public Internal Control Systems in EU Member States - Second Edition 2014

COMPENDIUM of the public internal control systems in the EU Member States 2014 Second edition Europe Direct is a service to help you find answers to your questions about the European Union Freephone number 00 800 6 7 8 9 10 11 The information given is free as are most calls though some operators phone boxes or hotels may charge you More information on the European Union is available on the Internet httpeuropaeu Luxembourg Publications Office of the European Union 2014 European Union 2014 Reproduction is authorised provided the source is acknowledged doi10276143027 ISBN 97892279378683 COMPENDIUM of the public internal control systems in the EU Member States 2014 Second edition Table of Contents Foreword 1 Introduction 2 Analysis overview 3 Contributions 16 AUSTRIA 17 BELGIUM 29 BULGARIA 38 CROATIA 49 REPUBLIC OF CYPRUS 66 CZECH REPUBLIC 73 DENMARK 83 ESTONIA 93 FINLAND 113 FRANCE 121 GERMANY 137 GREECE 140 HUNGARY 151 IRELAND 169 ITALY 176 LATVIA 191 LITHUANIA 199 LUXEMBOURG 215 MALTA 226 THE NETHERLANDS 239 POLAND 253 PORTUGAL 267 ROMANIA 274 SLOVAK REPUBLIC 296 SLOVENIA 307 SPAIN 315 SWEDEN 334 UNITED KINGDOM 343 Appendices 357 APPENDIX 1 358 APPENDIX 2 364 1 Foreword Pressure on public finances has been substantial in recent years despite welcome signs of economic recovery People responsible for spending the taxpayers money are under growing scrutiny and increasing pressure to get it right and invest the funds properly for the benefit of citizens As former minister of finance and current budget Commissioner I realise how difficult this task can be as there is never enough money to address all urgent needs Thats why it is important for Member States to share experiences on control and audit systems which could improve transparency accountability and ultimately ensure better spending It is therefore my pleasure to introduce to you the second edition of the Compendium on the public internal control systems being applied in EU Member States The Compendium is a comparative and structured inventory of the public internal control systems operated in EU Member States A key objective of the first edition was to facilitate peertopeer learning thus contributing to good governance in the public sector To help deliver this an EU28 Network for Public Internal Control experts was established It provides a platform at EU level to discuss and share experience on internal control and internal audit issues in the European public sector I am glad to say that the first edition received very positive feedback from professionals in both the public and private sectors This broad interest plus Croatias accession to the EU in 2013 together with many changes in the Member States are the main reasons for this update Let me again express my appreciation to all those involved in the compilation and delivery of this Compendium I hope that this updated Compendium will continue to act as a catalyst for improving the overall quality of public internal control systems an objective we all share Janusz Lewandowski Commissioner for Financial Programming and Budget 2 Introduction This Compendium provides a structured overview of the various Public Internal Control PIC1 systems currently being applied by the public sector in each of the 28 EU Member States These are systems primarily used to manage national funds both revenues and expenditure2 rather than European funds On its publication in 2012 the Compendium was the first comprehensive overview ever produced It is based on national contributions mainly from Ministries of Finance Contributions are not confined to the present situation only most Member States have also provided valuable information on potential future developments The Compendiums primary aim is to be a source of information and a springboard for discussion amongst those organisations responsible for developing national internal control systems whether they are governments inside the European Union or outside eg candidate countries potential candidate countries and European Neighbourhood Policy countries However other audiences may also be interested such as supreme audit institutions academic circles and all those who have a professional interest in being aware of the latest developments in the field of good governance in EU Member States Why produce a Compendium and what is its practical use It was decided to produce a comprehensive overview of PIC systems in EU Member States in September 2009 during the PIFC Conference organised by the Budget DG of the European Commission All Member States agreed to share information on their existing national PIC systems thus permitting the mapping of the current public internal control landscape in the EU and the creation of a major facilitator for sharing best practice between peers The first edition of the PIC Compendium was introduced and presented at the PIC Conference organised by the European CommissionDG Budget in February 2012 Feedback and support from stakeholders motivated DG Budget to ask Member States to update the original This revised version has been prepared in time for the second PIC EU28 Conference 1516 May 2014 in The Hague The Compendium is a snapshot of the Internal Control systems in the EU28 Member States and as such is a tangible output of the Network established in 2012 The first edition proved to be a useful working tool for many It is used by professionals when considering changes to Internal Control systems Acknowledgements DG Budget is grateful for the support it has received from Member States and is happy to present this second edition of the PIC Compendium Although the Compendium is compiled by the European Commission Member States remain responsible for the contents of their contributions Any major changes since 2012 are indicated right at the beginning of every Member State contribution 1 The acronym PIC is used here as the common denominator for all the internal control systems used in public administration in the EU Member States The PIFC concept is a stateoftheart model for Public Internal Control that complies with international standards such as INTOSAI and IIA IPPF and European good practice It is used by the Commission to provide potential candidate countries with guidance for re engineering their public internal control systems where necessary 2 For Member States with a federal structure only the central governments may have been covered 3 Analysis overview Foreword This Analysis overview was prepared in 2012 for the first edition of the PIC Compendium comprising contributions by the then 27 EU Member States Since then Croatia has become the 28th Member state and is thus included in this second edition of the PIC Compendium However the 2012 analysis remains broadly applicable and has been updated solely with minor amendments 1 Introduction This Compendium with its contributions from all EU Member States is the very first detailed description of Public Internal Control PIC in EU Member States It describes how PIC is organised and how it is meant to operate in each Member State The snapshot of the situation as described in detail in this Compendium was taken in spring 2011 All stakeholders and in particular practitioners are looking for solutions to problems in the field of public internal control The Compendium is especially intended to give them the opportunity to discover the solutions that have been found by other EU Member States The compendiums descriptions of PIC systems may also be of value to anyone who is interested in the way in which public resources whether they be national EU or other related expenditures revenues or assets are managed and controlled so as to ensure their proper use for their intended purposes Some contributions to the Compendium describe in detail how Member States have designed their control and audit systems and why This description includes an indication of the standards international or national that are used as well as the rules and practices of reporting Other contributions put more emphasis on explaining the overall context in which the audit and control systems have developed and are continuing to develop Sometimes these systems have incorporated innovative ideas for dealing with common and well known challenges However it is not only the sunny and easy side that is described The contributions reflect many years of serious thought and hard work This overview is a first attempt to highlight similarities and differences in the reasons and ways in which PIC has evolved and developed over the last decade illustrated by country examples It also highlights some aspects of what the future holds as indicated in the contributions The overview is not intended to be exhaustive and is based on the individual contributions provided by the Member States The contributions however may use the same words and terminologies for different concepts It is recognised that solving the challenges arising from this fact for an overview will need much more indepth analysis of the individual concepts than was possible to accomplish during this first exercise This overview is only a starting point and more work will be needed especially to clarify issues of context influencing individual PIC developments 2 Main Developments of PIC in the last 1015 Years The reform of the public administration or some of its aspects has been on the agenda of many EU Member States for several decades While the more general public management reforms were more intense in the 1990s it is interesting to note that the areas of PIC seem instead to have seen more reforms since 2000 These later reforms could be explained by the objective need to adjust general reforms and could also be related to trends such as recognition of the need to manage risk In this period PIC has developed into a widely used integral and vital part of most governance systems in Europe 4 Reasons for reform Accession to the EU has clearly been of fundamental importance for the way in which the 13 newest Member States have reformed their public administrations in general and their PIC systems in particular It has also influenced the solutions to PIC systems adopted by the countries that became EU Member States in the mid1990s Austria Finland and Sweden3 Later on after accession striving for better performance and results has seemed to be the most prominent objective This objective was also the motivation for the EU 15 which recognised the need to adapt the public sector to a rapid delivery of the services demanded today and of the services that will be expected in the future while at the same time striving to prevent booming budget deficits see the contributions of Belgium Denmark France and Portugal4 There are also countries where administrative reforms have been aimed at fundamentally devolving or decentralising central public powers see Italy and Spain In other countries reforms have been based in part on the view that some services that are delivered today by public organisations could more efficiently and effectively be delivered by nonpublic or partially competitive organisations see Sweden and United Kingdom Main developments in PIC The reforms carried out over the past 15 years and for some countries even longer see France Netherlands and UK have brought fundamental changes to most of the 28 public administrations and to the environment in which they operate which is usually referred to as the control environment As the Spanish contribution stated the controls of public sector economy and financial activity cannot be separated from the changing situation in which they take place Consequently there have also been many changes in the way in which PIC operates and how it is organised The most striking developments in PIC components in Europe have resulted from an increasing attention to objectives and performance management to risks and governance as a whole including accountability as well as to the quality of service delivery and cost efficiency These developments have led to the wide introduction of international or national standards clearly defined legal bases and clearer mandates for control internal audit and where it exists financial inspection The functional independence of internal auditors has increased and they are expected to deliver new or wider services focusing on economy efficiency and effectiveness and on the provision of information and assurance with regard to system operations Reporting requirements have increased as have requirements for specific knowledge and competence of civil servants responsible for financial management and audit Public internal control has of course always existed in one form or another in each country but starting in some countries with reforms in the 1970s see France and 1980s see Netherlands and UK it has been modernised in a comparatively short period of time over the past 1015 years all over Europe During this period it has developed as a commonly known concept that is widely used PIC has become an integral and vital part of a modern governance system Practitioners in public financial management and control as well as internal auditors have become or are becoming a professional category of staff with formal qualifications and with special longterm training programmes including certification which are sometimes provided by institutes that are external to the public sector However it should be underlined again that there are many differences 3 See the 19962001 SIGMAOECD publications 4 19 20 and 32 4 References to countries do not necessarily mean that there are no other countries that would fall in the same category 5 between countries even neighbouring countries in terms of why when and how reforms in the public sector and in PIC are carried out 3 The Specific Parts of PIC 31 Internal Control Environment PIC systems differ from country to country as they have to fit into the respective overall governance arrangements with each of the constitutional stakeholders government parliament and the supreme audit institution as well as the accountability arrangements that exist between these stakeholders Within the government internal accountability arrangements are also a determining factor as is the content of accountability of those responsible for carrying out public tasks A distinction can be drawn here between legal accountability for compliance with rules and regulations and managerial accountability for the use of public resources to achieve goals Budgeting and accounting arrangements also have to be taken into account Accountability arrangements Each of the contributions of the EU Member States places the description of the PIC system within the context of the countrys overall governance arrangements explaining the reasons for specific developments as well as the causes and effects of solutions that characterise the system The contributions refer primarily to the organisation management and accountability arrangements of the executive However they also set out the context regarding the role of the other constitutional stakeholders Parliament has a major role to play with regard to the adoption of legislation not the least the adoption of the budget monitoring its implementation and holding the government to account The role of the supreme audit institution SAI is to report to parliament on its assessment of the reliability and completeness of the financial and nonfinancial information provided by the government To some extent regional and local governments are also taken into account although this Compendium focuses on the central government level The devolution and decentralisation of political and administrative powers including the existence of autonomous layers of the public administration at central regional and local levels or the use of various types of organisations semipublic private to deliver public services and to raise feestaxes or channel budget funds determine the conditions for the way in which PIC systems are designed and by whom Although general orientations can be distinguished and while all EU Member States have the main democratic arrangements in place the way in which governments are constitutionally organised differs significantly from country to country These differences relate to the organisation of the administration and the accountability of government to parliament but also to the budgeting and accounting systems that have been developed in the light of each countrys specific situation and needs The issue concerning who are the managers carrying out public tasks and for what exactly they are responsible has also not been dealt with in similar ways in the countries However all of these issues have a significant impact on the way that PIC is understood and organised Most countries describe their public administration as being organised in a monocratic and hierarchical way performing its activities on the basis of the principle of legality The administration is generally organised according to the ministerial rule ie in ministerial portfolios or sectors where line ministries have overall responsibility for their sector 6 including for subordinated organisations with line ministers politically accountable to government andor parliament for the decisions of their sector Some countries have in addition created agencies which operate under the political responsibility of the respective line minister The Netherlands for example has created 40 internal agencies for policy performance and operational management activities under the full political accountability of the respective minister with hundreds of lawbased armslength agencies under the limited political accountability of the minister Sweden is an exception to the ministerial rule as ministries do not have subordinate administrations Daytoday administrative work in Sweden is exercised by central agencies which work independently from ministries and the heads of these agencies are directly accountable to the government In most countries the political head of the ministry is politically responsible for hisher sector but is also accountable to the government andor parliament for executive decisions including financial management decisions and sometimes results In several countries however there is a clear division between the political and the executive heads of a public entity In Malta permanent secretaries and since recently in Hungary administrative state secretaries are responsible and accountable for management decisions In France programme managers integrate political and managerial responsibility under the ministers authority for the respective programmes that are assigned to them In Italy and Spain while political management organs have been given the task of defining the objectives to be pursued administrative managers are responsible for the basic organisation of the offices and for overall staffing levels In Ireland and the UK the accounting officer who is usually the most senior civil servant is even directly accountable to parliament Responsibility of public managers All of the contributions describe functional and financial delegation of decisionmaking arrangements within public entities aimed at ensuring that top managers are supported across the full spectrum of their responsibilities This delegation of decisionmaking includes the settingup of units responsible for preparing budgetary and financial management decisions Some countries have enhanced the financial function considerably transforming it from a pure accounting function to a broader financial management and control function However management and accountability arrangements within public administration entities differ significantly from country to country as does the spectrum of responsibilities of the executive level of administrative authorities such as ministers directors of agencies and heads of departments and units public managers Some countries such as Germany Greece and Luxembourg have kept to a large extent the traditional legal and hierarchical arrangements whereby managers are legally responsible for regularity and propriety as well as economy and efficiency in the use of an entitys resources Apart from legal requirements more and more countries nevertheless seem to expect the executive level of administrative authorities to ensure that the specific policy objectives that are planned implemented and accounted for annually can be achieved with the resources available In Denmark for example state institutions must set objectives for their work and monitor the results in their annual reports incentives for managers can be performancebased salary contracts and other measures and the institutions management must ensure the optimum utilisation of resources in accordance with the institutions objectives France has also introduced an objectiveoriented management In the Netherlands the policy programme is set by the government In Malta a Public Service Agreement is signed by every ministry with the aim of charting in 7 a direct manner the outputs expected from each ministry and identifying the officials responsible for the achievement of these objectives In those countries the budget and organisational arrangements as well as administrative laws usually give to managers a rather large discretion in the use of public funds In the UK for example departments have considerable freedom to decide how they will organise direct and manage the resources at their disposal In return managers are held accountable not only for the application of rules and regulations in their decision making but also with regard to the results achieved It seems that the more discretion countries give to public managers the more those countries focus on the proper functioning of internal control systems and the reporting on progress of achieving the objectives and related constraints Budget and basis for accounting About half of the countries seem to have an inputoriented budget Estonia Germany Greece Hungary Poland and Spain but many of those countries are currently in the process or are planning to introduce an outputbased budget Austria Ireland Portugal Romania Slovenia usually aimed at relating the budget to programmes Several contributions explain that the introduction of the managerial principle in public management is closely connected to this emphasis on outputs and on an evaluation of the achievement of targets set see Slovenia A few countries have already moved towards an outputoriented budget that is based on policy objectives eg Denmark France Sweden and United Kingdom The accounting approach at the central level of government is reported by several countries to be cashbased see Germany Ireland Malta Portugal Slovenia and Spain but an increasing number have adopted a modified accrualbased accounting see Czech Republic Denmark France Greece and Sweden or a mixture of approaches Netherlands Only very few countries have established full accrualbased accounting see Estonia 32 The Concept of Internal Control Not all countries interpret the concept of internal control in the same way While some countries have special internal control institutions that are independent from those they control others give the responsibility for internal control to the respective administrative entities In some countries this decentralised system of internal control is embedded and forms an integrated part of the administration The need to establish internal control report on it and apply a risk management approach can be spelled out explicitly in laws and regulations or derived from an existing legal basis In decentralised systems top managers have to report on the functioning of internal control systems More and more countries also require top managers to apply systems for managing or mitigating the risk of not achieving set objectives Different definitions of an internal control system The system of internal control is described mainly in two different ways in this Compendium Some contributions see Luxembourg and Spain describe it as the entire control system within the public administration and the sum of all institutions involved in controlling public funds internal in this context is understood as internal to the executive as opposed to external control which is exercised by the supreme audit institution and parliament Those countries have special control bodies such as Spains Intervenciòn General de la Administraciòn de Estado IGAE or Luxembourgs Inspection Générale des Finances which are independent from the authorities and entities of which 8 they are controlling the economic and financial management Those systems can be called centralised internal control systems Other countries such as Denmark Netherlands Sweden UK and the 13 Member States that joined the EU since 2004 understand the PIC system to mean the conceptually comprehensive and harmonised approach of government to ensuring that all public entity managers establish maintain and monitor their integral management processes Internal control in those countries is designed to address risks and to provide reasonable assurance that in pursuit of the entitys mission the general objectives are pursued These objectives are the orderly execution of ethical economical efficient and effective operations fulfilment of accountability obligations compliance with applicable laws and regulations and safeguard of resources against loss misuse and damage It is interesting to note that today some countries such as France and Portugal where strong control institutions used to exist have started to decentralise especially ex ante controls and to thus increase the responsibility and accountability of public managers Those systems can be called decentralised internal control systems Legal basis Many of the countries with a decentralised control system need to have internal control systems that are established within public entities clearly spelled out in the legal basis of these entities either in specific laws see Greece and Slovak Republic or explicitly included in other financial regulations eg in Finland the definition and responsibilities for IC is described in the Budget Act in Hungary it is included in the Act on Public Finances as well as in special government regulations and in guidelines and manuals in Estonia IC is mentioned in various legislative acts such as the Government Act In some other countries internal control is not explicitly mentioned but a clear framework for internal control of institutions has been created in existing rules and regulations eg Denmark based on Public Accounting OrderGuidelines for Responsibility for Management Many countries explain that their legislation and their financial management and control practises have implemented the interrelated components set out in the model of the Committee on Sponsoring Organisations of the Treadway Commission COSO as well as the guidelines for internal control standards in the public sector of the International Organisation of Supreme Audit Institutions INTOSAI This is the case especially of the newest EU Member States but also of other countries such as Finland Netherlands and the United Kingdom Responsibility for and reporting on internal control Setting up monitoring and reporting on the functioning of the respective internal control systems within public entities is part of the management responsibilities in those countries that have explicit decentralised internal control policies This reporting requirement is usually combined with the annual report or the annual financial statement of the entities In Lithuania each year the top manager of the public legal entity presents a report on the state of financial control in the public entity In Poland ministers report annually on the execution of the annual activity plan of the whole sector for which they are responsible and submit a statement on the status of management control for the preceding year In Finland the report on operations included in the final accounts of an accounting office must include an assessment of the appropriateness and adequacy of internal control and related risk management as well as a statement on the status of internal control and key development targets drawn up on the basis of the assessment assessment and statement of assurance of internal control Accounting officers in the UK sign annually a statement on internal control declaring the officers approach to and responsibility for risk management internal control and corporate governance 9 Risk management For most countries with an explicitly decentralised internal control system risk management is also a mandatory requirement for public management In Estonia for example the government regulation on strategic planning stipulates that any state authority is to submit a summary of risk analysis and an analysis of the activity environment In Sweden most agencies must perform a risk analysis aimed at identifying the circumstances constituting a potential risk that the entity would be unable to meet the objectives in accordance with the requirements established by the government If necessary measures are to be taken to meet those objectives Other countries such as Ireland indicate that formal risk management strategies are not in place in general but they are implemented informally by some departments A few countries on the other hand do not mention explicitly risk assessments at all as a part of their internal control arrangements Germany Italy Luxembourg and Spain 33 Internal Audit Almost all Member States have an internal audit function in place but it does not necessarily cover all areas of the public administration Formal and informal ways are used to achieve a relevant level of coordination and harmonisation Traditional compliance and financial audits are supplemented increasingly by consultancy services and audits of performance requiring professional and well trained internal audit staff Some of the Member States have established audit boards andor audit committees Existence of internal audit and legal basis Of the 28 Member States the vast majority have an internal audit capacity in place Three countries are currently relying on other arrangements but have plans to introduce internal audit in the public sector Luxembourg is considering as a link to its preparation for budgetary reform either establishing an internal audit unit within each ministry of a certain magnitude or establishing an internal audit unit attached to the Ministry of Finance Greece has adopted a law for the establishment of internal audit the implementation of which is pending upon the signature of the required presidential decree In Italy a commission has been entrusted with issuing directives in order to provide at least a minimum legal base for internal audit The Spanish system which gives great importance to exante form of control called preliminary control of legality has also an elaborated form of internal audit carried out subsequently and systematically of the economic and financial activities of the state public sector by the earlier mentioned IGAE Some countries such as France and Portugal have undertaken during the past decade a comprehensive structural reform of the public sector which includes moving from a traditional legalist and inputoriented system as referred to in the Portuguese contribution towards a system that is more performanceoriented Internal audit now exists in all line ministries and ideally it focuses on the reliability and efficiency of internal control systems and valueformoney The function of financial inspectors in Portugal has been refocused from transactionsoperations towards areas where the financial risk is considered to be high The majority of countries that have an internal audit established the function in specific laws or regulations Internal audit is not a regulatory requirement in the United Kingdom but it is nevertheless enshrined as a mandatory part of governance and assurance arrangements within central policy rules and de facto every government department and armslength body has an internal audit service There is no explicit legal basis in 10 Germany either but apparently all departments follow the recommendations made by the Federal Ministry of Interior in agreement with all other ministries Some 18 contributions indicate that their internal audit activities are based on specific standards It is clear that the Institute of Internal Auditors via its Standards for the Professional Practise of Internal Audit has also played a prominent role as the de facto standardsetter for public internal audit systems which is very similar to the way in which the COSO model and INTOSAI have shaped internal control standards However a noticeable development in recent years not the least for the 13 Member States that joined since 2004 is that later laws or regulations on internal audit refer to recognised international standards and good practice rather than to specific standardsetters Internal audit coverage Most internal audit systems do not cover all parts of the public sector or every part in the same way Even the coverage of the central government part varies from country to country The following examples will illustrate this situation Lithuania plans to amend existing legal acts for the elaboration of internal audit in municipalities In Estonia work is continuing in the implementation of both internal control systems and an internal audit function in local governments In both of these countries there is a need and ambition to ensure more coherent and comparable information on the performance of the public sector not the least for accountability purposes Efforts aimed at achieving costefficiency also explain the variation of internal audit coverage In Romania for example public internal audit structures have been established within each public entity and with the same tasks ranging from legality to audit of economy efficiency and effectiveness However for local public entities with a budget up to 100000 EUR there is no obligation to set up a unique internal audit function In those cases internal audit is instead limited to regularity audits which are performed by the existing internal audit offices of one of the ministries Romania has also a system in place aimed at extending internal audit coverage to local administrations as well A structure has been put in place allowing town halls to cooperate in the framework of an association to establish a common internal audit service Another step that is being taken gives town halls the possibility of forming partnerships of two or more thereby using a more costeffective way of creating an internal audit service In Sweden only those few agencies that manage complex or sensitive operations possess large assets transfer huge funds or have a highcost base are obliged to set up internal audit The Belgian regulations explicitly allow internal audit activities to be carried out in three different ways by a permanent dedicated audit service by a permanent shared audit service for a number of institutions or by an external service These possibilities are already possible or will soon be possible in other countries as well under certain conditions see Denmark Estonia Netherlands Slovenia The Spanish contribution illustrates the new complexities that arise from a public audit and control point of view when a centralised public sector is reorganised fundamentally and the demand for control and audit will concern different types of organisations with different reporting demands A way forward that has been suggested is the wider and more common use of the single audit concept including techniques procedures and reporting arrangements which would allow cohesive action by all controlaudit bodies New challenges new types of audit The programme of audit work has developed considerably for internal auditors Todays work programme is far from the task of checking compliance with mainly financial 11 regulations and policies A basic component of todays work programme for most internal audit functions is the audit of financial information and of the regularity of financial management aimed at assuring the minister or the top management of an entity as to how the internal control systems and procedures of the entity are functioning This assurance is sometimes linked to the obligation of the ministertop management to sign a statementmake a declaration on the functioning of the entitys internal control systems However the introduction of performancebased budgeting evaluations riskbased management the growing complexity of the technology used to deliver government services etc seem to have considerably changed the demand that is made on internal audit There are increased requests for more varied expertise more consultancy services and higher quality of services Only the contribution of Estonia indicates that the demand for consultancy services has decreased The extension of the scope of internal audit services is also reflected in the various and increasing types of audits regularly conducted by internal audit functions compliance inventory financial financial assurance management operational systems and IT audits are often mentioned in the contributions Security information security and performance audit are also mentioned frequently Internal audit relation with external audit With a few exceptions there seem to exist continuous and in some cases elaborate working relations between public internal audit and external audit entities SAIs These relations have developed over time and in some countries they are formal and laid down in laws and regulations but they are equally often based on initiatives taken by the audit organisations themselves for example in order to avoid duplication of work and facilitate the process for the auditee How this relation has been defined is of course dependent on the precise mandate and role of the respective institutions A common basic relation between internal and external audit is described in the Maltese contribution The SAI of Malta has access to and can use the work of internal audit for evaluating the effectiveness of internal control Internal audit is also well placed to provide the SAI with information on the effectiveness of the systems used However the SAI always has full responsibility for the conclusions drawn from such information Internal audit provides the SAI with the annual audit plan and the heads of the two institutions liaise on various professional matters This description captures the situation in most countries as long as a few more components are added such as internal audit providing audit plans and reports to the SAI audit organisations cooperating on methodological and training matters and the SAI having the possibility as an advisor or observer to take part in regular meetings of the heads responsible for internal audit see Austria Bulgaria Cyprus Denmark Hungary Latvia Netherlands Poland and United Kingdom Use of audit boards and audit committees The use of audit boards and audit committees to improve the governance of institutions by strengthening their standing and increasing the quality and value of audit activities concerns about half of the countries In principle there is a distinction between at least two categories of audit boards and committees One category is centrally placed and has primarily an advisory function in relation to the government or to part of the government on PIC matters including internal audit A second category is more directly concerned with the management and operations of existing internal audit functions and covers parts of the government 12 However these boards or committees may play very different roles have different mandates and cover more or less of the public sector Today they are more common at central government level than in any other parts of the public administration but the coverage is far from being comprehensive The advisory type of boards and committees can be found for example in Hungary with the Public Internal Finance Control Interministerial Committee providing guidance for the improvement of the PIC system and in Finland with the Advisory Board for Internal Control and Risk Management for the development of internal control and the planning of cooperation and joint measures across sectors of government Other examples illustrate the diversity of audit committees which focus more on management and operational matters for internal audit Poland has 17 audit committees corresponding to the 17 ministries all of which were established in 2010 Such a committee may inform and give advice to the minister about risks connected with the implementation of activities throughout the entire area of responsibility of the ministry and this function is aimed at achieving the ministrys objectives The commitee is thought to provide an efficient internal audit service to the minister as well as services with a view to ensuring adequate efficient and effective financial management and control Latvia has four audit committees consisting of senior management officials The task of these committees is limited however to keeping management informed of the results of internal audits and convince management to take decisions on the implementation of any recommendations stemming from these audits However it seems that the number of such committees in decentralised structures or in regional and local administrations is growing slowly if at all The contributions of Bulgaria and the Czech Republic both indicate that managers question the relevance of such committees and as stated in the Czech contribution audit committeesaudit boards did not find support in the Czech public sector as the new concept of internal audit is perceived with some exceptions as another bureaucratic and economic burden without an apparent benefit to the public sector Building competence and certification of public internal auditors Considerable public resources have been and are continuing to be invested yearly in building the competence of managers and staff of internal audit units and institutions Investments have also been made in professional networks seminars and conferences for internal and external auditors often including both public and private sectors There is a requirement in at least half of the countries for each internal auditor to continuously maintain or upgrade hisher professional knowledge and experience Training programmes have been developed for this purpose and training is often delivered via those entities responsible for the coordination and harmonisation of internal audit in collaboration with the countrys audit professionals using internal training facilities and trainers for example from the administration universities or private organisations Alternatively the internal auditor may be given the opportunity to follow distance etraining or other training provided by certified educational institutions In Bulgaria Hungary Netherlands and Slovenia a public internal auditor must be registered authorised certified or otherwise able to prove that heshe has undergone the required professional education in order to be in a position to serve as a public internal auditor In Denmark the head of the internal audit service within the Ministry of Finance is certified Certification Scheme for Public Auditing and internal audit staff are obliged to follow a course in public auditing and in addition have the opportunity to follow courses organised by the associations for internal auditors Estonia and Lithuania are currently considering the introduction of national certification in order to better meet the demands and needs of their public sectors 13 34 Coordination and Harmonisation of Internal Control and Audit The coordination and harmonisation of internal control and audit in the public sector at large or in the government sector is achieved in many different ways More than half of the countries have established special units for this purpose Coordination and harmonization A clear majority of the countries have taken steps to ensure that internal control including internal audit policy and methods are coordinated and harmonised throughout the central government administration Several countries are considering at the moment ways of establishing similar coordination with other parts of the public sector as well The ways to achieve a coordination of policy and methods range from making recommendations to establishing professional networking arrangements between financial controllers internal and external auditors and finally to setting up central harmonisation units More than half of the countries do have such special entities which have responsibility for proposing regulations harmonising the standards of the various internal control components monitoring overall quality and performance and establishing and coordinating training activities see for example Finland Lithuania Netherlands Portugal and Slovenia In most cases these entities are part of the ministry of finance and sometimes they are also backed up by independent advisory boards or committees Several countries have no specific harmonisation arrangements However they may instead have forms of networking arrangements which may provide the necessary level of coordination and harmonisation see for example Austria Cyprus Denmark Germany and Latvia The Czech Republic recently abolished its central harmonisation unit for efficiency reasons Other countries see France Hungary Portugal and United Kingdom have underlined the importance of such structures especially for creating good and efficient cooperation arrangements between managers of public entities and financial controllers and auditors Portugal considers that an effective and practical harmonisation and coordination structure has an important role in overcoming resistance to a more fundamental reform of the control and audit structures in an administration 4 Financial Inspection An ex post financial inspection service is established in about half of the countries The organisation and reporting requirements of the inspections differ considerably Financial Inspection Financial inspection is usually understood either as an external and centralised control activity exercised by inspectors who are independent from the entity they inspect and aimed at addressing major irregularities and dysfunctions and administratively sanctioning the responsible people and institutions or embedded in public organisations as expost financial control inspectors In a few cases the financial inspection service is reported to also have ex ante tasks see Belgium The financial inspection function is established in the majority of the 13 newest Member states such as Bulgaria Croatia Hungary Poland Romania and the Slovak Republic as 14 well as in Belgium France Greece Italy Portugal and Spain By contrast no central institution responsible for financial inspection exists in the Nordic States Denmark Finland and Sweden the Baltic States eg Estonia Latvia and Lithuania Germanic countries Austria and Germany or the UK In those countries the function is embedded in the financial management and control system The organisation of financial inspection differs considerably among the countries In the EU 15 where financial inspection functions exist such as in France and Spain the function is historically an important part of the financial management and control system and comprises a huge number of staff During their accession period the 13 newest Member states established the internal audit function but nevertheless kept the financial inspection function in order to bridge the gap while internal audit was still in the development stage However they changed the focus of their traditional financial inspection function towards investigating more serious cases of mismanagement fraud and corruption triggered by complaints and other information The number of inspectors in EU 12 countries is lower than in the old Member States but it is nevertheless significant Reporting requirements also differ in the different systems While in the 13 Member states that joined the EU since 2004 financial inspection usually reports to the Ministry of Finance in countries where the supreme audit institution is organised as a court of accounts with judicial power France Italy Portugal and Spain financial inspection also has to report any irregularities detected to the Court of Accounts which then opens a financial responsibility procedure and requests the reimbursement of any undue payments made by managers 5 What will the future bring Looking towards the future the contributions mainly describe the next steps for already decided and ongoing reforms of the countries public administrations or PIC systems Such steps when they relate to more general administrative reforms concern for example ongoing devolution from central government to implementing entities and the existing controlaudit systems in particular will suffer the consequences of this devolution see Spain Or in the case of Italy an even more fundamental transformation of the state into a federal republic will include increasing the transparency of the public administration establishing relevant monitoring and reporting practices and clarifying the measurement and evaluation of organisational and individual performances Other contributions describe the intentions or decisions already taken to establish reporting accounting internal control and audit systems at regionallocal government levels or for nonpublicpartly public services with the ambition of ensuring an equal level of protection transparency and effectiveness irrespective of where public resources are spent see Estonia France Lithuania Netherlands and Romania Next steps related to ongoing public expenditure reforms that are often mentioned in the contributions are better integration of strategic planning at government level with the budget Estonia streamlining budget execution and financial controlaudit solutions Portugal and improving the monitoring of government spending and policy performance by introducing new procedures and systems for measurement evaluation and risk management Estonia France and Portugal A prominent aspect that is common to most contributions is the struggle for better quality and more efficient solutions for internal control and especially internal audit Some countries see Estonia Hungary and Lithuania plan to introduce systematic quality assessments quality monitoring or quality review systems The contributions of Estonia and the United Kingdom offer an additional perspective related to quality namely the need to ensure that the information provided to those responsible for setting priorities and defining programmes will allow them to read across public programmes and entities as well as 15 across private and public sector accounts The internal audit services then become more oriented towards strategic objectives of programmes or entities The need for more efficient internal audit and proposed solutions for meeting this need is pointed out by several countries Some complementary ways of achieving better costefficiency are mentioned The Czech Republic Latvia and the Slovak Republic plan to simplify and streamline control and audit systems within the government sector but also between the government and other parts of the public sector Other countries will reduce costs and increase efficiency by centralising support services such as internal audit staff management and officehousing Netherlands and also by improving the management of all information across the entire public sector with the help of new information systems and Internetbased solutions However the future may also take very different directions from what was hoped and planned at the beginning of 2011 The Spanish contribution raises the fundamental question in which aspects does the current and developing PIC system need to be adapted or more radically changed as a consequence of the austerity and other measures that many countries have recently started to implement or will have to design and implement Also what role if any is there for PIC institutions in designing or participating in the implementation of these measures Solutions that countries could easily afford a few years ago might be out of reach in the future for financial reasons 6 Concluding Remarks The wave of public administration reforms which started in some countries at the beginning of the 1980s has become to some extent a PanEuropean movement and as this Compendium shows none of the EU Member States has remained unaffected especially with regard to PIC However the countries have followed their own specific trajectories and developments in PIC at different speeds and in different directions due to a disparity in the starting positions with regard to administrative traditions and state infrastructure but also due to a disparity in targets An obvious conclusion of this summary is that public administration reform in general and reforms in public internal control in particular are never finalised Administrations continue to look for costefficient solutions to specific challenges in a rapidly changing environment As in the past public administrations with all kinds of administrative traditions will have to remain creative when adapting to new requirements Notwithstanding all differences between countries there are a multitude of similarities existing today with regard to the different parts of the PIC and not the least internal audit These similarities might create an opportunity and rationale for crossborder networks focusing on further benefitting from other countries experiences in the specific European context and finding synergies Meetings between similar bodies from various countries creating a platform for costefficient training of internal auditors as well as financial managers might be concrete ideas for such a network approach To wrap up we would like to draw the attention of the reader towards issues that are not covered with this Compendium but that should not be forgotten in future discussions We are all facing the prospect of stormy weather in our economies However only a couple of the contributions raise questions to what extent this condition will have consequences directly or indirectly for the existing PIC solutions After all this Compendium does not discuss to what extent if at all the weather forecast could also be a consequence of flaws or failures in the PIC systems 16 Contributions 17 AUSTRIA Public internal control 5 Summary of the major changes 20112013 Federal budgeting was subject to substantial changes in two stages 2009 and 2013 from a cashbased governmental accounting system to a budgeting and accounting system based on accrual principles In the Austrian contribution no major issues have changed When writing the contribution in March 2011 the first stage was already implemented and the second stage was very good foreseeable as the budget law applicable as of 2013 was already stipulated There was nothing else to do than to change the time perspective Beside this the names of some directorates general have changed slightly and the position of Federal Ministry of Agriculture Forestry Environment and Water Management was redefined in matters of interaction with its paying agency 1 Brief history of present PIC systems Federal budgeting is subject to substantial changes It was developed in two stages 2009 and 2013 from a cashbased governmental accounting cameralistic system including multiplephase accounting to a budgeting and accounting system based on accrual principles which facilitates budget control both by presenting accrual consumption of resources and by cash flows indicated in the cash flow statement There is also a statement of the financial position in the sense of a federal balance sheet The initial stage of the budget law reform applicable from 1 January 2009 has the following objectives The federal budget planning is stated for several years and is binding For the first time a financial framework with binding expenditure ceilings has been established These ceilings were defined as binding on the level of five headings rolling for four years to come The amount of a majority of the ceilings is thus fixed Only in the case of items dependent on economic cycles or on tax revenues have variable limits been specified the amount of which is to be determined on the basis of clear defined parameters The expenditure ceilings are approved by the parliament which can also change it The required budgetary discipline is supported politically in this way although it is always possible to react to changed priority settings The parliament is thus always the final decisionmaker in the matter of the budget With the budget planning extended over several years planning security is enhanced for all the participants and a predictable sustainable budget policy is supported The strategic report accompanying the Federal Budgetary Framework Act contains all the information necessary in order to provide for the figures of the binding budget planning to be traceable over several years The strategic 5 Contributed by the Federal Ministry of Finance 18 report thus becomes together with the Federal Budgetary Framework Act a key budget planning document Also from 2009 incentives are determined for each department supporting them in using the tax money efficiently the funds not used up at the end of the year are generally not forfeited but rather transferred into a reserve fund and they can subsequently be used with no obligatory assignment ie according to the priorities of the department In this way every minister becomes hisher own Minister of Finance and heshe is able to extend hisher own scope of action by a wise and efficient administration of the budget funds This leads to a more efficient use of tax money for the benefit of the citizens The second stage of the budget law reform became applicable as of January 1st 2013 The following objectives are being pursued in the second stage The desired effects and benefits of policies and administration will be integrated into the budget Such performanceoriented budgeting is intended to clearly and transparently indicate to a wide public the kinds of results which are achieved when the tax money is used Another significant aspect of the performanceoriented budget is gender budgeting which has been introduced with the budget law reform in Austria and the legal basis for which has already been established in the federal constitution The federation the states and the municipalities are obliged to aim at the real equality of genders when providing the budget The second stage of the budget law reform involves a fundamental further development of budgeting in the federation with regard to a new budget structure and in connection with this a resultsoriented management of the departments Emphasis is placed on the ongoing development of the federal accounting The truest possible indication of the financial situation of the federation which has been included in the constitution as a new budget principle will bring a transition from the traditional governmental accounting to an accounting oriented in commercial terms without losing sight of the particularities of a public budget To a large extent the development of the PIC systems is related to the budget law reform and it essentially includes an extension of the audit universe towards performance orientation The supervisory functions in the broader sense are provided basically as follows Parliament The general parliamentary supervisory powers also apply in connection with budgeting the rights of interpellation enquiry and resolution The National Council may request the execution of particular inspections by the Court of Auditors The National Council receives a number of reports on administration or from the Court of Auditors The principle of performance orientation applicable from 2013 leads to an extension of parliamentary competences particularly of the budget committee Court of Auditors The tasks of the Court of Auditors within the scope of budgeting are essentially related to participation in law making and the associated supervision and accounting This includes the following countersigning of deeds by which financial debts are substantiated 19 being informed in the case that budget forecasts are exceeded generally before implementation participation in adopting significant implementing rules for the Federal Budget Act preparing the federal statement of accounts Bundesrechnungsabschluss and its submission to the parliament National Council as its own legislative enactment as part of the second stage of the budget law reform a function within the budget planning process If EU funds are involved in the federal budget the European Court of Auditors also becomes entitled to exercise supervision of the budgeting institutions Federal government Within the budgeting process the federal government is responsible for decisionmaking in respect of the stability programme the strategic report the Federal Budgetary Framework Act drafts and the Federal Finance Act Bundesfinanzgesetz etc It is also competent to approve the expenditure commitments and dispositions on interests in companies proposed by the Minister of Finance Federal Chancellor The federal Chancellor exercises coordination functions in human resource planning and in the performance orientation of the budgeting process Federal Minister of Finance The federal Minister of Finance exercises particular tasks within the budgeting process in compliance with the federal constitution and the federal budget act including being responsible for the overall budgeting process in charge of drawing up the draft Federal Budgetary Framework Act including the strategic report and the draft Federal Finance Act as well as the stability programme responsible for enacting implementing rules possessing a number of participation rights in other institutions is responsible for interdepartmental budget control Budget institutions The Federal Budget Act 2013 differentiates the institutions involved in the budget process according to the stage of the activities planning decisionmaking execution and supervision Correspondingly it discriminates between regulatory responsible for planning and decisionmaking and executive responsible for execution and partly for internal control institutions whereby adherence to the foureye principle is also foreseen within the regulatory institutions The executive institutions include the Federal Accounting Agency the accounting offices the paying agencies and the purchasing agencies Federal Accounting Agency The Federal Accounting Agency is a public legal institution that assumes the accounting tasks of the federation 20 The scope of responsibilities includes in particular organising acquiring and recording accounting data including passing them on to the Federal Computing Centre GmbH processing payments excluding cash payments supervising adherence to the forecasted amounts and settlement of receivables and debts of the federation in accordance with their maturity preparing the annual closing of accounts internal control and measures related to the establishment and cancellation of accounting offices and paying agencies Accounting offices The scope of responsibilities of accounting offices particularly includes the accounting tasks for the institutions authorised to make payments teilanweisende Organe Paying agencies Paying agencies are established at institutions involved in the processing of cash this shall be restricted to an inevitable extent Purchasing agencies Purchasing agencies are basically responsible for the clearance and administration of both movable and immovable federal assets except for money receivables intangible assets and federal interests however this applies only to the extent to which these tasks have not been assumed by the Federal Accounting Agency or the accounting offices The executive institutions are subject to the right of objection arrangements the form or content of which are contrary to the budget law are to be returned to the regulatory institution unexecuted If the regulatory institution insists that such arrangement shall be implemented it must be implemented persistency regulation however such a case is to be reported to the Minister of Finance and to the Court of Auditors 2 Public internal control environment Budget objectives The constitution states that the objectives of the budget process are overall economic balance sustainably arranged budgets and real equality of genders Budgetary principles The budgetary principles of economy profitability and usefulness are explicitly declared by the constitution as binding principles for the federal administrative bodies and the supervisory standards of the Court of Auditors are defined correspondingly From 2013 the budgetary principles will be presented in a conceptually and materially extended framework including efficiency includes also profitability and economy 21 transparency clear arrangement of documents and processes the truest possible indication of the financial situation of the federation orientation to performance taking into account the effects achieved with public funds in all the budget phases thus including usefulness and replicating the equality of genders Performanceoriented impact assessment The principle of performance orientation also includes comprehensive responsibilities for the assessment of the impact of the regulatory measures Financial economical environmental and consumer protection aspects shall always be covered The assessment measures are also subject to mandatory reporting within the framework of performance control Budgetary and accounting systems With regard to the system of transition from a cashbased accounting system to an accrual accounting system and from an inputoriented to a performanceoriented budgeting please refer to Section 1 External audit The main task of the Court of Auditors is subsequent external accounting and management supervision Its additional tasks related to budgeting are described in Section 1 The internal control measures set forth in the federal budget law include material and computing inspections the inspection of activities with respect to adherence to the budgetary regulations and in individual cases unexpected subsequent inspection They are performed by the executive institutions in particular by the Federal Accounting Agency Fraud andor irregularities In the event of improper conduct the disciplinary law for public officials or as the case may be the penal code are applied The Central Public Prosecution Service for Fighting against Corruption was established at the beginning of 2009 Effective from 1 January 2010 the Federal Service for Prevention and Fighting against Corruption was established at the Ministry of Interior Its activities are focused on the prevention and identification of the abuse of public authority bribery acceptance of gifts etc 3 Concept of public internal control 31 Managerial accountabilityresponsibility The explanation shall be preceded by the following The Federal Ministry of Finance BMF consists of six directoratesgeneral DGs DG I Corporate Operations and Services DG II Budget and Public Finances DG III Economic Policy and Financial Markets 22 DG IV Customs and International as well as Organisational Tax Issues DG V Information Communication Technology egovernment DG VI Tax Policy and Tax Law The directoratesgeneral are supervised at the top administrative level by a secretary general The administration is organised hierarchically and performs its activities on the basis of the principle of legality a strict adherence of administration activities to the law In the context of international administrative developments the BMF can be considered as adhering to the new public management with an approach of good governance The strategies of the ministry are based on the governmental executive agreement and on the international particularly European guidelines and are documented in a strategic paper The planning and implementation of the annual goals is based on management by objectives which is also related to human resource tools such as appraisal interview and the compensation system The PIC system affects all the units involved in public finance in particular the Corporate Operations and Services DG in terms of the BMF budget the Budget and Public Finances DG in terms of the federal budget the Economic Policy and Financial Markets DG in terms of the financial aspects of these topics the Customs and International as well as Organisational Tax Issues DG in terms of taxes and customs to the level of tax offices and customs offices the Information Communication Technology egovernment DG as the IT unit for the federal budget and the BMF budget as well as the expert organisation for accounting processing payments and costperformance accounting and for the Accounting Agency the Tax Policy and Tax Law DG in terms of tax estimates and assessment of the consequential costs of regulations The principle of managerial accountabilityresponsibility is particularly anchored in the principle of legality in the hierarchical monocratic structure of public administration and in the control and coordination instruments outlined in Section 1 It is complemented by internal administration instruments such as management by objectives human resource measures for targetoriented conduct eg appraisal interviews compensation systems and by internal audits The aspects of performance orientation are even more emphasised by the budgetary reform in 2013 The internal control system in the sense of the five indicated components is primarily established on the level of directoratesgeneral and adjusted to the needs of the particular operating areas Organisationally interrelated topics are attended to jointly by the responsible directoratesgeneral For example a close interrelationship exists in the area of financial operations with institutions such as the National Bank the Kontrollbank the Financial Market Authority and the Austrian Federal Financing Agency Also specialised assessors exist for the collection of taxes and customs fees verifying the quality efficiency and effectiveness of the administrative activities A central risk management unit for the overall Ministry of Finance was established in 2013 23 In compliance with the monocratic structure of public administration lower managers are accountable to their particular directorsgeneral These directorsgeneral and the secretary general are in turn accountable to the minister The minister is responsible to the parliament In the financial sector the decisionmaking powers are delegated on the basis of the authorisation rules and particular values to the officials of various administrative levels with strict attention to the separation of incompatible functions within an internal control system The decisionmaking powers in the management area particularly management organisation human resources and infrastructure are determined on the basis of task descriptions of the officials The delegation of responsibilities and powers however is never unrestricted The basic responsibility and obligation to supervise always rests with the next level of authority The policies are in a hierarchical relationship to each other The top policies of the ministry are generated on the directorgeneral level and fixed on the political level The strategies on lower levels are derived by the responsible managers and fixed by the particular directorgeneral etc Ultimately all of the members of personnel are concerned with the implementation of the policies Annual targets are determined for each workplace and their achievement is evaluated in the next year Tasks like budget preparation preparation of authorising officers financial decisions subsequent control processes tendering and contracting management advice accounting and elaboration of financial procedures and guidelines are the primary responsibility of the Controlling and Department Budget division The Procurement and Infrastructure division is also responsible for tendering and contracting The subsequent control is provided in particular by the accounting agency As concerns tasks reaching beyond the departmental budget ie involving the federal budget these are implemented by the appropriate section The budget planning for the departmental budget is performanceoriented The determining of the department objectives was discussed above The following applies to the federal budget The Minister of Finance follows the budgetary guideline of a balanced budget over the economic cycle Heshe is responsible for EU budgetary affairs as well as for financial relationships with the states and municipalities equalisation stability pact Heshe creates the following draft documents Federal Budgetary Framework Act BFRG Federal Finance Act BFG federal budget forecast strategic report budget report and work instructions and papers together with other budgetary institutions Furthermore heshe administers the federal budget ie is entitled to create budget reserve funds subject to approval by the federal government manages expenditure commitments approves expenditures exceeding the budget overspending 24 must participate in and approve the federal intentions to implement significant regulations laws ordinances and charges Federal assets Heshe is responsible for allowances for federal assets eg transfers charges abandonment and is entitled to settle financial debts and federal liabilities Interest budget financial and human resource controlling Heshe enacts directives and ordinances The internal control system shall support adherence to the applicable regulations and strategic orientation enhance the efficiency of administrative activities provide for the public expenditure requirements efficiently manage the public funds guarantee the regularity and reliability of administrative activities and protect information legally subject to confidentiality It therefore covers also all the financial decisions The Federal Statement of Accounts is established on the basis of the annual statements of the ministries and the related inspections by the Court of Auditors and submitted to the National Council when the Minister of Finance has presented hisher opinion The Federal Statement of Accounts includes the overall economic indication of the federal budgeting the comparative budget forecast analysis in which the actual disbursements and incomes are compared with the federal budget forecast the annual status report as an asset balance statement the annual profit and loss statement with an indication of expenditures and revenues a report on the status of the federal debt and federal liabilities the annual closings of accounts of the legal entities managed by the federation A rule applies with respect to the department budget that the Minister of Finance creates an annual statement of accounts It is audited by the Court of Auditors and adopted into the Federal Statement of Accounts 32 Internal audit From the outset it should be stated that the definition of the IIA in compliance with the International Standards for the Professional Practice of Internal Auditing 2013 does not include provisions on internal auditing as part of internal control However the contents of this message can be approved The internal audit has not been developed as part of the PIC The capability of the minister to have an internal audit performed in the particular ministry is stated in the Federal Ministries Act The Minister of Finance has issued two ordinances for hisher department The control organisation ordinance regulates the position of the internal audit in relation to the internal control system The audit charter 25 regulates the internal audit activities on the basis of the IIA standards In both cases all the departments employees are subject to the regulation The freedom of audit reporting is provided to the full extent The audit reports are presented directly with no intermediary stage to the minister or hisher office In hisher annual report the head of the internal audit evaluates hisher organisational independence based on the IIA standards 1 100 and the INTOSAI standards GOV 9 140 The audit charter referred to as Audit Charter Revisionsordnung was proposed by the head of the audit and then approved by the minister It complies with the IIA standards Activities beyond the scope of the audit are not performed as part of the internal audit Occasional consulting activities outside an audit are performed within the framework of the IIA standards Continuous professional training is provided on the basis of a general public management education scheme for university graduates and an additional basic education scheme for internal auditors For example a number of auditors acquire the Master of Business Administration Public Auditing degree at the Vienna University of Economics and Business others are certified corporate risk managers or have a teaching assignment for internal project management at a university of applied sciences etc Every four years the internal audit itself is subject to an external quality assessment The audit reports are presented to the minister the secretary general the head of the particular section the managers involved at the ministry and the head of the audited unit The inspections of the internal audit go far beyond financial and regularity audits They include operational audits and in particular management audits Delinquency audits are provided by a specialised audit unit Bureau of Internal Affairs In addition to the audits ordered by the Minister of Finance certification audits in the area of expenditure funding and audits together with the European Commission DirectorateGeneral for the Budget are performed The representatives of both the audited function and of the particular higherlevel organisational units responsible for solving the problems identified or the potential issues are invited to the concluding discussions of an audit The function directly responsible undertakes to provide for specific implementing measures within a fixed term of not longer than 12 months Within the fixed term this function is required to present a report to the internal audit The implementationfailure to implement the approved measures is monitored and reported quarterly to the minister and the secretary general If fraud andor irregularities are identified during an audit the Bureau for Internal Affairs of the Ministry of Finance is notified This bureau initiates a separate investigation The two investigation processes run in parallel and are coordinated A clear separation exists between a financial inspection and an internal audit In the sense of a single audit concept an internal audit is distinctly higher than an internal financial inspection On the one hand an internal audit takes into account the financial inspection results when creating the annual audit plan and when performing the individual audits On the other hand it verifies the efficiency and effectiveness of a financial inspection if undertaken by the bodies of the Ministry of Finance 26 33 Internal audit relations with external audit The internal audit department has its annual audit plan informally coordinated by the Court of Auditors to which it presents its annual report When the Court of Auditors inspects a topic already checked within an internal audit the audit reports are presented In such cases the Court of Auditors holds an initial discussion with the internal auditors 34 Audit boards andor audit committees Neither audit boards nor audit committees are established The following measures can be considered as focused in this particular direction regular crosschecking of the Court of Auditors with respect to internal audits of the federation and its separate legal entities restricted coordination activities by the Office of the Federal Chancellor for internal audits of the federation regular external quality assessments at the Ministry of Finance only 35 Coordination of public internal control There is no particular centralised coordination or harmonisation function within the Ministry of Finance or within the federation The control tasks are performed within the framework of a clearly defined comprehensive national control concept Internal audit regularly assesses the functionality of the internal control systems A general federal control is based on the Court of Auditors within the scope of the annual report and the crosschecking activities The EU funds are subject to the following Particular regulations sector regulations apply to the implementation of the large European agricultural and structural policy programmes together with the EU financial regulations These regulations include also the involvement and responsibility of the Member States according to them the Member States are required to introduce certain implementing and control functions In Austria the required national legislation framework includes provisions implying that the EU expenditures by means of the public budget in particular the federal budget are based on a defined process The national budget law is applicable also in the area of EU budgeting Furthermore it must be ensured that the provisions contained in the EU sectoral regulations are applied in practice if necessary this is based on the enactment of particular national regulations With respect to its participation function Austria is subject to control by the European Commission the European Commission is entitled to inspect the appropriate use of EU funds by the authorities as well as by the beneficiaries Agricultural policy The national implementation of the common agricultural policy is based on the Agrarmarkt Austria paying agency with the exception of export refunds which are processed by the SalzburgErstattungen customs office The internal national processing of funding within the framework of rural development is also provided by the Agrarmarkt Austria paying agency with the involvement of the Federal Ministry of Agriculture Forestry Environment and Water Management or Federal Ministry of Finance the state Chambers of Agriculture and the state governors depending on the particular process The federation is responsible for certification control and paying functions Federal Ministry of Agriculture Forestry Environment and Water Management or Federal Ministry of Finance 27 Cohesion for growth and employment The national implementation of structural programmes is based on various functions of both the federation and the states depending on the particular competence The legal framework is based on the convention between the federation and the states in the matter of the administration and control system in Austria for the EU Structural Funds Accordingly programmes with regional targets cofinanced from the European Regional Development Fund ERDF are coordinated by the individual states However the administration of the programs cofinanced from the European Social Fund ESF and extending over the territories of several federal states is the responsibility of the federation Federal Ministry of Labour Social Affairs and Consumer Protection An exception is Burgenland with its own programme cofinanced from the ESF Certification control and paying functions for both the ERDF and the ESF are the responsibility of the federation in the case of the ERDF the Office of the Federal Chancellor and the paying agency function for the ERP Fund in the case of the ESF the Federal Ministry of Labour Social Affairs and Consumer Protection The basic competence for the affairs indicated in Articles 310 to 325 of the Treaty on the Functioning of the European Union rests with the Federal Ministry of Finance 4 Financial inspection The bodies intended for financial inspection are Court of Auditors Federal Accounting Agency Internal audit units at the Ministries Additionally at the Federal Ministry of Finance the Bureau for Internal Affairs which is responsible for delinquency inspections Certification functions for EU funds Inspection functions for EU funds State inspection bodies In addition to the indicated bodies the following prosecution institutions also exist Federal Service for Prevention and Fighting against Corruption from 2010 public prosecution services Central Public Prosecution Service for Fighting against Corruption from 2009 criminal courts No central institution responsible for financial inspection bodies and prosecution institutions has been established and the establishment of such an institution is not envisaged The inspection bodies standing closer to the inspected field both technically and organisationally are considered more efficient Information on significant inspection results related to both national and European budget expenditures is presented to the Federal Ministry of Finance Inspection can be initiated by the following bodies in the following ways 28 Court of Auditors Parliament minister Court of Auditors Accounting Agency Operating inspections per institution Subsequent inspections per institution Internal audits at the ministries Particular minister Delinquency audit Particular minister per institution Certification functions for EU funds Per institution Inspection functions for EU funds Per institution State inspection bodies Analogically to federation Federal Service for Prevention and Fighting against Corruption Per institution Public prosecution services Per institution Central Public Prosecution Service for Fighting against Corruption Per institution Criminal courts Principle of accusation These bodies can undertake both ex ante and ex post inspections with the exception of paying agency inspections and inspections in case of delinquency 5 Ongoing andor future reforms The budgetary reform has already been outlined in Section 1 The ongoing development of the control systems will be based on the context of this reform 29 BELGIUM Public internal control 6 Summary of the major changes 20112013 The management of public accounts has been modernized by the implementation of a new information system and reforms of the accounting system Fedcom project see 25 These reforms allow improved monitoring of the execution of the state budget along with enhanced monitoring of financial positions and performance The system provides also analytical accounts which offers possibilities for more thorough analysis and more effective and efficient reporting Another advantage of the new system is that opportunities arise to build in or reinforce internal control mechanisms Besides these efficiency benefits the systems also creates more transparency The Court of Auditors has a permanent access to the system which allows them to better schedule and to target their audits Regarding the concept of the public internal control PIC system the legal basis has been created but the implementation however seems to be a difficult matter An Audit Committee of the Federal Administration ACFA has been established in 2010 Ever since the ACFA actively pioneered the implementation and setting up of internal audit structures But these efforts seemed to bear little fruits which ultimately led to the resignation of the Chairman of the ACFA in December 2013 The lack of formal internal audit structures is captured by enhanced internal control systems Internal control is also enshrined in legislation but in contrast to internal audit departments invested in developing and improving their internal control systems The Federal Public Service FPS of Budget and Management Control BMC provides methodological support and brings departments together to exchange experiences and PIC practices This all resulted in increased awareness of the need and added value of PIC Although there is progress in the establishment of solid PIC structures much work is left to be done Political elections in 2014 may impact the direction of PIC developments as choices must be made on the political level As to the reforms of the accounting system some challenges remain such as refining the system to optimize its functioning and consolidate its success 1 Brief history of the development of public internal control When a new government came into power after the 1999 elections one of its top priorities was modernising federal government This soon came to be called the Copernicus reform The underlying philosophy was that citizens were not there to serve the administration rather the reverse the administration should be there to serve the citizens In fact the reform comes down to the introduction and application of the principles of corporate governance in the public sector with the aim of improving public 6 Contributed by the Federal Ministry of Finance 30 sector performance The reform had four key pillars a new organisational structure a new human resources HR policy new working methods and a new system of control As regards the organisational structure the old ministries were replaced by horizontal and vertical federal government services In addition several programmatic public sector services were set up The new HR policy involved seeking to create appealing working conditions by such measures as ensuring that salaries were aligned with market levels and working out personal development plans Organisational processes were redesigned in business process reengineering BPR projects with a focus on simplification and improved service Finally the intention was that greater accountability would form the key element of a new management culture The emphasis would shift from ex ante control to ex post control As part of this the managers were also expected to improve their own internal control systems With a view to the introduction of sound governance a legal framework was created in 2002 for both the introduction of an internal control system and the extension of internal audit activities It also arranged for the installation of audit committees in all federal and programmatic public sector services However the implementation of these regulations did not really get off the ground as there was insufficient engagement both at the political level and within the civil service A new attempt was made in 2007 Three new Royal Decrees were drawn up to replace the existing legal framework In addition to the introduction of an internal control system and the organisation of internal audit activities a separate decree also arranged for the creation of a single Audit Committee for the Federal Government Audit Committee of the Federal Administration ACFA However the change to the legislation still did not lead to an increase in momentum in practice as the Court of Auditors also noticed Instead the turning point was the appointment of a Government Commissioner for the implementation of internal audits in the federal government in mid2009 His assignment consisted of the following tasks making a proposal for the process of introducing internal audits preparing and starting this introduction under supervision of the audit committee that was due to be set up drawing up a timetable for this and finally supervising the transition from ex ante control to ex post control in consultation with the Inspectorate of Finance The Government Commissioner resigned in July 2010 following the early elections the previous month His powers were taken over temporarily by the retiring Minister for the Budget until the government commission was abolished entirely at the end of 2010 Even so it was thanks to the Government Commissioner that the Audit Committee for the Federal Government was installed in April 2010 The presence of an independent body of this nature led to an increased awareness among management regarding organisational control One consequence of the creation of the committee was that every manager had to provide a report to it within six months of the appointment of its members This report had to detail the existing structures and evaluation mechanisms for internal control within the managers organisation as well as providing a plan for the organisation of hisher internal audit activities Another consequence was that henceforth all managers would have to provide the ACFA with an annual report on the performance of their internal control system and the improvements they are planning to make 31 2 Public internal control environment 21 Codes of conduct and ethics The Federal Public Service FPS Budget and Management Control BMC includes the Bureau voor Ambtelijke Ethiek en Deontologie agency for ethics and codes of conduct within the civil service The agency is responsible for the development of the federal preventative integrity policy As part of this it draws up policy recommendations for the responsible ministergovernment as well as providing a support service for other government institutions 22 Human resources management The federal government has a database the socalled federal map that provides federal staff HR departments and citizens with an overview of all jobs and classes of jobs within the federal administrative public service This ensures that all members of staff have a picture of their own job and also clarifies the specific career opportunities The job descriptions give a picture of the different responsibilities and the expectations concerning performance and skills 23 Tax fraud For some years the government has had a state secretary for the coordination of fraud prevention as part of efforts to combat tax fraud The state secretary has two duties firstly to improve collaboration between all the services involved administrative organisations monitoring bodies the police and the judiciary in the effort to combat tax and social fraud in the areas of prevention detection control prosecution and punishment and secondly to ensure uniform application of tax and social legislation 24 Public sector accounting The act of 22 May 2003 reformed government accounting by arranging for the introduction of general accounts alongside the budgetary accounts The general accounts are based on the principles of doubleentry bookkeeping The act also arranged for the transition from budgetary accounts on a cash basis to budgetary accounts on a transaction basis This means that income and expenditure are entered into the accounts when the right is established rather than when the cash is actually paid or received However it was not until 2009 that implementation of the act started Since 2012 the rollout of the Fedcom project see below has been completed within the different departments of the federal public sector 25 New information system for the management of the accounts Fedcom project The Fedcom project is a federal project that aims to modernise government accounting Since the introduction of the new accounting system the federal state has three kinds of accounts Firstly there are budgetary accounts to allow monitoring of execution of the state budget Secondly there are general accounts to some extent comparable to those in the private sector to allow monitoring of changes in the financial position balance sheet and the financial performance income and expenditure account Finally there are analytical accounts to allow analysis of expenditure per cost centre Items are entered into the accounts on a transaction basis in accordance with the ESA 95 rules Among the benefits of Fedcom is the opportunity to build in internal control mechanisms and segregation of duties One of the consequences is that the ex ante controls by the 32 Court of Auditors on the amounts payable have been replaced by a permanent access to the system This allows the auditors of the Court to better schedule and direct their audits on the legality regularity efficiency and reliability of the institutions internal control systems The new accounting system will also lead to more effective and efficient reporting since the system offers lots of possibilities to improve information management and to analyse these databases 3 Concept of public internal control 31 Managerial accountabilityresponsibility There has been some increase in management awareness in the federal government institutions concerning internal control and internal audit since the installation of the ACFA in April 2010 Even so there is still a great deal of suspicion among management regarding these principles of public sector governance and much work will need to be done to arouse interest among both management and operational staff For instance the installation of the ACFA meant that Article 20 of the Royal Decree of 17 August 2007 on establishing the ACFA came into effect This article states that every manager must submit a report to the ACFA within six months of the initial appointment of the ACFA members and that this report should deal with the existing structures and evaluation mechanisms for internal control within the managers organisation and a plan for the organisation of hisher internal audit activities Besides this there is also the Royal Decree of 17 August 2007 dealing with the internal control system within some services of the federal executive which seeks to increase the sense of responsibility among management and to set conditions for improved risk management The scope of both the abovementioned Royal Decrees is however limited to 22 institutions they therefore do not cover the entire federal executive The regulations only apply to all the federal and programmatic public services and the services depending on them 16 the Ministry of Defence and five category A public utility institutions The Royal Decree of 17 August 2007 concerning internal control systems explicitly states that the reference framework is COSOINTOSAI It also stipulates that every member of staff should contribute to the proper performance of the internal control system in a manner appropriate to their job Regarding the determination of an acceptable level of risk a distinction is made between risks at the political policy level and risks at the policy level within the civil service The acceptable level of risk for risks associated with objectives at the political policy level is determined by the minister in consultation with the manager The manager determines the acceptable level of risk for risks at the policy level within the civil service and informs his minister All managers should submit a report to the ACFA on 15 February of each year dealing with the performance of their internal control systems They should also include in the report the improvements they wish to make in the year ahead Regulations stipulate that the following subjects should be covered as a minimum the tasks objectives and resources of the public sector service acknowledgement by the manager of their responsibility for the proper performance of the internal control system the application of the general objectives for internal control to the service a description and evaluation of the internal control system in accordance with COSOINTOSAI comments made by those responsible for the internal audit activities and the external control bodies and the response to these comments and finally a description of those structures and procedures 33 for monitoring and evaluation of the internal control system that the manager used to gain knowledge of the quality of their internal control systems 32 Internal audit The existence of internal audit activities is legally enshrined in the Royal Decree of 17 August 2007 on the internal audit activities within some services of the federal executive Here too the scope is limited to the 22 institutions mentioned above The regulations allow internal audit activities to be carried out in three different ways There is the option of a permanent dedicated audit service within the institution or a permanent shared audit service for a number of institutions or an external service This last option involves the internal audit activities being carried out by a private firm or by an existing audit service which may or may not be shared within other institutions The ACFA invited the ministers several times to make their final choice on how they want to organise internal audit within their department The most recent survey shows that 11 departments want their own specific audit service 5 departments are willing to install a shared service for departments of health and related services and 6 departments are prepared to set up a shared service for the horizontal supporting departments The different choices and the discussion between departments on how the internal activities should be formalised and implemented resulted in the current situation where the Royal Decree is being revised The Royal Decree stipulates the basic mission for the internal audit activities For example the internal audit activities should be carried out using an independent objective systematic and methodological approach The evaluation of the internal control system should form the basis for a dialogue between the internal audit service and management and should result in recommendations for improvements to the internal control system Those responsible are obliged to take this into account The internal audit activities are also subject to IIA standards They should be evaluated at least once every five years by a competent independent evaluator or team consisting of individuals who do not work for the institution in question The regulations state that the internal audit activities should cover all the objectives of the internal control system The internal audit service must draw up a work programme based on a risk analysis and this programme should be approved by the ACFA It is only after this that the manager is informed of the programme No auditors may officially take on any tasks that are the responsibility of the manager concerning the internal control system The assignment of the internal auditors their rights and obligations and their position within the service should be specified in a charter to be drawn up in consultation with the manager and which must be approved by the ACFA The charter should also make arrangements for reporting and lay down the rules for disputes and confidentiality It must also include a commitment from management that they will respect the independence of the internal auditors and will not take retaliatory measures against individuals who cooperate with the internal audit activities being carried out within the service The job description and the competency profile of the individual in charge of the internal audit activities should be submitted to the ACFA for advice prior to the managers proposal to the minister The ACFAs opinion is binding The individual in charge of the internal audit activities may hold the position within the same service for only 12 years Heshe is subject to an evaluation by a member of the ACFA the manager and the 34 relevant minister In contrast the auditors carry out their job for periods of six years and may be reappointed 321 Relations between the internal audit and the external audit There are currently no official protocols or agreements between the internal audit services and the Court of Auditors The regulations mention the single audit principle Specifically the Royal Decree dealing with the internal audit activities specifies that for processes containing procedures that are subject to an external audit the internal audit service can following favourable advice from the ACFA draw up protocols formalising arrangements for the coordination of tasks and the exchange of information Once internal audit services will be formalised it is likely that talks with the Court of Auditors and other audit partners concerning the single audit principle will start This is after all an area in which lessons can be learned from the regional experience In fact the Flemish governments internal audit service has drawn up a memorandum of agreements with the Court of Auditors based on the single audit principle with the aim of avoiding overlap and duplication in audits and investigations 322 Audit boards or audit committees The Royal Decree of 17 August 2007 on establishing the Audit Committee for the Federal Government ACFA arranges for the creation of a single audit committee for the abovementioned 22 institutions The members were appointed by the Royal Decree of 21 February 2010 discussed in the Council of Ministers The ACFA was officially installed on 2 April 2010 According to the above mentioned Royal Decree the ACFA should consist of seven independent members four Dutchspeaking and three Frenchspeaking Together they should have sufficient expertise in the areas of public sector activities the budget cycle ICT public sector management public law internal control strategic management and risk management The members are appointed for a period of six years They can be reappointed for one more term of office The members appoint a chairman from amongst its members To ensure their independence the vacancies rules and conditions were publicised in November 2009 through the press the Internet and publication in the Belgian official gazette Candidates were not allowed to be working as civil servants for any of the institutions covered by the audit committee After all such civil servants are internal members of the organisation to be audited and therefore by definition not independent At the time setting up the ACFA was a top priority for the Government Commissioner as it is key to the expansion of internal audit activities It should safeguard the independence of the internal audit activities and ensure their effectiveness and quality an audit is not possible if you cannot report to an independent body The ACFA meets at least once a quarter At least five members need to be present for resolutions to be valid The members receive an attendance fee per meeting This fee is reduced drastically from the seventh meeting onwards The head of the Inspectorate of Finance cf below attends meetings by law Heshe has an advisory role and no voting rights The members subscribe to the international professional standards of the IIA The ACFA is accountable to the government and its individual members It draws up two reports for this purpose each year on 31 July One of these reports is for the individual ministers and relates to the service the minister in question is responsible for and the 35 other report is for the Council of Ministers The reports aim to give the ministers and the government an overview of the state of affairs of the internal control systems within the institutions in question The ACFA can request all the information necessary to produce these reports from the managers or individuals in charge of the internal audit activities Incidentally the role of the ACFA is bolstered by the fact that its general duties have explicitly been specified in legislation For example the ACFA must inform the government of the reliability of the internal control systems within the institutions for the purpose of achieving the governments objectives It must also warn the government if it thinks that the institutions are supplying incorrect or unreliable information that could lead to the government taking decisions based on wrong information In addition the ACFA has drawn up an audit charter and rules of procedure The audit charter contains the following elements a list of the members with the start and end dates of their terms of office designation of the chair and the person responsible for the ACFAs secretarial services a list of the ACFAs responsibilities the reporting regulations and the acceptance of the confidentiality principle for communication between the individuals in charge of the internal audit activities and the ACFA Since the installation of the ACFA the Chairman and the other members actively pioneered the implementation and setting up of the internal audit General budget restrictions and incomprehension of the added value of internal audit led to tense relations with the political level As a consequence the Chairman resigned in December of 2013 and the viceChairman has been appointed as his successor 33 Coordination of public internal control Article 6 of the Royal Decree of 17 August 2007 concerning the internal control system specifies that the Federal Public Service FPS Budget and Management Control BMC will ensure methodological support for the expansion of internal control within the services involved The FPS BMC can set up thematic interdepartmental networks on its own initiative and take charge of their coordination It can also carry out consultancy assignments on request of the services involved Specifically the Management Support department within the FPS BMC is charged with this task This department is currently understaffed because of budget restrictions Furthermore the FPS BMC notes that it is very difficult to find people with the right profile One possible reason is the higher salaries in the private sector The Management Support department currently facilitates the internal control network an informal body This initiative was originally started up by the then Government Commissioner in spring 2010 but has been in the capable hands of Management Support since the start of this year The meeting frequency is fairly high with an average of one meeting every one to two months The Management Support department focuses specifically on internal control Despite its limited capacity it carries out consultancy assignments throughout the federal government It provides training for civil servants in the form of an internal control course and gives talks when requested dealing with the added value of internal control According to the Royal Decree the Management Support department is also appointed as coordinator for the internal audit network However it was decided following discussions between Management Support and the ACFA that the internal audit network would be started up through the ACFA secretarial office This will prevent any conflicts of interest between internal control and internal audit The secretarial office took over this task only temporarily and for the moment the auditors facilitate the network themselves 36 4 Financial inspection 7 The federal supervisory authorities in particular the Council of Ministers and the Ministers for the Budget and the Civil Service as well as the Communities and Regions Article 51 of the special act of 16 January 1989 concerning the funding of the Communities and Regions call on the financial inspectors to carry out administrative and budget control The Inspectorate of Finance reports directly to the Ministersgovernments Federal Authorities Communities and Regions The financial inspectors do not have any hierarchical relationship with the ministers they are assigned to nor with the departments where they carry out their controls The independence of the financial inspectors is explicitly endorsed in the special act of 16 January 1989 and in the act of 22 May 2003 for the organisation of the budget and the accounts of the federal state just as in the abovementioned special act The financial inspectors are the advisors on budgetary and financial matters for the ministers to whom they are assigned In addition they function as controllers on behalf of and at the expense of the ministers who are responsible for the budget or administration Finally in cases of direct assignment of authority they are responsible for checking all operations planned by the authorising officers with the exception of minor operations or operations that are defined in such a way that there is no room for subjective interpretation by the authorising officer They may also be instructed by the minister to whom they are assigned to carry out investigations at public sector institutions or private institutions subsidised by the public sector The Inspectorate of Finance is also charged with auditing European funds This task is becoming increasingly important as time goes on The exante control our primary task concerns the following aspects the budgetary feasibility regularity efficiency effectiveness economy and desirability In addition to those cases draft resolutions where control by the Inspectorate of Finance is mandatory see above any individual minister the Minister for the Budget the Minister for the Civil Service and the Council of Ministers can instruct the Inspectorate of Finance to carry out specific assignments audits investigations specific audits etc often ex post Ex anteex post see above The thresholds above which ex ante controls of public sector orders and allowances apply can be amended by joint agreement of the line minister and the Minister for the Budget These thresholds can be raised depending on the performance of the internal control system For example at the Ministry of Defence an ex post control based on sampling is used for cases between the current thresholds and the higher thresholds Recent federal regulations state that protocols will be concluded between the Minister for the BudgetCivil Service and the Audit Committee on the one hand and those responsible for the internal audit activities and the Inspectorate of Finance on the other hand to agree on formal conditions for the coordination of tasks and sharing information for the analysis of processes regarding public procurement the allocation of discretionary subsidies and the recruitment of contractual staff The head of the Inspectorate of Finance attends the meetings of the Audit Committee by law in an advisory capacity 7 This chapter was written by the Inspectorate of Finance 37 5 Ongoing andor future reforms At present no major reforms are planned in public administration reform PAR and public internal control PIC However political elections in May 2014 may shuffle the political landscape and have an impact on the direction of public internal control developments Besides the resignation of the Chairman of the ACFA puts some pressure on the political level and this may finally trigger the implementation of internal audit services With regard to PAR and PIC reference can be made to the implementation of the Fedcom project see also Section 25 which is based on the new government accounting act act of 22 May 2003 The main changes involved are the division of the accounts for expenditure and nontax income into three categories namely the budgetary accounts the general accounts and the analytical accounts instead of the single budgetary accounts a transition from accounts on a cash basis to accounts on a transaction basis no more credit transfers as there will no longer be nonsplit credits and finally centralisation of all payments which will take place through the central accounting officer with the exception of petty cash Fedcom uses an enterprise resource planning ERP application namely SAP as the IT system for this threepart accounts system The application is based on three endtoend processes From established right to cash management this process covers revenue and cash management From budget to report this covers entering and monitoring the budget the periodic closing of the accounts and the fixed assets From order to payment this process covers government orders including local purchases specific purchases expenses claims subsidies and staff costs Finally it is worth noting that certain services that used to operate more or less independently are now collaborating more closely with Fedcom and that all roles are being identified and the necessary authorisations assigned 38 BULGARIA Public internal control Summary of the major changes in 20112013 This update mainly concerns changes to the legal framework for public internal control Most of those changes are presented in Part 2 Public internal control environment A major new development is the new law regulating the entire public finance management system The Public Finance Act came into effect in January 2014 It deals with the structure and procedures relating to the national and municipal budgets introduces strict fiscal rules and provides a robust legal setup for programme budgeting and reporting Notably the law contains a provision on the managers responsibility concerning management and control systems thus providing a connection to internal control legislation That section also focuses on some changes to the remit of certain authorities such as the National Audit Office which now has the power to impose administrative sanctions An update describes the operations of inspectorates in the ministries and a General Inspectorate within the Council of Ministers administration There is also information on the recent amendments to the Public Procurement Act and the regulations concerning civil service Another new development is the signature and implementation of an agreement aimed at improving coordination among the various bodies that have audit and inspection functions Part 3 provides an update on the activities of the Public Financial Inspection Agency as regards its powers to introduce planning in its operations concerning financial inspections of public procurement Other sections of the document have been edited with a view of providing more detailed and analytical information on the processes described For example Part 1 A brief history of the current public internal control system now describes the introductory and development stages of internal audit in Bulgaria Part 3 The concept of public internal control in Bulgarias administration has also been changed to include an update on the functioning of internal audit and the activities of the Central Harmonisation Unit Certain texts have undergone minor editing and stylistic changes 1 Brief history of the public internal control PIC system The new Bulgarian system of Public Internal Financial Control DVFK was set up in line with the countrys obligations accepted following the negotiations on Chapter 28 Financial Control It was implemented in two stages Stage One 20012005 The Public Internal Financial Control Act came into effect in 2001 The Act sets out an obligation for managers in the public sector to establish financial management and control systems SFUK based on the principle of managerial accountability It governs exante control and introduces for the first time internal auditing as a legal concept Establishing a new governance culture underpinned by the principles of sound financial management superseding the earlier model that was based on expost investigation and 39 sanctions is a long and challenging process An important step in this development involves making a terminological distinction and functionally segregating internal audit from inspection At that stage the internal audit function was centralised and performed by auditors employed by the Public Internal Financial Control Agency ADVFK which was hierarchically within the remit of the Minister of Finance Internal auditors operated under two different arrangements as delegated auditors posted to a given ministry municipality or another organisation and as auditors performing specific assignments During that period internal audit was more akin to inspection and it was combined with establishing irregularities and imposing administrative penalties At that stage Bulgaria drafted an outline for what was to become the Public Internal Financial Control PIFC The development process included adopting a policy paper on PIFC setting up a PIFC board within the Council of Ministers implementing twinning projects financed by the European Union and peer reviews to assess progress Stage Two Post 20052006 During the period preceding Bulgarias EU accession the main goals in that field to be agreed upon in the negotiation process were to decentralise internal audit separate it from the inspection function set up central harmonisation units for internal control and internal audit respectively and adopt a more detailed legal regulation for financial management and control systems To this end the PIFC Policy Paper was updated and the existing legislation was replaced by three new acts The Financial Management and Control Act introduced the principles of managerial accountability borrowing from the COSO Internal Control Integrated Framework It set up definitions for the elements of control environment risk assessment control activities information and communication and monitoring Managers of public sector organisations were now required to report on the state of the financial management and control systems under their respective management to the Minister of Finance on an annual basis With the Public Sector Internal Audit Act the internal audit activity was decentralised The Act defined the range of those organisations that must have their own internal audit function and of those for which it is optional rather than mandatory to set one up It provided a legal definition and set requirements for the performance of internal audit based on the principles of the International Standards for the Professional Practice of Internal Auditing and best practices The Public Financial Inspection Act created an agency succeeding ADVFC reporting to the Minister of Finance Thus the enacted legislation on internal audit in the public sector and on financial inspection achieved a clear and unequivocal delineation between the two functions An Internal Control Directorate was set up at the Ministry of Finance It is made up of two Central Harmonisation Units one for financial management and control and another for internal audit The Directorate reports to the Minister of Finance directly In 2008 the Council of Ministers adopted a Strategy for the Development of Financial Management and Control and Internal Audit in Bulgaria for the period 20082010 The priorities on which the strategy focused were to strengthen managerial accountability in public sector organisations ensure quality internal auditing reinforce the coordinating and harmonising role of the central harmonisation units at the MF and achieve efficient implementation of audit activities concerning EU funds and programmes Throughout this period reform in public internal control was accompanied by the development of policies on public administration civil service and budget management 40 2 Public internal control environment Budget framework For a long time the public budget structure and budget procedures were governed by both the Organic State Budget Act and the Municipal Budgets Act Starting in 2001 Bulgaria gradually introduced programme budgeting and a single account system Key budget procedures were regulated through annual state budget acts Therefore it was necessary to adopt new legal regulation in that area The new Public Finance Act effective from January 2014 places the public finance governance system on a broad basis and translates the midterm budget framework into a real tool for midterm forecasting and planning It introduces strict fiscal rules for central and local government bodies and provides a longterm setup for budgeting and budget reporting in a programmebased format The law helps to consolidate all aspects of the management and use of public resources at both national and local levels It defines certain basic principles that need to be observed in managing public finance such as comprehensiveness accountability adequacy economy effectiveness and efficiency transparency sustainability and legality It lays down fiscal rules aimed at defining clear and transparent limits for fiscal policy in the long term It provides a regulatory framework for budget structure national budget relationships and financial relationships with the general budget of the EU and other international programmes and agreements It defines the roles responsibilities and time schedules for budget preparation adoption and execution and for continuous monitoring and reporting on the consolidated fiscal programme and annual reporting on the execution of the state and municipal budgets A section of the law deals with the treatment of accounts for EU funds and thirdparty assets The introduction of legal provisions on servicing of bank accounts the SEBRA System for Electronic Budget Payments single account system and centralised payment of social security and health insurance contributions payable by public sector organisations provides a longterm legal framework for those areas which are key to the efficient operation of public finance and which had previously been governed by the respective state budget act for each year The Act also includes regulations on accounting in public sector organisations and other entities in the general government sector in line with the requirements of the European system of national and regional accounts in the Community The law contains a provision concerning the responsibility of managers of public sector organisations in terms of the establishment functioning and reporting of financial management and control systems in accordance with existing legislation thereby ensuring linkage with the Financial Management and Control in the Public Sector Act and the Public Sector Internal Audit Act Other changes in legislation In 2011 the government adopted a summary of the legislative changes it intended to introduce in the area of public procurement with the aim of absorbing EU funds more efficiently This has resulted in a number of major amendments The amendments focused on simplifying and eliminating certain public procurement rules such as those applying to smaller supply service or construction contracts through a public call rather than a full procurement procedure and the appeal procedure under the Public Procurement Act ZOP They also aimed to comply with Bulgarias obligation as an EU Member State to implement Directive 200981EC of 13 July 2009 which regulates public procurement in defence and security considering the need for fair and transparent procedures along with the specific features of those two public sectors 41 The year 2012 saw many legislative amendments to the status of civil servants The law expanded the opportunities for civil servant recruitment authorities to delegate powers concerning employment relations with civil servants in public administration introduced a new procedure for determining pay grades and so on External audit The National Audit Office of Bulgaria supervises the implementation of the budget and other public funds and activities in accordance with the National Audit Office Act ZSP and internationally accepted auditing standards Its main control task is to ensure that financial statements issued by budgetfunded organisations are reliable and true and that public funds and activities are managed in a manner that is legal efficient effective and economic and it provides assurance to the National Assembly concerning these aspects The National Audit Office operates on the basis of an annual audit programme that is presented to the National Assembly The scope of its audit activities also includes public undertakings fully owned by the state companies where the state or municipal participation exceeds 50 of the equity and entities whose debts are secured by government guarantees or collateralised by state or municipal assets Where they have found any breaches of the Public Procurement Act the National Audit Office authorities can impose administrative sanctions The National Audit Office presents audit opinions and annual activity reports to the National Assembly EU funds audit authority In terms of EU funds and programmes in Bulgaria the role of audit authority is assigned to the Audit of EU Funds Executive Agency which was set up in 2008 The Agencys special audit activities concerning EU funds and programmes are regulated in the Public Sector Internal Audit Act and in an Ordinance It operates on the basis of strategic and annual plans and an audit plan for each audit operation Planning is based on risk assessment Functionally and structurally the Executive Agency is set up as a separate organisation independent from the authorities responsible for the management and execution of payments for all of the programmes cofinanced by the European Union Other control bodies Apart from internal and external audit and financial inspection authorities there are inspectorates These were set up under the Administration Act They have administrative control functions and report directly to the respective government minister Their remit also covers the activities of secondlevel budget spending units The main purpose of inspectorates is to ensure that anticorruption procedures are followed and to detect non compliance or irregularities A General Inspectorate at the level of the Council of Ministers coordinates and supports the activities of inspectorates providing methodology guidance for their operations Coordination of control activities In 2011 a Cooperation Agreement was signed between the Minister of Finance and the Chairman of the National Audit Office which is also binding on the Audit of EU Funds Executive Agency and the Public Financial Inspection Agency in terms of their respective functions The parties agree to cooperate by exchanging information including for the 42 purposes of coordinating plans by developing methodologies ensuring consistent use of terminology training delivery joint workshops seminars round table discussions etc There are regular meetings between representatives of the management of all organisations involved in the Agreement 3 Outline for a system of public internal control of the Bulgarian civil service 31 Managerial accountabilityresponsibility Managerial accountability lies at the heart of public internal control As required by law internal control is set up as a crosscutting process integrated in an organisations activities and is carried out by the organisations management and employees Internal control comprises five interrelated components that are specified in the law control environment risk management control activities information and communication systems and monitoring Internal audit is a managerial tool for monitoring and hence managers of organisations have an obligation to create conditions enabling the internal audit function in accordance with the legislation in force In terms of managerial accountability the law requires managers to achieve the organisations goals and manage public funds in a legal economic efficient and effective manner When performing their managerial responsibilities managers must establish and improve constantly the financial management and control systems in their respective organisation in accordance with the provisions of the law and the MF methodology taking into account the specific nature of the organisations activities and the results of monitoring Those systems include policies and procedures for providing reasonable assurance that the organisations objectives are being met In terms of sound financial management managerial accountability covers all structures programmes activities and processes within an organisation including any organisations that are lowerlevel spending units One of the important mechanisms for achieving sound financial management is to exercise preliminary control in all processes within an organisation It is common practice for persons in managerial positions or other employees in relevant specialised units of an organisation to exercise exante control of the activities specific to that organisation through internal coordination procedures For exante control of financial activities an organisation may appoint financial controllers Alternatively this function may be performed by accounting personnel in addition to their normal duties To ensure that accounting principles and procedures are properly implemented and that financial discipline is observed a double signature system is implemented when concluding contracts issuing orders for hiring employees or sending them on business trips in transactions involving expenditure etc In such cases financial commitments andor payments can be made provided that they have been signed off by both the person in charge of the accounting records and the organisations manager or another person authorised to order payments on behalf of the organisation According to Bulgarian law ministers and mayors have administrative and budget powers they appoint employees conclude contracts and spend public funds By law managerial accountability is delegated to elected officials such as ministers mayors or other managers In some organisational structures managerial accountability resides with senior administrative heads such as the directors of agencies and heads of commissions Secretariesgeneral also run the respective administrations and perform management tasks assigned to them by the organisations manager On the other hand less senior managers such as directors of directorates heads of departments also have managerial accountability concerning the structural unit they manage The law requires them 43 to assume responsibility for their actions with regard to internal control in the units they manage and to report to their superior manager As part of managerial accountability more senior managers may delegate responsibilities to subordinate managers Any such delegation does not relieve a more senior manager from responsibility for implementing delegated powers Consequently managers request periodic reporting on the implementation of delegated powers via direct communication with their subordinates in managerial positions and lowerlevel spending units Directors of financial directorates are important links in the internal control system More often than not they or their subordinates engage in budget planning sign as a second signatory propose and apply accounting policies and exercise exante control Here the principle of separation of duties is applied Goalsetting is one of the main responsibilities of managers within their respective scopes of managerial accountability along with the responsibility to identify risks and implement effective control systems When drawing up programme budgets it is important to provide a clear definition of the organisations goals and objectives and the criteria for achieving them The goals of the internal control system include achieving reasonable assurance that the activities comply with the law internal rules and regulations and contracts legality and reasonable assurance of the reliability and comprehensiveness of financial and operational information the effectiveness efficiency and economy of operations and the safeguarding of assets and information On an annual basis managers ministers mayors and managers of other organisations provide the Minister of Finance with information about the performance adequacy effectiveness and efficiency of financial management and control systems The standard form contents procedure and deadlines for the provision of information are laid down in an ordinance adopted by the Council of Ministers As a rule such information includes the managers evaluations of the general state of the management and control systems any measures taken to develop and improve them and any elements in need of development and improvement Every year the Internal Control Directorate of the Ministry of Finance preparesupdates a questionnaire on the state of financial management and control systems with reporting guidelines which is approved by the Minister and then forwarded to managers Managers of organisations provide the relevant information by answering the questionnaire and produce an annual report on the state of financial management and control The report has an additional part where the internal audit unit gives its opinion on the information reported By signing the report managers ascertain and assume responsibility for the adequacy and efficiency of the systems set up in the organisations they manage Moreover they sign the annual financial statements in their capacity as firstlevel budget spending units The Minister of Finance imposes a fine if this obligation to provide an annual report by a set deadline is not met The information obtained from the annual reports and the questionnaire is summarised in a consolidated report which is then adopted by the Council of Ministers and submitted to the National Assembly 32 Internal audit The Public Sector Internal Audit Act ZVOPS and Internal Auditing Standards in the Public Sector the Standards regulate internal audit activity in the public sector The Act is in line with the principles laid down in the International Standards for the Professional Practice of Internal Auditing of the Institute of Internal Auditors the IIA and the COSO Internal Control Integrated Framework the COSO Framework 44 An important internal audit tool is the Internal Audit Manual approved by the Minister of Finance It has three parts Internal Audit Activity Management Audit Operation Execution and Audit Tools and Techniques The methodology is applied by the internal auditors from all internal audit units in the public sector Internal audit tasks are defined in line with the fundamental requirement of auditing to support the organisation in achieving its goals These tasks include identifying and assessing risks in the organisation evaluating the adequacy and efficiency of financial management and control systems and issuing recommendations on how to improve the organisations operations The law provides for the broadest possible scope of an internal audit It covers all structures programmes activities and processes within an organisation The remit of the audit unit of an organisation can also cover any undertakings of that organisation where no audit unit has been set up In performing their duties internal auditors have the right to access all of the organisations employees assets and information Internal audit activities are carried out by an internal audit unit IAU which comprises a head of unit and internal auditors These persons report directly to the manager of the organisation and are members of its staff All internal auditors in the public sector must hold an Internal Auditor in the Public Sector certificate issued by the Minister of Finance or an internationally recognised internal auditor certificate The national certificate is awarded following a successful written examination The responsibility for ensuring the independence of internal auditors in internal audit planning auditing and reporting on the results resides with the manager of the organisation The internal audit unit reports directly to the manager of the organisation which ensures its functional and organisational independence The manager of the organisation may not assign internal auditors any functions or activities other than internal auditing Internal auditors may not carry out assurance audit operations concerning any activities or structural units for which they have provided consulting services or in which they have been employed over the past year Any such circumstances must be declared Auditors must also indicate any actual or perceived conflict of interest or partiality The head of internal audit may be appointed or dismissed only with the ministers approval The Public Sector Internal Audit Act distinguishes between organisations in which it is mandatory to set up and maintain an internal audit unit and organisations for which the discretionary decision to have such a unit is within the respective managers remit of managerial accountability An internal audit function must be set up at the Council of Ministers and all ministries other central government authorities certain secondlevel budget spending units and municipalities with a budget exceeding an amount specified in the law Public sector organisations that are not required to maintain their own internal audit unit may opt in and set one up The procedure to do so is as follows Based on risk assessment the firstlevel spending unit makes a proposal to the Minister of Finance to set up an internal audit unit Companies owned by the state or a municipality may set up an internal audit unit in line with the ZVOPS following a decision by their management body In public sector organisations internal audit activities may also be performed by a person from outside the organisation who holds a national or an international certificate and has experience in internal auditing This option can be taken up only if the organisation is not required by law to set up an internal audit unit and has not taken steps to create one on the basis of risk assessment In Bulgaria internal audit functions have been set up in public sector organisations in all 16 ministries and 123 of the 264 municipalities The function also exists at 21 firstlevel and 15 secondlevel budget spending units most of which are agencies attached to the respective ministries 45 Maintaining and expanding professional knowledge and skills is a requirement that is laid down in legislation and further detailed in the internal audit methodology Each manager of an internal audit unit must draw up an annual plan for the professional training and development of their auditors in order to ensure that their audit staff have adequate knowledge skills experience and professional qualifications The plan must be approved by the organisations manager Internal audit work is carried out through assurance or consulting operations Assurance operations account for most of the audit work 70 of all operations in 2012 The focus is on systemsbased audits The number of consulting operations is growing constantly Followup audits to monitor implementation of recommendations given in previous audit operations are included both in the strategic and the annual plans of each internal audit unit Internal auditors assess the adequacy efficiency and timeliness of actions taken on accepted recommendations Usually a large percentage of recommendations tend to be accepted by organisation managers with the acceptance rate exceeding 90 and a followthrough rate of over 80 Internal auditors are obliged to report immediately to the organisations manager any indications of fraud or irregularities they detect They also propose corrective measures and notify the competent authorities If the organisations manager fails to take any steps within 14 days of being notified the internal audit unit notifies the competent authorities and the organisations audit committee if it has one The law provides for the option of setting up an audit committee at the discretion of the organisations manager Committee members should meet certain requirements in terms of educational and professional qualifications The role of audit committees is to support the internal audit unit by giving an opinion on the internal audit units statutes and activity plans reviewing the annual report on the units internal auditing performance and providing feedback on any significant internal audit issues In practice only one public sector organisation has established an audit committee under the ZVOPS The reason for this can be seen in certain features of the organisational setup in public administrations the existence of numerous other structural and functional units within public sector organisations advisory boards working groups risk management committees etc difficulties in identifying suitable and qualified members financial considerations and so on Reporting on internal audit activities is governed by the Public Sector Internal Audit Act the Internal Auditing Standards in the Public Sector and the internal audit methodology Managers of internal audit units issue an annual report presenting the results of internal audit activities The report is sent to the organisations manager and its audit committee if it has one and to the Minister of Finance within the corresponding reporting deadlines The minimum requirements for the content of the report are laid down in the ZVOPS Failure to meet the annual reporting deadline triggers a fine by the Minister of Finance The information gathered through the annual reports is subsequently summarised to produce a consolidated report as described in Item 31 above which is then adopted by the Council of Ministers and presented to parliament 33 Coordination of public internal control Under the Financial Management and Control Act and the Internal Audit Act the responsibility for coordinating and harmonising activities in financial management and control and internal audit in all public sector organisations is assigned to the Minister of Finance To support the Minister in these two functions a Central Harmonisation Unit for Financial Management and Control and a Central Harmonisation Unit for Internal Audit 46 were set up These are the two branches of the Internal Control Directorate in the Ministry of Finance The Directorate develops and updates methodologies in the areas of internal control and internal audit monitors the implementation of the applicable legislation by ministries and municipalities and coordinates and compiles the plans of internal audit units for audit operations involving EU funds and programmes The Directorate carries out external quality reviews of the internal audit function in certain public sector organisations Other functions of the Directorate include providing support for professional training in financial management and control and internal audit and organising workshops for managers and relevant staff in public sector organisations in order to disseminate information on the relevant legislation methodology and good practices in Europe in the area of financial management and control and internal audit It organises and administers examinations for the national internal audit certificate which is issued by the Minister of Finance As mentioned in the reporting sections of Items 31 and 32 above the managers of public sector organisations report to the Minister of Finance on an annual basis on the functioning adequacy effectiveness and efficiency of their financial management and control systems and internal audit activities The Internal Control Directorate analyses that information and drafts a Consolidated Report on Internal Control in the Public Sector That report is submitted to the Council of Ministers for approval and then presented to the National Assembly and the National Audit Office It is also published on the Ministry of Finances website The Directorate maintains a database of financial management and control and internal audit which contains the applicable legislation and methodologies audit opinions and information on harmonisation unit activities data on internal audit units certified internal auditors in the public sector and other relevant information 4 Financial inspection The public financial inspection function is governed by the Public Financial Inspection Act ZDFI and carried out by the Public Financial Inspection Agency ADFI which is an administrative body that reports to the Minister of Finance The Agencys main duty is to protect public financial interests by carrying out expost financial inspections on compliance with rules and regulations on the budget financial economic or reporting activities and public procurement in the organisations within its remit detecting infringements of regulations on the budget financial economic or reporting activities and indications of possible fraud investigating any damages incurred by assets owned by the organisations within its remit initiating procedures for imposing administrative penalties and fines on guilty parties in cases where there are legal grounds for such action detecting fraudirregularities affecting the financial interests of the European Communities In addition the ADFI performs checks on public contracting authorities that are not subject to financial inspections Another important function of the ADFI is to assist European Commission inspectors in their control activities and onthespot checks pursuant to Council Regulation Euratom EC No 218596 where a person who is the subject of an inspection refuses to allow their premises andor documents to be inspected 47 The ADFI interacts and exchanges information with the Prosecutors Office the Ministry of Interior the National Audit Office the Public Procurement Agency and other public authorities on the basis of signed agreements Public financial inspections are carried out in budget organisations companies in which the state or a municipality holds a blocking share of the capital other legal entities in which the state or a municipality have direct or indirect participation in terms of assets beneficiaries of state aid and entities financed from the state budget or municipal budgets extrabudgetary accounts or funds or under international agreements or EU programmes The ADFI carries out financial inspections in the following cases to follow up on requests complaints or reports of infringements filed by public authorities private individuals or legal entities to inspect procedures for the award and execution of public contracts based on information from the public procurement register or referrals from the Public Procurement Agency and the National Audit Office to verify the absorption of state aid and targeted grants in a given year at the request of the Council of Ministers or the Minister of Finance at the request of the Prosecutors Office under the Judicial System Act ZSV and following reports of irregularities that affect the financial interests of the European Communities established by the AFCOS Directorate in the Ministry of Interior These ADFI operations are not preplanned Following a 2012 amendment to the legislation the ADFI carries out inspections of public procurement procedures on the basis of an annual plan The frequency of those inspection activities is determined on the basis of an analysis of public procurement activities and risk assessment and taking into account the Agencys administrative capacity The ADFI draws up an annual performance report which the Minister of Finance presents to the Council of Ministers This report is forwarded to the National Assembly for information 5 Ongoing andor future reforms A number of strategic documents prepared by the government include guidance for the development of financial management and control notably the National Reform Programme 20112015 implementing the Europe 2020 strategy Every year the Consolidated Report on Internal Control in the Public Sector also includes an analysis of the issues areas in need of improvement and development trends The operation and development of management and control systems based on the principles of sound financial management and managerial accountability is an ongoing process that requires competent and qualified managers at all levels in the organisations and staff with the appropriate expert knowledge and skills It is essential to improve the understanding of the essence and basic principles of good governance including through appropriate training One of the challenges is to improve goalsetting and risk management processes in the public sector The entire management and control system needs to focus not only on ensuring legal compliance but also on achieving efficiency effectiveness and economy Although the establishment of the internal audit function is still at an early stage of development its structure and operations based on the law standards and methodology have become part and parcel of the public sector setup Efforts should focus on taking internal audit to a higher level of maturity and improving its added value That is why special attention should be paid to developing internal audit as a key element in the 48 monitoring system of financial management and control thereby improving its quality and efficiency It is necessary to strengthen the administrative capacity of internal audit units so that they can deliver timely and highquality assurance and consulting services Measures should be put in place to meet training needs in order to ensure a high level of professional competence knowledge and skills In terms of audit operations it is important to find solutions to allow the specific activities and processes in the various organisations to be covered adequately It is also important to harness the efforts at all levels of the public sector to transform internal audit into a real tool for providing assurance and consulting and to obtain added value by improving internal control Consideration should be given to introducing working mechanisms to bring the internal audit function to smaller municipalities and other organisations and implementing suitable forms of audit committees while observing the principles of cost efficiency 49 CROATIA Public internal control 1 Brief history of the public internal control system Establishment and development of the internal financial control system in the Republic of Croatia The establishment and development of the internal financial control system in Croatia began in 2003 The ensuing period from 2004 to 2007 was marked by the adoption of the first strategic documents for the development of the internal financial control system and the preparation drafting and adoption of legislation while the activities in practical implementation were primarily directed at establishing and developing internal audit Practical implementation of financial management and control began as late as 2007 The initial strategic documents for the development of the internal financial control system in the public sector the Public Internal Financial Control Development Strategy September 2004 and June 2005 were aimed at introducing the concept of the internal financial control system and explaining key terms related to the system such as managerial accountability the concept of financial management and control value for money exante and expost controls defining the existing state of play with an emphasis on the institutional framework as well as legislation governing this matter and objectives to be achieved The key activity in that period was the drawing up of the Public Internal Financial Control System Act Official Gazette No 14106 which was at the same time one of the basic requirements of the European Commission and a part of preparatory activities for the European Union membership which were monitored under Chapter 32 Financial Control The Public Internal Financial Control System Act was adopted in December 2006 regulating in detail the components of the internal financial control system ie financial management and control and internal audit In the years when preconditions for the establishment and development of the internal financial control system in the public sector were being created from 2004 to 2007 and its practical implementation was at an early stage the budget system in Croatia had characteristics of an inputoriented budget system The budget and budgetary relations system at the time was regulated by the 2003 Budget Act Official Gazette No 9603 Although the 2003 Budget Act was drawn up on the contemporary principles of programme planning accounting aligned with international standards and measures to ensure macroeconomic stability practical implementation of some of its provisions was lacking resulting in controls focusing on inputs and limited flexibility in managing budgetary funds It should also be pointed out that at the time of adoption of the 2003 Budget Act one of the main fiscal policy objectives was to establish fiscal discipline Such an approach was sustained by a large number of input controls and a bottomup approach to decisionmaking as regards budgetary allocations 50 The adoption of the Strategy for the Improvement and Modernisation of the Processes in the State Treasury System 20072011 marked a watershed by setting out objectives and measures to develop an efficient and sustainable system of public finance management which in addition to fiscal discipline necessary for macroeconomic stability was also to ensure strategic allocation of funds and more efficient provision of public services on a valueformoney concept A new Budget Act Official Gazette No 8708 followed in July 2008 laying the legal basis for the implementation of the measures contained in the Strategy for the Improvement and Modernisation of the Processes in the State Treasury System 20072011 Budget reforms introduced by the 20072011 Strategy for the Improvement and Modernisation of the Processes in the State Treasury System and the 2008 Budget Act which aimed to ensure more responsible transparent and successful management of budgetary funds created preconditions for the development of an internal financial control system Having recognised the need for internal financial control systems to be developed as part of the budget system the Public Internal Financial Control System Development Strategy of the Republic of Croatia for 20092011 adopted in September 2009 set the main objective of developing this system as a support to the budget system development Strategic planning at the state level as a mediumterm budget framework and a precursor to a threeyear strategy of Government programmes has been introduced to connect policies with the budget identify priorities and allocate limited budgetary funds strengthen the system of accountability for the objectives set and the budgetary funds allocated inform the public about the objectives activities and expected results improve the results of programmes through more transparency accountability and predictability of financing and achieve better coordination in the functioning of the institutions The introduction of programme planning has encouraged a shift in the approach to planning from an expenditure controlbased budget to a budget based on management interest The practice of risk identification in respect of the objectives set out in the strategic plan has been introduced The latest amendments to the Budget Act Official Gazette No 13612 have introduced a similar practice for local and regional selfgovernment units by making provision for a threeyear plan of development programmes containing objectives and priorities for the development of a given local or regional selfgovernment unit connected with the programme and organisational classification of the budget Steps in budget execution have been improved as shown by centralised payments through the treasury system In addition a process is under way to connect the State Treasury with the accounting system of each budget user which allows for more detailed monitoring of state commitments already from the contracting stage Greater flexibility in budget execution has been achieved as well as greater accountability not only in terms of the amount and type of expenditures but also in terms of the results achieved Joining accounting and procurement information provides a wider view of the liabilities incurred as well as a system of monitoring any commitments incurred at the contracting stage 51 A reporting system has been established to ensure answers to questions as to who has spent money on what how efficiently money has been spent and with what results The financial and budgetary supervision system has been established 2 Public Internal Financial Control development environment 21 Budget system At the onset of the financial management and control development the budget system in the Republic of Croatia had the characteristics of an inputoriented budget system As a result of such a budget oriented at inputs types and amount of cost and programme planning without set programme targets and performance indicators budget management was directed at monitoring discrepancies between what was executed and what had been planned rather than at monitoring the results of the programmes and their impact on the quality efficiency and effectiveness in providing public services and goods What was lacking in such a budget system was a fundamental basis for the development of comprehensive financial management and controls namely a firm link between strategic goalsprogrammesprojectsactivitiesbudgetary funds At the start of practical implementation of financial management and control there was no clear or integral concept of the manner in which financial management and control was to be incorporated into the budget system so the activities focused at only one segment of the internal financial control system which was documenting business processes The Budget Act adopted in 2008 introduced important elements of financial management and control into the budget cycle Budget reforms were directed at developing planning and programming stages in a budget cycle and putting greater emphasis on achieving targets and on the results achieved with invested funds This required connecting strategic and financial plans developing programme planning by defining programme targets developing performance indicators and an implementation monitoring system For that reason the focus was on strengthening financial management and control in crucial processes for quality budgetary funds management such as planning programming preparation of a financial plan implementation and monitoring of the financial plan implementation including contracting and procurement processes and internal reporting systems 22 Budget accounting Since 2002 a new concept of budget accounting has been used All central government entities use a standard accounting plan based on an economic classification of data and a decadal system with five levels of data elaboration Changes to the Croatian budget system were launched primarily because of the need to develop and align the classification system with internationally prescribed classifications the need for quality information on the business operation of individual entities and the central government as a whole as well as the need to adjust to global trends and requirements set by international macroeconomic statistical systems change of the accounting principle The budget accounting system is based on the modified principle of event occurrence but it is designed in such a manner to enable extracting from records and reports the information necessary for a complete event occurrence that is for reporting to all statistical systems including those of the European Union As a Member State Croatia has the obligation to submit a fiscal report twice a year by the end of March and by the 52 end of September In addition it is also required to meet all other commitments arising from full membership It is important to point out that the plan of revenues and receipts by source of financing is adopted at the basic account level within the Accounting Plan whereas the plan of expenses and expenditure and outlays by programme activity and project is adopted within the Accounting Plan section or rather the budget is adopted at the third level of economic classification while budget execution is reported at the fourth level of economic classification 23 Budget supervision Budget supervision is a process of supervising the legality purpose and timeliness of the use of budgetary funds which provides for measures to be taken by the Financial and Budget Supervision Sector of the Ministry of Finance to eliminate the identified illegalities and irregularities Budget supervision includes the auditing of accounting financial and other business documents of entities and is performed via onthespot supervision of the supervised entity that is by analysing its financial and accounting documentation Budget supervision is carried out on the basis of petitions by citizens requests by central state administration bodies local and regional selfgovernment units and other legal persons giving rise to suspicion of irregularity or fraud and by order of the Minister of Finance By a decision of the Minister of Finance dated 7 July 2008 the Financial and Budget Supervision Sector was designated as an organisational unit carrying out the tasks related to the AntiCorruption Strategy implementation and work of the Ministry of Finance on implementing the Strategy The Financial and Budget Supervision Sector does the following inspection supervision of the legality purpose and timeliness of the budgetary fund use as well as the timely and full collection of revenues and receipts from budget users and local and regional selfgovernment bodies inspection supervision of compliance with and application of the law and other regulations affecting budgetary funds and funds from other sources regardless of whether they are revenuesreceipts expensesexpenditure refunds assets or liabilities of budget and extrabudget users or local and regional selfgovernment units supervision of the use of credit facilities for which the central government and local and regional selfgovernment units have provided collateral as well as borrowing and the issue of guarantees checking of the compliance with laws other regulations and acts which are directly or indirectly related to the use of budgetary funds and takes due measures to address any illegalities and irregularities found keeps and updates a register of irregularity officers and based on reports submitted by competent ministries and other state administration bodies and local and regional selfgovernment units compiles a consolidated report on the number and type of irregularities found in the previous year and the actions taken against irregularities identified in previous periods inspection supervision on whether budgetary funds allocated to companies non governmental organisations and other nonprofit organisations and natural persons are used in accordance with the law and for designated purposes inspection supervision of the material and financial operations of companies which are majorityowned or coowned by the Republic of Croatia or by a local and regional selfgovernment unit and in which shares or business stakes are held by 53 the Republic of Croatia or the local and regional selfgovernment unit which has a decisive influence on the management or in respect of which the Republic of Croatia or the local and regional selfgovernment unit has founding and ownership rights as well as companies included on the list of legal persons of special interest to the state and legal persons with public authority which are not budget or extrabudgetary users inspection supervision of the financial operation of businesses and public authorities as regards compliance with deadlines for the payment of amounts due and the implementation of prebankruptcy settlement proceedings financial supervision of concessionaires as regards the legal regular and timely calculation notification and payment of concessions at the request of the concession grantor determines whether the concession grantor takes due measures to collect concession payments in accordance with the concession contract and special regulations governing concessions submits complaints to competent state attorneys offices or files motions with competent bodies to bring misdemeanour charges and performance of other activities within the scope of its competence 24 Protection of the European Unions financial interests in the Republic of Croatia In the preaccession period the Republic of Croatia was obliged to ensure a legislative framework to protect the financial interests of the European Union while also establishing an efficient and effective system of irregularity and fraud management in connection with the management and use of European Union assistance funds AFCOS system In the Republic of Croatia protection of the financial interests of the European Union is mandated in Article 114a of the Budget Act Official Gazette 8708 and 13612 and the Regulation on the Institutional Framework of the System for the Prevention of Irregularities and Fraud AFCOS Official Gazette 14413 In the Republic of Croatia the AFCOS system includes the following a a network of accredited bodies managing and using European Union assistance funds the irregularity reporting system b a network of bodies engaged in combating fraud corruption or any other form of illegal activity within the system AFCOS network c the Ministry of Finance Service for Combating Irregularities and Fraud which has a coordinating role within the system and represents a contact point with OLAF The Irregularity Reporting System The Irregularity Reporting System has been continuously developed since 2005 when state administration bodies were preparing for accreditation by the European Commission in relation to the use of European Union assistance funds The basic function of this system is reporting on irregularities The bodies that make up the Irregularity Reporting System are obliged to submit quarterly reports on irregularities to the Service for Combating Irregularities and Fraud within the Ministry of Finance which have been identified in the projects under implementation which are funded by the European Union preaccession assistance CARDS PHARE ISPA SAPARD IPA Irregularities are reported by irregularity officers appointed at each body 54 As of 1 July 2013 the bodies within the Irregularity Reporting System submit quarterly reports to the Service for Combating Irregularities and Fraud within the Ministry of Finance in accordance with the existing procedures on any irregularities which have been identified within the projects being implemented as part of the programmes of structural funds and the Cohesion Fund as well as programmes of the European Maritime and Fisheries Fund the European Agricultural Guidance and Guarantee Fund EAGGF and the European Agricultural Fund for Rural Development EAFRD Procedures for preventing identifying taking action reporting and following up on reported irregularities in the use of European Union assistance funds are an integral part of the manuals of all bodies within the Irregularity Reporting System and contain detailed rules on irregularity and fraud management On receiving reports of irregularities the Service for Combating Irregularities and Fraud verifies their quality for the purpose of sending them to the European AntiFraud Office OLAF Reporting on irregularities is carried out via the electronic Irregularities Management System IMS AFCOS network In order to make the AFCOS system fully operational the AFCOS network has been established by Decision of the Government of the Republic of Croatia Official Gazette 15113 which defined the bodies within the AFCOS network and their tasks Each body within the AFCOS network appoints its representative to participate in the execution of tasks of the AFCOS network The role of the AFCOS network is not to report on irregularities but to act upon identified irregularities or suspicions of fraud where necessary in cooperation with the Service for Combating Irregularities and Fraud According to the said AFCOS network has a consulting role in the AFCOS system If a body within the AFCOS network is at the same time a beneficiary of European Union assistance funds then it is represented both in the AFCOS network and in the Irregularity Reporting System and has different roles depending on whether it is a beneficiary of funds or has the role of a repressive body In the AFCOS network it is represented by a person appointed by the aforementioned Decision of the Croatian Government while in the Irregularities Reporting System it is represented by an irregularity officer Currently the AFCOS network is composed of representatives of the Ministry of Justice the Ministry of the Interior the Ministry of Finance the Tax Administration the Customs Administration the Sector for Harmonisation of Internal Audit and Financial Control the AntiMoney Laundering Office the Sector for Financial and Budget Supervision the Ministry of the Economy the Directorate for Public Procurement System the State Attorneys Office of the Republic of Croatia and the Agency for the Audit of the European Union Programmes Implementation System The Service for Combating Irregularities and Fraud The Service for Combating Irregularities and Fraud was established within the Ministry of Finance late in 2006 and must be operationally independent of any other body in the AFCOS system This service is competent for the coordination of legislative administrative and operational activities among the bodies within the AFCOS system with a view to protecting the financial interests of the European Union and in that regard for direct cooperation with OLAF The Service for Combating Irregularities and Fraud is responsible for developing advanced training programmes for the staff of AFCOS system bodies in cooperation with OLAF and providing organisational support in their implementation 55 facilitating direct investigations performed by OLAF experts on the territory of the Republic of Croatia related to the protection of financial interets of the European Union in the Republic of Croatia instructing the competent bodies within the AFCOS network for action with a view to gathering evidence establishing facts initiating penalty procedures and taking appropriate action on the basis of notifications received at the email address opened specifically to notify irregularities exchanging information with other bodies with public authority in case of suspicion or notification of suspicion of fraud corruption or any other form of irregularity in the system and making appropriate notifications to the competent bodies within the AFCOS network monitoring the course of investigative procedures in respect of the unlawful use of European Union assistance funds reporting to the National Authorising Officer on the measures taken and the results of procedures initiated for the purpose of sanctioning the irregularities identified in the programmes of the EU preaccession assistance receiving checking and consolidating reports on irregularities in the management and use of European Union assistance funds and their submission to OLAF monitoring the recovery of illegally disbursed European Union assistance funds and keeping a register of irregularities Since August 2009 the Service for Combating Irregularities and Fraud has regularly held training on the subject of combating fraud in the AFCOS system protecting the financial interests of the European Union in the Republic of Croatia and on irregularity and fraud management Procedures on irregularity and fraud management are being improved for the bodies within the Irregularity Reporting System promotional materials have been produced and promotional campaigns have been organised to raise public awareness of the fight against irregularities and fraud Early in 2014 the Government of the Republic of Croatia plans to adopt a National AntiFraud Strategy to protect the financial interests of the European Union along with a corresponding Action Plan for the 20142016 period with a view to ensuring the effective and efficient protection of the financial interests of the European Union by defining objectives and measures based on the weaknesses identified in the AFCOS system 25 State Audit Office The State Audit Office is the supreme audit institution of the Republic of Croatia and was established in 1994 pursuant to the State Audit Act Official Gazette 7093 In accordance with recommendations by the International Organisation of Supreme Audit Institutions INTOSAI and its declarations as well as with the closing benchmarks for Chapter 32 Financial Control as part of preaccession negotiations on the European Union membership provisions on the State Audit Office as the highest audit institution of the Republic of Croatia which is autonomous and independent in its work were incorporated into the Constitution of the Republic of Croatia in 2010 In accordance with such changes to the Constitution the State Audit Office Act Official Gazette 8011 adopted in July 2011 elaborates in greater detail the provisions on the competence organisation and method of work of the Office Pursuant to the provisions of the State Audit Office Act the Offices competence covers the auditing of state revenues and expenses financial statements and financial 56 transactions of state sector units local and regional selfgovernment units legal persons financed from the budget legal persons founded by the Republic of Croatia or local and regional selfgovernment units companies and other legal entities in which shares or stakes are majorityowned by the Republic of Croatia or local and regional self government units as well as the use of funds of the European Union and other international organisations or institutions for financing public needs State sector units and local and regional selfgovernment units are taken to mean all bodies of legislative executive and judicial authority as well as all agencies institutions and other entities at the level of the Republic of Croatia and local units which are financed from the state budget or the budgets of the local units Reports on state budget execution must be audited every year Political parties independent members of Parliament and members of the representative bodies of local and regional selfgovernment units elected from the list of a group of voters must also be audited every year as regulated by the provisions of the Political Activity and Electoral Campaign Financing Act Official Gazette 2411 6111 2713 and 4813 consolidated text which fully regulates their financing acquisition and spending of funds as well as supervision and audit of financial reports and operations Other entities falling within the Offices competence are audited according to an annual work programme and plan issued by the Auditor General The scope of the annual work programme and plan is determined on the basis of a risk assessment the financial significance of the entity subject to auditing the results of the previous audit collected information on the business operations of the audited entity and other criteria which are determined by an internal act of the State Audit Office The State Audit Office is organised on the model of supreme audit institutions in developed European countries It is structured as a single institution with its Head Office in Zagreb and 20 regional offices in county capitals The Head Office in Zagreb and the regional offices operate in the entire territory of the Republic of Croatia The Head Office has departments organised according to types of audits and entity subject to auditing as well as legal affairs human resources and accounting departments and an internal audit department The scope of work of the Head Office also includes public relations and international cooperation The State Audit Office is run by the Auditor General who is appointed by the Croatian Parliament for a term of eight years with the possibility of reappointment The Auditor General has his or her advisory body the Council of Experts composed of recognised economics and law scholars and experts in the field of audit accounting and finance Audits are carried out in the manner and according to procedures laid down in the framework of audit standards of the International Organisation of Supreme Audit Institutions INTOSAI and the Code of Professional Ethics for state auditors The audit process includes planning implementation and reporting The State Audit Office pays much attention to longterm strategic planning with a view to developing and improving its operation The strategic plan for the 20082012 period defined main activities aimed at increasing audit quality raising the professional and ethical qualities of staff and ensuring a high degree of application of technical achievements computer techniques and tools in the conduct of audits The purpose of the activities aimed at increasing audit quality was to achieve the highest quality of audit reports and excellence in the work of the institution concerned and all its employees This was achieved by constant oversight of the quality control system and regular alignment with audit practices in the world by updating the work methodology manuals guidelines and instructions for the work of certified state auditors The Strategic Plan for the 20132017 period was adopted at the end of 2012 identifying the following objectives strengthening the institutional framework capacity building 57 aligning the methodology and manner of work with ISSAI standards further improving the quality control system improving the internal organisation of work and defining criteria and methods of rating the effects of the Offices work By achieving the set strategic objectives and increasing excellence in operation the Office is expected to make an even greater contribution to increasing the accountability efficiency and effectiveness of all participants in the process of collecting spending and managing budgetary extrabudgetary and other public funds 3 Concept of internal controls in the public sector of the Republic of Croatia 31 Managerial accountability Some changes to the organisational culture including a managerial approach to public service provision are being implemented These changes are oriented towards the development of financial management and controls across the entire organisation which requires powers and responsibilities for budget management to be clearly defined within the organisational structure costs and and revenues to be adequately controlled throughout the organisation and reporting lines to be established enabling timely financial reporting and reporting on the performance of the invested budget funds For this purpose authorities and responsibilities delegation models have been developed within the organisational structures helping the heads of budget users to define more clearly managers competences and responsibilities for the implementation of the set objectives and management of budget funds An obligation to decide on the appointment of persons responsible for implementing the strategic plan for a three year period and on the delegation of authorities and responsibilities for the management of budget funds provided for in the financial plan has been introduced By decision on the appointment of persons responsible for implementing the strategic plan for a threeyear period the head of the budget user regulates the managerial accountability for achieving strategic objectives By decision on the delegation of authorities and responsibilities for the management of budget funds provided for in the financial plan the head regulates the managerial accountability for the use of budget funds The said decisions represent an instrument of practical implementation of managerial accountability and are a good indicator of where changes need to be introduced in the organisational structures and method of the financial plan preparation Specifically these decisions are hard almost impossible to implement in the institutions which have no clearly defined objectives and which implement programmes through several organisational units making it difficult to determine individual accountability and where the budget or financial plan is not elaborated by organisational units These are all important prerequisites to even consider the development of the managerial accountability of managers Strengthening the link between the first and second level of budget users namely ministries and budget users within their structure eg agencies centres etc as well as counties and cities and their budget users is an important element in the development of the control environment in the preparation and implementation of strategic plans coordination of the preparation and implementation of financial plans or budget and reporting system The development of a planning approach to business operations fosters better quality risk management in the public sector as well Risk management is being developed as an integral part of the planning and decisionmaking process including risk identification in 58 relation to the set objectives the assessment of the probability of their occurrence and the impact they can cause documenting riskrelated data and risk reporting In relation to the development of control activities the practice involving the drafting of internal acts rulebooks guidances instructions guidelines building on to legal regulation including the Budget Act the Internal Financial Control System Act and other regulations is encouraged to define in further detail the procedures the authorities and responsibilities of individual participants defined as well as exante and expost controls particularly in the processes of planning preparing and implementing financial plans business documentation processing transaction recording procurement contracting and assets liabilities revenues and expenses management The development within the budget system oriented at interrelating objectivesplans budget funds fosters information and communication system improvements particularly the accounting and reporting systems which follow the link between planning documents and budget funds necessary for their implementation both in the planning and implementation phase It is necessary to develop cost accounting and management accounting including the records and reports on contracted liabilities in order to provide complete and timely information for planning the dynamics of financial plan implementation on the costs and cost centres in order to provide information for the purpose of cost management decisionmaking about potential savings assessment of the financial impact of programmes projects activities etc and on the accomplishment of the objectives and the programme performance With regard to the development of the financial management and control monitoring and assessment models of selfassessment of the financial management and control system are developed and in addition to the assessment of the financial management and control through its five components they require the assessment of the financial management and control system in the key areas related to the budget cycle This was initiated by passing the Fiscal Accountability Act in November 2010 Official Gazette 13910 and introducing the Fiscal Accountability Statement More specifically the questionnaire to be filled in when submitting the Fiscal Accountability Statement is a selfassessment of the financial management and control system in its key areas budgetfinancial planning budget executionfinancial plan implementation public procurement accounting and reporting The Fiscal Accountability Questionnaire requires all budget users to meet a certain minimum degree of development of their financial management and control system in its key areas so that the said system would serve the function of ensuring fiscal accountability In addition to the Fiscal Accountability Questionnaire large budget users central state administration bodies extrabudgetary users of the state budget counties county seats the City of Zagreb cities with more than 35000 inhabitants are required to fill in a questionnaire for the Annual Financial Management and Control System Report and to undertake a broader selfassessment of their financial management and control system analysing it across all its components control environment risk management control activities information and communication as well as monitoring and assessment The Fiscal Accountability Act has linked the provisions of the Budget Act and the Public Internal Financial Control Act defining clearly defined that the heads of budget users may be considered fiscally accountable only if they have ensured an efficient and effective functioning of the financial management and control within their institutions 59 32 Internal Audit The obligation to establish internal audit at budget users in the Republic of Croatia has been stipulated in accordance with the Public Internal Financial Control Act and is part of a comprehensive system of public internal financial control aimed at providing assurance and advice to the budget user as an independent and objective activity so as to achieve added value and improve operations Likewise internal audit activities assist the budget user in achieving budgetary objectives by taking a systematic and disciplined approach to evaluation and improvement of the effectiveness of the process of risk management controls and governance The criteria for the establishment of internal audit units were redefined in July 2013 by the adoption of new Rules on the internal audit of budget users Official Gazette 9613 in such a manner that the internal audit units are primarily organised at the level of consolidated budgets or at the level of ministries and major local and regional self government units counties county seats with more than 50 employees the City of Zagreb and cities with more than 35000 inhabitants with an obligation of those internal audit units to conduct the internal audit at the budget users within their competence as well Secondlevel budget users as well as budget and extrabudgetary users of local and regional selfgovernment units with highrisk scope of operations were given the option to set up an internal audit unit although they were are not obliged to do it subject to a prior approval of the Minister of Finance However these budget users are required to submit prior approval of the competent minister county head or mayor together with the proposal for establishing their own internal audit unit In addition if second and third level budget users establish their own internal audit units these units are required to cooperate with the internal audit unit of the competent ministry or with the local and regional selfgovernment unit Universities and health care sector institutions are set apart as being subject to the obligation to establish their own internal audit unit or a joint internal audit unit Since these systems science and health care are large but not as yet sufficiently integrated within the consolidated budgets at this stage of development it is almost impossible to expect internal audit activities to be provided only from the level of the competent ministry The said budget users especially health care system budget users are expected to organise their joint internal audit units The criteria for the establishment of the internal audit function defined by the new Rulebook on the internal audit of budget users have brought about significant changes compared to the criteria defined in the Rulebook on the internal audit of budget users of March 2008 Official Gazette 3508 The internal audit establishment criteria stipulated by the 2008 Rulebook on the internal audit of budget users did not take into account the interrelations among public sector institutions so in addition to ministries counties and cities they required even smaller budget users to establish independent internal audit units all users with more than 50 employees and expenses and expenditure in excess of HRK 30 million For the most part this category consisted of second and thirdlevel budget users agencies institutions in the field of social affairs culture justice etc which had insufficient capacities to establish their own internal audit units and whose competent ministries and their relevant budgets did not include them in the internal audit function from their own level This resulted in a significant number of those being subject to the obligation to establish internal audit not being able to do so due to a lack of capacities leaving a significant portion of budget funds not covered by the audit activity The criteria set out in the new 2013 Rulebook on the internal audit of budget users contribute to ensuring that the internal audit as an advisory function is available to as many budget users as possible and that at the same time its resources are optimally organised adhering to auditing standards and work methodology 60 The development of financial management and control which has been oriented towards supporting the development of the budgetary system in recent years influenced the choice of areas which are subject to auditing by the internal audit Budget subsidies and assistance systems longterm asset management and public procurement are standing out as the most important auditing areas in the past two years Unlike the audits conducted in the early stages of internal audit development which were mostly simpler audits and compliance audits the ones conducted in the past few years can be considered as more complex audits and systems audits because they have resulted in recommendations that are aimed at developing the financial management and control system of greater quality precisely in those areas in which in accordance with current developments weaknesses have been identified particularly in the area of written procedures systems of recording and reporting as well as exante and expost control mechanisms The fact that initial audits were generally simpler audits and compliance audits can be explained by several reasons Among the audit reports at the time a large number of audits concerned initial pilot audits which internal auditors conducted as part of their training and which as a rule were simpler However it is necessary to point out that in circumstances where the financial management and control are more focused on the control of compliance with laws regulations and the planned budget funds than on achieving greater efficiency and effectiveness in the use of budget funds the internal audit is accordingly more focused on compliance audits It should be noted that even then in the early years of internal audit development a part of internal auditors conducted more complex system audits as well in the field of financial management pointing out to the need to further develop financial management and control system in their recommendations Although the recommendations were accepted they failed to be implemented at the time and thus the effects of the audits were not discernible Nowadays the implementation of recommendations is at a much higher level and the contribution of internal audit activities is evident in the building of specific control mechanisms resulting in the following at some institutions at the state and local level drafting of internal acts rulebooks guidances guidelines instructions improving the system of records reporting information dissemination strengthening of the expost and exante control especially in the award of grants subsidies selection of programmes projects etc The development of financial management and control in the area of strategic planning programming and risk management as an integral part of the planning and decision making process contributes to a considerable extent to a better quality preparation of strategic and annual internal audit plans Given that early on in the financial management and control system development from 2005 to 2007 budget users did not have a sufficiently developed planning approach to business the preparation of strategic and annual internal audit plans required significant cooperation of internal audit and management in order to determine the mission and vision as well as to define objectives and processes If such cooperation was lacking or not achieved sufficiently internal auditors did not have complete information for the preparation of strategic and annual plans therefore the choice of auditing areas may not have reflected the priority auditing areas in the best possible way It was not until the development of a budget system which drives strategic planning and links it to the budgetary planning that the need for strategic planning arose facilitating the preparation of internal audit strategic plans and alignment with the strategic plans of the institution nowadays All this has encouraged the improvement of the internal audit strategic planning methodology which in addition to the initial narrow view focusing only on the processes and objectives and risks at the level of processes currently focuses on strategic objectives and programme objectives as well as the on the risks at the level of strategic objectives and programme and project objectives 61 321 Interrelation of internal and external audit Relationship between the internal audit of budget users and the State Audit Office The interrelation of internal and state audit has been stipulated by several documents According to the Lima Declaration which is the fundamental document of the state audit state audits should examine the efficiency of the internal audit service In accordance with the Public Internal Financial Control Act heads of the internal audit units cooperate with the State Audit Office and at its request and with the consent of the heads provides information regarding the contents of the audits which have been completed Other forms of collaboration also take place at the request of the State Audit Office When assessing internal control systems state auditors assess the work of the internal audit of the entity the financial reports and operations of which are subject to auditing in order to determine whether they can rely on the work performed by internal auditors When assessing the work of internal audit state auditors check the status of the internal audit and its organisational setup and independence quality and methodology of the internal audit work internal audit capacities together with their expertise and competence In addition the interrelation between the internal and state auditors is reflected in the exchange of information and mutual consultations as well as the exchange of audit reports and assistance when it comes to accepting and following the auditors recommendations Cooperation with the Agency for the Audit of European Union Programmes Implementation System The Agency for the Audit of European Union Programmes Implementation System ARPA performs the external audit function and is functionally independent from all participants in the system of management and implementation of EU programmes The ARPA performs its activities in accordance with international auditing standards and international quality control standards taking into account the guidelines of the European Commission In assessing the management and control system the ARPA also audits the internal audit work as an integral part of the overall management and control system In assessing the performance of the internal audit unit the ARPA assesses the independence competence and work efficiency of internal audit The methods and areas of mutual cooperation between internal audit in the institutions involved in the implementation of EU programmes and the ARPA are regulated by the cooperation agreements 322 Audit Committees The Public Internal Financial Control Act of the Republic of Croatia does not provide for the establishment of audit committees in the institutions of state and local regional selfgovernment However under the State Audit Act the companies of special public interest are required to establish an audit committee consisting of members of the Supervisory Board and members appointed by the Supervisory Board The role of the audit committee is to monitor the financial reporting procedure and the efficiency of internal control internal audit and risk management system oversee the implementation of the audit of the annual financial statements and consolidated financial statements monitor the independence of independent auditors discuss the plans and annual report of the internal audit as well as important issues relating to this area 62 33 Public Internal Financial Control Council The Public Internal Financial Control Council has been established with the aim of developing financial management and control and the internal audit The Council is an advisory body to the Minister of Finance and has no managerial powers The Council members are appointed by the Government of the Republic of Croatia at the proposal of the Minister of Finance from the circle of persons who have knowledge and experience in the field of financial management and control internal or external audit and from the ranks of heads of budget users The Minister of Finance is the President of the Council The Council is convened as necessary but at least three times a year The Councils activities are focused on improving risk management and selfassessment of internal control by the head of the budget user monitoring the implementation of activities undertaken by the head of the budget user on completion of the risk assessment and selfassessment of the internal control monitoring the implementation of recommendations of the internal audit and the State Audit Office by the head of the budget user protection of functional independence and development of the internal audit issuing recommendations for the development of financial management and control and the internal audit assessment of the justification of argument for the dismissal andor reassignment of the internal audit unit head providing advice and opinions on the Consolidated Annual Public Internal Financial Control Report prior to its approval by the Minister of Finance and submission to the Government of the Republic of Croatia 34 Coordination of activities related to the Public Internal Financial Control system 341 Coordination and harmonisation of methodology and work standards The Central Harmonisation Unit of the Ministry of Finance is responsible for coordinating the establishment and development of the public internal financial control system of the Republic of Croatia The Central Harmonisation Unit is responsible for the development and implementation of the methodology and standards of the financial management and control system and of the internal audit It also develops the methodology of risk assessment to be used by all public institutions provides methodological guidelines related to the financial management and internal audit assesses the activity of internal audit units and the development of financial management and control oversees the implementation of the set requirements and analyses the functions of internal audit and financial management and control units within the ministries and other state administration bodies as well as local and regional selfgovernment units In order to improve the work methodology the Central Harmonisation Unit collects and analyses strategic and annual plans of all internal audit units as well as plans for the development of financial management and control adopted by budget users on an annual basis 63 Since the development of methodology and work standards in the public sector should be harmonised and coordinated with the development of the budget system and reforms in the field of public administration the Central Harmonisation Unit develops cooperation with institutions in charge of public sector reforms for example with the State Treasury the Ministry of Public Administration the Ministry of Regional Development and EU Funds institutions involved in the management of EU funds and others The cooperation of the Central Harmonisation unit and budget users at the state and local level required to implement the internal financial control system in their daily operations is of special importance The role of the Central Harmonisation Unit is to connect or network budget users in order for them to exchange experience knowledge identified difficulties and weaknesses examples of good practice etc The Central Harmonisation Unit submits an annual internal audit report to the Croatian Government and this report is based on the consolidation and analysis of the annual reports submitted by the internal audit units The reports contain information on the operations of the internal audit units and the execution of plans The annual report on the internal audit activities enables monitoring both the organisational structure and capacities of internal audit The Government of the Republic of Croatia also receives the Annual report on the financial management and control system functioning based on the consolidation and analysis of the annual reports submitted by line ministries and other state administration bodies as well as local and regional selfgovernment units The said report on the audits and internal audit activities performed and the financial management and control system report together form the Annual Public Financial Control System Report 342 Coordination of professional training and certification of public sector internal auditors The Central Harmonisation Unit is responsible for the organisation of professional training for obtaining the qualification of certified public internal auditor It organises basic training after which a certification of the Minister of Finance is awarded authorising each trainee to conduct internal audits in the public sector The certification is a proof that internal auditors are trained to apply professional standards and work methodology prepared by the Central Harmonisation Unit for the purpose of conducting internal audits in public institutions Furthermore the Central Harmonisation Unit is the competent authority for the organisation and implementation of other forms of training optional modules workshops and other forms of professional development for the purpose of continuous professional training of certified public internal auditors as regulated by the Instruction on the continuous professional development of internal auditors in the public sector In the course of 2013 activities have been initiated to encourage internal auditors to prepare for taking examinations aimed at obtaining the international CGAP Certified Government Auditing Professional certification so a number of public internal auditors are expected to take the CGAP examination in 2014 343 Guaranteed independence of the internal audit function Functional independence of the internal audit is defined in the Public Internal Financial Control Act The internal audit unit is set up at the highest organisational level and is in the organisational and functional sense accountable directly and solely to the head of the budget user Functional independence of the internal audit unit is achieved through its independence from other organisational forms of budget users in planning their work conducting internal audits and reporting Accordingly the budget users in their regulations on the internal structure among other things regulate the scope of work of internal audit units 64 The new Rulebook on the internal audit of budget users have further strengthened the independence of internal auditors The establishment of an internal audit unit at the level of the ministry and local and regional selfgovernment units with the obligation of the unit to conduct the internal audit of the budget users within their structure as well further ensures the independence of the internal audit which as a result has an overview from the highest organisational level within the consolidated budget that is the ministrycountycity level of the financial management and control system as a whole ranging from the highest level at which strategic objectives and priorities are defined and financial plans and reports consolidated to the budget users which fall under the competence of the ministrycountycity in charge of the accomplishing the set objectives spend funds from these consolidated budgets and are accountable to the ministercounty headmayor with regard to the financial management and control system functioning method With such an approach the internal audit still retains its direct accountability to the ministercounty headmayor for planning and reporting while the scope and the area in which it may act at all levels under the competence of the ministercounty headmayor is expanded Internal audit is conducted exclusively by certified internal auditors who are the employees of internal audit units 344 Coordination of professional training in the financial management and control field Under the Public Internal Financial Control Act the Central Harmonisation Unit provides professional training to the persons responsible for financial management and control development coordination heads of financial management and control financial management and control coordinators In addition to professional training the Central Harmonisation Unit organises other training programmes conferences seminars and workshops aimed at professional development of the heads of budget users and the heads of organisational units who are responsible for the financial management and control as well as the persons responsible for financial management and control development coordination those appointed to coordinate risk management risk coordinators employees of finance and budget organisational units As of 2014 the National School of Public Administration will be involved in the organisation and implementation of advanced training programmes within the competence of the Ministry of Finance 4 Financial Inspection Please refer to section 23 5 Ongoing andor future reforms Planned activities in the implementation of further reforms within the framework of Public Internal Financial Control system In the last few years the development of the internal financial control system has been characterised by its close interrelation with the budget system development and public administration reforms Also the internal financial control system development is one of the principal measures in the anticorruption programmes related to budget users and 65 public companies Such interrelation of the development of the internal financial control system with the development of the budget system and public administration reforms will continue in the upcoming period The implementation of the Public Internal Financial Control Act began in 2006 so there is a need to amend the Act and align it with the requirements of practice and changes ensuing in the development of this system over the past years as well as changes in the environment in which the system evolves The Act is to be amended in the upcoming period so as to strengthen the role and importance of the internal financial control system within the budget system extend the application of the act to the companies and other legal entities whollyowned by the Republic of Croatia or by local and regional selfgovernment units define the role of the heads of internal organisational units in addition to the responsibility of the heads of the budget users regarding the establishment and development of the internal financial control system define the role of the organisational units in charge of finance as a coordinator of the financial management and control development at the level of budget users align the components of financial management and control with the updated internal control standards issued by the Committee of Sponsoring Organisations of the Treadway Commission COSO in March 2013 improve and align the internal audit methodology developed by the Central Harmonisation Unit with the updated International Standards for the Professional Practice of Internal Auditing and the International Professional Practices Framework IPPF issued by the Institute of Internal Auditors IIA in application since January 2013 Among other things further development will be aimed at improving the risk management methodology at budget users with a focus on risk identification at the level of programmeprojectactivity objectives further development of the practice of conducting horizontal audits of identical processes being performed by more budget users and vertical audits of interrelated institutions in the public sector control of the quality of the internal audit activities of budget users by the Central Harmonisation Unit monitoring and supervising the practical implementation of financial management and control system within the budget users by the Central Harmonisation Unit and providing feedback to the institutions in charge of the reforms of the budget system and public administration networking and development of an information exchange system by presenting good practices The above mentioned and other activities to be undertaken in order to further develop the internal financial control within budget users and strengthen the accountability for allocated budget funds will be included in the new strategic document which will define the future directions of development 66 REPUBLIC OF CYPRUS Public internal control 8 Summary of the major changes 20112013 The Republic of Cyprus signed a Memorandum of Understanding MOU with the Troika European Commission European Central Bank and International Monetary Fund for the provision of financial assistance of 10bln The MOU prescribes a lot of restructuring both in the setup and the functioning of the civil service and consequently major reforms are currently under implementation The whole process does affect financial management and controls and a new law relating to financial reporting and budget preparation and implementation is expected to be finalized and voted for by the Parliament early in 2014 In addition following a decision by the Council of Ministers all the Line Ministries will be obliged to set up Internal Control Units The major improvements on the existing financial management framework relate to the increased flexibility that will be allowed to line ministries to both develop and implement their budget on the one site and the greater accountability and transparency on the other site Transparency and accountability is pursued by setting new rules for forecasting and reporting at an aggregate level at the Ministry of Finance and by creating a fiscal Council which shall review assess and report on the fiscal indicators Governments estimates and projections 1 Brief history of the present public internal control system The Organization of the public sector in Cyprus and specifically financial management and controls have been the subject of discussions of the Republic of Cyprus and Troika International Monetary Fund European Commission and European Central Bank within the framework of the Memorandum of Understanding signed between the two parties in March 2013 Consequently there are certain reforms going on at the moment which are described in section 5 of this report However the basic elements of the system will not cease to perform their main functions as these were previously assumed The financial control system of the public sector comprises two layers of controls external controls which are carried out by the National Audit Office and internal controls which are mainly carried out by line ministries the Treasury and the Internal Audit Service The budget including development expenditure is prepared by the Ministry of Finance on an annual basis and becomes law once it is approved by the parliament The development budget used to be prepared and monitored by the Planning Bureau until 2007 however following a reform of the national procedures which was initiated by the Minister of Finance the whole budget process including both development and operational expenditure is now carried out under the responsibility of the Ministry of Finance In addition since 2009 the budget has been prepared on a threeyear basis 8 Contributed by the Treasury of the Republic of Cyprus 67 The responsibility for managing and supervising all financial operations in respect of money paid or received lies with the Accountant General Head of the Treasury The Accountant General and the Deputy Accountant General are appointed by the President of the Republic and their role in terms of managing and supervising all accounting operations stems from the constitution All Treasury staff are hired by the Public Service Commission and thereafter the Treasury assumes responsibility for their training and professional development The operation of the accounting function is explained in detail in paragraph 31 It is worth noting however that the Republic of Cyprus which was established in 1960 inherited a quite robust accounting system from the UK which was subsequently further developed and built on The existing Law for the management of revenues and expenditure and of the accounting system of the republic and other related matters was established in 2002 and in 2004 the Treasury set in operation an automated financial reporting system following an initiative of the Accountant General In the context of this initiative to modernise and automate the work of the Treasury all accounting and financial procedures and instructions were reviewed at the time Internal auditing is carried out by the Internal Audit Service This is headed by the Commissioner of Internal Audit who is an independent state official The internal audit function was a separate directorate within the Treasury until 2003 At that time and following the enhanced role that the directorate had to assume due to the accession of Cyprus to the EU it was decided that it should become an independent office There are 11 line Ministries each of which is organised in departments andor directorates in accordance with its objectives and needs and sets out procedures and controls other than financial controls which as mentioned above are set out by the Treasury on a horizontal basis to serve the public and carry out its daytoday activities All public servants except police army and education staff are hired by the Public Service Commission based on the approved organisation chart of each ministry appearing in the budget law Ministries assume the responsibility to adequately train their staff in accordance with their needs Cyprus operates an academy of public administration which aims to assist in the development of the managerial capacity and the modernization of the public sector by offering training seminars to public servants 2 Public internal control environment The public internal control PIC environment in Cyprus is characterized by a tightly controlled centralized approach The key player in the PIC system is the Treasury the other actors being the Ministry of Finance the Internal Audit Service and the controlling officers who are located at each ministrydepartment The Treasury is responsible for ensuring rational financial administration paying all obligations of the republic maintaining a sound financial management framework servicing the public debt providing the regulatory framework for public procurement across the government and delivering timely and accurate financial information The Ministry of Finance mainly assumes the responsibility for preparing the annual budget handling domestic and international economic affairs and taxation issues and managing the national debt The Internal Audit Service operates independently of the line ministries and reports to the Internal Audit Board The national budget is prepared on an annual basis on a linebyline basis by the Ministry of Finance At the same time the budget for each of the two following years is prepared The budgetary process is based upon historic data the level of current spending and each years financial targets which are currently agreed with the Troika within the existing Memorandum of Understanding 68 The budget is submitted to the Council of Ministers by the Minister of Finance and when approved it is submitted to the parliament The parliament can vote for the budget in which case it becomes law The parliament may reduce or vote against certain budget votes but it cannot increase the budget for any line Once the budget is approved by the parliament it becomes law and it stipulates the categories and lines of expenditure and the amounts that each ministrydepartment is allowed to spend for the next three financial years In accordance with the budget law certain specified officials the controlling officers permanent secretaries or directors of departments are responsible for authorizing the expenditure of each ministrydepartment The approved budget is entered into the accounting system and no payments can be made in excess of the budget unless an additional budget is approved by the parliament or a transfer between votes is approved It is noted that every paymenttransaction must be approved by the responsible controlling officer or hisher authorized representative before it is processed and posted to the accounting system In order to secure and control the accounting activities and to provide timely and accurate financial information within a financially sound environment the Treasury operates various electronic systems covering the whole spectrum of its activities such as payroll and servicing of public debt All transactions are recorded in a centralised reporting system which is administered by the Treasury as far as access levels and user profiles are concerned It is noted that all accounting staff are appointed by the Accountant General and given access to the accounting system accordingly All transactions are recorded on cash basis in a twostep process ie first submitting and then finalising accounting entries All staff involved in the processes of paying or receiving money on behalf of the government follow binding instructions which are issued by the Accountant General in the form of circulars The Internal Audit Service prepares and implements an annual audit plan All findings and suggested corrective actions are communicated and discussed with the auditees and agreed action plans are usually set up and monitored More details about the Internal Audit Service are explained in Section 3 External audit is carried out by the Auditor General an independent official appointed by the President Audit activities cover both the financial and the operational activities of the government Audit findings are communicated to all the auditees ministries and departments for their comments and implementation of the relevant suggestions An audit report covering all ministries is compiled on an annual basis and submitted to the President 3 The concept of public internal control 31 Managerial accountabilityresponsibility Managerial accountability refers to the totality of operations of a ministrydepartment and is not restricted to the role of financial services It is an integral part of the wider scope of internal governance The control environment is characterized by strict procedures for the approval and execution of expenditure in accordance with the annual national budget The budget cannot be overspent without prior approval by the parliament The procedures for public procurement approval and payment of expenditure are uniform across the whole government and are governed by relevant laws regulations and instructions which are issued by the Treasury It is noted that the Treasury is the competent authority for both 69 public procurement and financial management handled by separate directorates and all accounting departments within the government are headed by Treasury staff Control activities in relation to approving and executing payments are standardized across the government and are overviewed by accounting staff Standardized forms electronic and manual are used for documenting and processing the approval and execution of all payments Staff who authorize and execute payments are well aware of the relevant regulations and procedures and the Treasury delivers training seminars based on a needs assessment to ensure and enhance awareness and efficiency of implementation Public procurement procedures are governed by national laws harmonised with the EU directives and detailed regulations issued by the Treasury Training seminars are provided from time to time to staff involved in procurement and an electronic system has been operating since 2009 providing for electronic submission appraisal and evaluation of tenders Control activities relating to other aspects of public administration are established and initiated by each ministrydepartment in accordance with their daily operations The level of such controls varies from department to department and depends on the management of each department It is noted that following a recent decision by the Council of Ministers all Ministries are now obliged to set up their own internal audit units As far as risk management and assessment is concerned there is no unified methodology or guidelines Assessments are performed at the level and at the initiative of each ministrydepartment The degree of detail and the quality of risk assessments varies within the various departments Daytoday communication with the public and other ministriesdepartments is performed in a uniform way as prescribed by national rules applicable to the whole government There are also detailed rules for processing and archiving incoming and outgoing mail Each ministry issues an annual report within three months of the year end presenting activities performed and targets achieved during the previous year Annual reports are submitted to the Council of Ministers An annual financial report is issued by the Accountant General presenting the financial results for the year on a modified cash basis and the implementation of the budget as at the year end The report is submitted to the Council of Ministers and the parliament and is available to the public The Treasury is reviewing the contents and presentation of the annual report with a view of providing financial information to potential users in accordance with international public sector accounting standards As noted above following a decision by the Council of Ministers all ministries are now obliged to set up internal control units Certain ministries however had already established such control units on their own initiative The nature extent and detail of the control activities performed by these units vary from ministry to ministry and is governed by internal rules and procedures As noted above all guidance procedures and controls relating to financial accounting and procurement aspects of public administration are provided for by the Treasury whereas other internal controls relating to the performance of daytoday work of the line ministries fall under the responsibility of their top administrative managers Decisions relating to policy development are taken by the Council of Ministers and each minister is responsible for implementing the policy at ministerial level The decision power as far as authorizing expenditure lies with the controlling officers top administrative managers who are appointed by the annual budget law Controlling 70 officers are personally responsible for approving all transactions relating to their ministrydepartment Responsibility can be delegated and it usually is to senior officials within the same organization The top management of each ministrydepartment is responsible though supported by accounting staff for the preparation of the budget within the constraints set out by the Ministry of Finance The annual budget is negotiated and approved by the Ministry of Finance before being submitted to the Council of Ministers Ministers are responsible for the effectiveness and results of the policies adopted 32 Internal audit The Internal Audit Service IAS an independent service headed by the Commissioner of Internal Audit assumes the responsibility for carrying out assurance and consulting activities The activities of this service are governed by the law on internal audit of 2003 The Commissioner of Internal Audit is appointed by the Council of Ministers for a period of six years and reports to the Internal Audit Board The Commissioner is responsible in accordance with the provisions of the relevant law for examining and evaluating the adequacy and effectiveness of internal control systems examining and evaluating the systems that have been set to ensure compliance with policies procedures legal obligations and regulations examining and evaluating the measures taken for the management of liabilities and safeguarding of assets and the verification of their existence examining and evaluating the economy efficiency and effectiveness of the various activities and procedures examining the operation of programmes plans and activities to ensure that their results are in accordance with the targets set and the operations are executed as planned evaluating the adequacy of management and control systems providing advice on the appropriateness of internal control systems and on other accounting and operational issues evaluating the credibility relativity and integrity of the financial and operational information conducting special investigations and audits on any subject that affects the integrity loss of revenue interests and operational effectiveness of the public service evaluating the quality of decisionmaking processes and of the information environment and performing any other task within the scope of internal audit Upon the completion of each audit an audit report is prepared which includes details of audit findings and recommendations covering measures to be taken by the auditee to address weaknesses identified Once the contents of the report have been discussed and agreed with the auditee an agreed action plan is prepared which includes details of recommendations as well as an implementation timetable Based on these timetables followup audits are carried out thereby monitoring the implementation of corrective measures and their results are communicated to the Internal Audit Board The officers employed at the IAS are members of the civil service and are appointed by the Public Service Commission in accordance with the Public Service Law The IAS staff possess many specializations and qualifications and include professional accountants 71 who as far as training is concerned comply with the requirements of the international and national institutes of which they are members Recently the IAS has been staffed with officers with qualification in mechanical civil and electrical engineering 321 Internal audit relations with external audit The Internal Audit Service operates independently from the Audit Office which is headed by the Auditor General Internal Audit reports are always communicated to the National Audit Office The findings of the audit service are taken into account when preparing the annual audit plan and there may be exchange of views in certain cases however there is no other interaction with the audit function 322 Internal Audit Board The Internal Audit Board to which the Commissioner of Internal Audit is accountable is appointed by the Council of Ministers for a term of three years and its responsibilities are set out by the Law on Internal Audit of 2003 It is chaired by the Minister of Finance and is made up of two other ministers the Accountant General and an experienced professional from the private sector The Commissioner of Internal Audit is obliged to submit an annual report within six months of each year end to the Internal Audit Board describing the activities performed by the service during the year The board is responsible for safeguarding the independence of the Internal Audit Service observing the results of the Internal Audit Service and informing the Council of Ministers accordingly suggesting measures to the Council of Ministers for the strengthening of the internal audit function in the public sector monitoring the quality of the work of the Internal Audit Service and making suggestions for its improvement getting information on the response of the management of the audited organizations to the issues raised by the Internal Audit Service requesting the management of the audited organizations to provide explanations if they do not respond to their obligations towards the Internal Audit Service receiving the annual internal audit plan and the strategic plan of the Internal Audit Service and deciding on the distribution of the annual internal audit report 33 Coordination of public internal control As far as financial management is concerned harmonization and coordination of procedures is achieved through the guidelines and circulars issued by the Treasury being the competent authority as explained above Internal audit activities are performed by the Internal Audit Service across the whole government and there is no need for coordination with any other body Ad hoc assessments and peer reviews may be carried out on the initiative of certain departmentsministries by professional sometimes international organizations and their findings are submitted to the top management of the ministrydepartment for adoption of relevant corrective action 72 4 Financial inspection There is no dedicated office responsible for financial inspections as such The Council of Ministers and top managers of ministriesdepartments can appoint investigating officers for specific suspected cases of fraud or mismanagement and based on the outcome of the investigation may pursue disciplinary action Such investigations may also be carried out by the Auditor General on hisher own initiative or by order of the President In a broader context certain investigations concerning the functioning of public services are carried out by the Commissioner of Administration Ombudsman on hisher own initiative following complaints submitted by individual citizens 5 Ongoing andor future reforms The Financial Management Framework of the Republic of Cyprus has been under review following the signature of the Memorandum of Understanding between the Republic of Cyprus and the Troika A new law modifying the procedures relating to financial reporting and budget systems has been prepared and following the relevant consultation procedures has been submitted to the Parliament It is expected to be voted for early in 2014 The new law aims to enhance transparency and availability of information to the public and other users and allow certain flexibility and accountability in relation to the budget implementation by the government departments A fiscal council with a mainly consulting role shall be established with a view to monitor review and assess the fiscal policy fiscal indicators projections and estimates As far as the budget is concerned the line ministries shall be obliged to prepare their budget based on the ceilings prescribed by the Minister of Finance and will have to submit it together with their strategic plan During implementation they will be able to move appropriations from one line to another In addition the Minister shall be able to authorize transfers between budget lines of different ministries and transfers from one fiscal year to the next Line ministries will be obliged to issue monthly implementation and forecast reports and the Ministry of Finance will issue 6monthly reports for the implementation of the budget In addition each Ministry shall monitor its short and long term commitments to identify its capacity to undertake any new projects The procedure for evaluating and appraising new investment projects shall be streamlined and formalized As noted above the pursued changes aim to allow more flexibility to the line ministries to develop and implement their budgets and in parallel enhance accountability and monitoring Relevant and timely information shall be made available not only to internal stakeholders but also to the public with a view to increase transparency and accountability at the level of the Government 73 CZECH REPUBLIC Public internal control 9 Summary of the major changes The Ministry of Finance is the central administrative body responsible for PIC coordination The Ministry of Finance was expected to guarantee fulfillment of the obligations to which the Czech Republic committed upon joining the EU In the area of good governance and public financial management control system the commitment required the introduction of a PIC concept In fact such a conception has never been fully implemented Reports on the status of the current systems that form the PIC environment together with the currently stressed status of public finance lead to the conclusion that system changes and new procedures for FMC and IA are needed These changes which should be based on international standards and good practice must ensure that public funds will be used not only exclusively for their agreed purposes but also in an economic and effective way ensuring at the same time adequate protection of state funds and assets The development of an integrated framework of PIC along with project State treasury and the adoption of a new Financial Control Act a new Civil Servant Law and new budgetary rules appear to be key points in order to reform and consolidate the PIC system Despite recommendations of the World Bank and the European Commission the Ministry of Finance has been unable to realize key projects10 that would improve PIC in the Czech Republic Consequently the system of Internal Audit has in practice remained not fully compliant with IIA standards The implementation of the projects Integrated Framework PIC and State Treasury may reinforce the system of FMC as well as the system of IA The State Treasury as the core information financial and accounting systems may in many ways contribute to their effectiveness and efficiency On one hand it is necessary to set up a model of internal audit based on decentralized audits in the competence of ministries regions and larger cities On the other hand the Ministry of Finance would like to also set up a centralized model of internal audit in relation to income and expenses of the treasury focused primarily on horizontal and systematic issues External Audit EA is another key element of good governance Its main task is to provide independent and objective assurance on the reliability of the accounts on the legality and regularity of financial transactions and on following conventions of sound financial management especially by the chapter administrators and accounting entities under the responsibility of these administrators and the state as a whole The Supreme Audit Institution SAI fulfils this task Actually in compliance with the INTOSAI Lima Declaration a new law extending 9 Contributed by the Ministry of Finance 10 Project of the State Treasury Integrated Framework of PIC and Single Collection Point 74 the scopes of SAI competences is being prepared New competences of SAI will include the auditing of municipal authorities state owned companies and their budget management A new attempt of the Czech Government to improve the PIC has been the document From Corruption to Integrity Government AntiCorruption Strategy for the years 2013 and 2014 Based on this anticorruption strategy the Ministry of Finance has been charged to draft a new law that would replace the Financial Control Act currently in force The new Financial Control Act should cover the following main objectives to harmonize terminology with new EU legislation in particular Regulation EU EURATOM No 9662012 of the European Parliament and of the European Council of 25 October 2012 on the financial rules applicable to the general budget of the European Union and the abolition of the Regulation EC EUROATOM No 16052002 to establish the functions of the three main elements of FMC IA and CHU within an integrated framework of PIC as the basic conditions for the application of the same system of protection of foreign and national public funds in the entire inspection process to edit the specific control mechanism in the corrective phase of a complete inspection process under the responsibility of FMC while taking care not to create duplicate control systems outside of managerial responsibility to create legal conditions for the establishment and maintenance of a centralized internal audit at the central government level to cover FMC systems at all levels of government to minimize duplication of inspection activities using the results of monitoring activities of another inspection body newly developed information system for the coordination of planning and auditing of public funds to establish the conditions for the internationally recognized standard accountability through the newly designed reporting requirements of the FMC IA to strengthen the position of the Ministry of Finance especially CHU as the coordinator of PIC development through supervision quality assurance 1 Brief history of the public internal control PIC system The basic government policy document for developing public internal control PIC is the 2005 concept paper on financial control systems government concept This policy is based on the conclusions of Chapter 28 of the accession negotiations regarding financial control and on other chapters It takes into account the recommendations of SIGMA in 2003 that the government should further develop the three pillars of PIFC providing assurance that the administration of public funds is adequate and trustworthy These elements are a Financial Management and Control FMC system a system of Internal Audit IA and the central harmonizationcoordination of both these systems These pillars which were implemented and maintained in accordance with international standards standards and proven good practice in Europe good practice should lead to economy efficiency and effectiveness in the use of public resources At the same time they should help to prevent errors and irregularities and as a consequence also avoid extra costs to the public budget 75 The legal framework of PIC in the Czech Republic is to be found in the key procedures for the authorities and public sector organizations in dealing with public budgets accounting and the internal control systems After the Czech accession to the EU legal instruments of the European Commission that are directly applicable have become part of this framework in particular the requirements of Article 280 of the Treaty establishing the European Community the requirements of the Financial Regulation applicable to the European Community and the relevant recommendations of the European Court of Auditors PIC is institutionally organized by central provincial and municipal authorities and other public organizations on the basis of the Financial Control Act The information in this report is limited to PIC in key ministries such as the key state budget chapter administrators chapter administrators The Ministry of Finance is the central administrative body responsible for PIC coordination The Ministry of Finance was expected to guarantee fulfillment of the obligations to which the Czech Republic committed upon joining the EU In the area of good governance and public financial management the commitment was to develop conception of PIC In fact this conception has never been fully implemented Despite recommendations of the World Bank and the European Commission the Ministry of Finance has been unable to realize key projects11 that would improve Financial Management and Control in the Czech Republic Consequently the system of Internal Audit has remained decentralized and less efficient 2 Public internal control environment One of the governments main objectives is a rigorous implementation to consolidate the public budgets in order to achieve a general government deficit limited to 3 of GDP by 2013 To meet this objective it established measures of legal organizational and operational nature to be implemented Development of integrated framework of PIC along with project State treasury and adoption of Civil Servant Law appear to be key point leading to the consolidation of public budgets Unlike before multiannual expenditure projections have been introduced as the binding method for budgeting in government spending They are the key instrument for financial management The main characteristic determining the PIC environment is the established system of state accounting In 2007 an accounting reform took place during which the government approved redefined basic principles of state accounting One of the first outputs according to the conceptual framework is to change the current method of accounting and the compilation of an accounts sheet and a financial report A package of legal technical and other tools now determines the central system of state accounting information Its purpose is to provide timely complete and accurate information on financial and asset situation in each entity the authorities and organizations in the public sector This means that aggregated and consolidated information on the state economic situation as a whole will be available not only on a cash basis but also on an accrual basis in a proper combination Ongoing monitoring and surveillance of progress within the accounting entities and at state level with regard to each phase of financial reform should therefore be the fundamental condition for the successful management of all 11 Project of the State treasury and Integrated framework of PIC 76 new obligations and rules The recently introduced accrual accounting principle is crucial for managing the state budget as well as for PIFC and for financial policy External audit EA is another key element of good governance Its main task is to provide independent and objective assurance on the reliability of the accounts on the legality and regularity of financial transactions and on following conventions of sound financial management especially by the chapter administrators and accounting entities under the responsibility of these administrators and the state as a whole The Supreme Audit Institution SAI fulfils this task The SAI acts on the basis of international standards of auditing when verifying the completeness and accuracy of state budget chapters accounts the state closing account and in other audit activities Actually in compliance with the INTOSAI Lima Declaration the new law extending the scopes of SAI competences is being prepared New competence of SAI is to allow auditing municipal authorities and their budget management The present weaknesses in the PIC system which are identified in the government PIFC concept should be gradually eliminated in accordance with the national strategy to protect the financial interests of the republic and to prevent errors irregularities frauds and corruption facilitate their detection and return unduly paid public funds According to this PIC concept the Czech public administration is generally perceived as an area where there is a large scope for corruption Generally corruption aims especially at areas where decisions are being taken on public finances and where public services are provided to citizens The Czech situation is complicated by the large number of decentralized and often overlapping control activities across an equally large number of government entities with complex links and different control outputs Reports on the status of the current systems that form the PIC environment together with the currently stressed status of public finance lead to the conclusion that system changes and new procedures for FMC and IA are needed These changes which should be based on international standards and good practice must ensure that public funds will be used not only for their agreed purposes but also in an economic and effective way ensuring at the same time adequate protection of state funds and assets Czech system has some undeveloped features of the model PIFC The first example is that the responsibility in the FM C for a complete inspection process is overlapped by control systems of tax authorities which act as external inspections outside of managerial responsibility The second example is the already mentioned decentralized internal audit The capacity of internal audit is insufficient to cover key issues of audit universe This vestige of traditional approaches in the Czech Republic is hard to overcome also because the third element of central harmonization coordination of FM C and internal audit was not sufficiently effective for both functional elements of the PIC at this stage of development 3 The concept of public internal control A wellstructured and functional model of PIFC is instrumental to an adequate internal control environment in the public administration This model consists of a set of recommendations based on the standards and European good practice developed by the European Commission to support Member State governments in their efforts to update and modernize PIC in these countries The Czech system provides the characteristics of PIFC ie the FMC system a system of IA and coordination of both these controls of PIC The main purpose of the government concept as mentioned before is to create an appropriate legal framework that will pave the way for a dynamic development of PIC in institutions and organizations at all levels of public administration The framework 77 foresees that the revision of guidelines for the implementation of these systems be based on the COSO standards At the same time it should create conditions for eliminating the decentralization and other weaknesses of the current PIC system introducing the same rules of protection of public funds provided from both foreign and national sources avoiding duplication and excessive overlap of the activities of various control bodies avoiding excessive control or audit activities in audits The changes needed in the development of the FMC and IA systems are being implemented gradually at various levels of the public sector However the procedure will require active coordination role of the Central Harmonization Unit to overcome occasional resistance to changes and enforce the principles and tools as laid out in the government anticorruption strategy for the years 2013 and 2014 The governments draft amendment to the Financial Control Act No 3202001 Coll was sent to the parliament in 2006 one of the key steps for the government to perform the necessary changes in the PIFC legal framework The Control Committee of the Chamber of Deputies however refused this draft and accepted another amendment to the Financial Control Act that deleted the provision on the need for a central harmonization unit CHU for PIC coordination in the Ministry of Finance In addition this amendment included the audit of management and control systems for operational programs cofinanced from EU funds into the exante ongoing and ex post financial control in the public sector However the vast majority of managers chapters remained at the previous organization The need for change to ensure the transition from traditional inspection approach to meeting the parameters of model PIC in public administration still has not been implemented The current system does not guarantee reasonable assurance for the effectiveness of the PIC Since 2001 this Financial Control Act has been amended 17 times The new general Control Act came into force at the beginning of year 2013 The first experience of its application in the area of ensuring control and audit processes in the performance of public finance suggests that this law did not bring any changes that would increase the efficiency of the administration and management of public finances Therefore it may be necessary to build a legal framework for the PIC which will better reflect all aspects of public finance 31 The FMC system The principles of good governance in the public sector require management authorities to be responsible for the implementation of PIC and for adhering to the principle requirements of depolarization professionalization and stability of the public administration separation of functions between the management authorities senior management and IA of chapter administrators providing central coordination of FMC for the entire public sector The management authority of a chapter administrator has overall responsibility for ensuring the discharge of public services throughout its scope of competence for the 78 relevant structured and measurable activities and for creating conditions to prevent incidents and practices that may endanger or prevent objectives and policies The minister as a top manager can delegate responsibility for the implementation of the objectives and implementation of policies to hisher deputies However determination of responsibility is not sufficient The hazy boundaries between political and administrative responsibility are a potential risk to maintaining continuity in the approaches of executives not only in the field of developing an adequate PIC by the chapter administrator but also in its implementation The adequacy is the ability to ensure the fulfillment of the basic objectives of the system under Act No 3202001 Financial control ie ensuring economy efficiency and effectiveness of operations reliability of the accounts and financial and accounting records compliance with the law and the protection of public funds The minister or the executive is entrusted with public resources for meeting the objectives and implementation of policies Heshe is responsible for the safety of these resources and must put in place effective controls to mitigate and prevent any risks of fraud corruption and irregularities including measures to avoid conflicts of interest One of the persistent issues today is that managers of chapter administrators attach different levels of importance to the new concepts of control The traditional inspectionrevision schemes continue to exist and in some cases managerial responsibility for establishing and maintaining the new internal control has been given to internal audit The effort to establish an overall internal control system has led to shifting human resources depending on the choice of which kind of control is preferred Such an approach is weakening both the FMC and the IA systems The implementation of projects Integrated Framework PIC and State Treasury may reinforce the system FMC as well as system IA The State Treasury as the core information financial and accounting system may in many ways contribute to the effectiveness and efficiency On the other hand it cannot replace managerial responsibility for ensuring the objectives of the PIC the formation of the control environment risk management performance control mechanisms information and communication and monitoring processes 32 The internal audit system Internal audit IA serves as a critical and independent observer of the governance process of the chapter administrators IA should provide the management authority of the chapter administrator with an analytical perspective on issues related to the methodical approach to risk management control processes and governance The internal auditor does so on the basis of its exceptional status legally enshrined in Part 4 Chapter III of the Financial Control Act IA assesses the identification of strategic operational and financial risks faced by chapter administrators and reviews the adequacy and effectiveness of the management and control mechanisms established under the responsibility of top management to reduce and manage these risks in a dynamic way The IA findings therefore have cardinal importance for the management of the chapter administrator They draw attention to the weaknesses of the FMC system and provide recommendations as to where the system needs to be improved added value IA activity must not be subject to managerial instructions but must follow a set of rules as contained in the internationally accepted professional practice of IA Its audit reports must be completely independent of the opinions of top management thereby making it 79 clear that the IA system is not part of the administrative and financial services of a chapter administrator but reports directly to the management authority IA regularly ensures that the chapter administrator abides by all the relevant legislation that it has established effective management and control mechanisms and that it takes measures to avoid conflicts of interest fraud and corruption It also regularly reports on the implementation of selfregulatory mechanisms through which the professional practice of IA is managed Performance measurement and IA quality assurance follow from standards ethical principles and best practices Efforts to maintain the status and monitoring function of IA in accordance with the Financial Control Act in a range of chapter administrators have in some cases been compromised by replacing internal audit services with external private sector suppliers of audit services Some chapter administrators also plan to replace the IA functions by the financial control of the accounting entities within their sector or municipal scope carried out according to traditional inspectionrevisions schemes The hiring of external private audit capacities is often based on the criticism that public internal audit does not fulfill the monitoring function Some chapter administrators also refuse to use the audit findings or implement the recommendations of external audit firms thereby increasing the costs to the national budget There is a high risk of not meeting the objective internal audit standards when management depends or unconditionally relies on the wisdom of external private audit firms Worse still is when management specifically interferes with the nature of objective assuring services or predefines the outcome of the socalled fully economically dependent external audit firm In extreme cases this risk can grow when the audit is only to be focused on a targeted search of errors or investigation of internal and third party complaints When internal audit reporting is restricted to stating a list of errors which does not give due regard to the identification of the real causes this may lead to a general perception by the public of an untrustworthy management of chapter administrators and of an unsatisfactory handling of public resources The considerable complexity of the current control structures in the Czech public sector is complicated by the implementation structures involving shared responsibility of the country and the European Commission for the proper administration and management of EU funds Different criteria for national and EU legislation create different objective conditions for the implementation of different management and control regimes for national and external public resources This means that the coordination of these systems is much harder than in the case of the single audit Overall taking into account the risks and issues mentioned above the present status of internal audit and the proper development of the internal audit function in the public sector are not considered satisfactory 321 IA and EA relations The Supreme Audit Institution SAI is the external auditor of the chapter administrators Its main purpose is to report and give an independent assurance of the accuracy of the public accounts financial reports and account sheets financial audit the legality of operations audit of compliance with the legislation and adherence to the principle of sound financial management in the administration performance audit The SAIs audit findings and recommendations confirm the existence of longterm persistent shortcomings in the governance of the administration chapters and can be 80 found in the summary report on the financial control results in the public administration the Ministry of Finance submits this report to the government every year In terms of annual audit plans the SAI coordinates its audit activities with those of the chapter administrators 322 Audit committees and audit boards Audit committees andor audit boards did not find support in the Czech public sector as the new concept of internal audit is perceived with some exceptions as another bureaucratic and economic burden without an apparent benefit to the public sector 323 Central coordination of PIC The methodological support and central coordination of the PIC system is in competence of CHU In order to improve development of the system PIC is necessary to innovate basic concepts legislation and methodology The guarantee of assurance about strong position of CHU for IA systems across the public administration should be a strategic document such as government policy mentioned in Part 1 Regular assessments of the FMC and IA systems in the public sector and regular reportsperiodic surveys about the status of these systems are contained in the annual report on the results of financial controls which the Minister of Finance submits to the government according to the Financial Control Act A copy of this report is submitted to the SAI The report is published on the website of the Ministry of Finance after having been discussed in the cabinet 4 Financial inspection The fight against irregularities fraud corruption and other illegal activities irregularities and frauds that have a negative impact on the financial interests of the state municipal authorities and EU must be effective Therefore it is necessary to clearly define the limits of responsibility of all actors involved in the ongoing management and control process in providing public services and management of public funds whether local national or international Financial inspection is the responsibility to ensure prevention detection reporting or notification and investigation of irregularities and frauds Financial inspection may take corrective actions especially in cases relating to the use of public funds without authorization financial corrections and imposing sanctions wherever it is needed to restore the financial discipline of institutions and public sector organizations and all other providers and beneficiaries of financial support from public sources The primary responsibility for risk assessment and risk management is with the management of the chapter administrator Top management must formulate a strategy to lower the risks a plan to identify fraudcorruption that explains the procedures for reporting and a continuous programme of raising staff awareness According to COSO ERM standards internal auditors are not responsible for the detection and investigation of fraudcorruption On the contrary they are required to provide independent assurance on the effectiveness of procedures established by top management to assess and manage risks associated with the threat of fraud or corruption All other activities carried out by IA should be consistent and not in conflict with this primary task Internal auditors should of course have sufficient knowledge to be able to identify indicators of fraudcorruption The role of the IA is not reduced but 81 focused on the assessment of control mechanisms in this case financial inspection as established and maintained by the top manager Task of the financial inspection is to perform all operations following the initial findings reported by the FM CIA or fraud suspicion Approaches to the FI should be guided by the principle that if the responsible person does not load or does not maintain a functional system PIC heshe commits negotiations that is understood as an irregularity 5 Ongoing andor future reforms The basic policy document for the further development of the PIC remains the governments concept mentioned in Part1 above based on the functional model PIFC drawn up by the European Commission to help the governments of the EU Member States The Czech government has been aware of the need for changes in its PIC system and adopted in 2008 its Action Plan for the implementation of the priorities and objectives of the National Strategy to protect the financial interests of the Commission in the country The Action Plan includes the commitment to draft a new law to replace the current already obsolete 2001 Financial Control Act At the same time the government provided clear criteria for the regulation of basic elements of PIC in public administration in accordance with the requirements set out in Part 1 above These criteria were subjected to a broad discussion in consultations with experts from all levels of government in the Czech Institute of Internal Auditors and in academia The draft law according to the government submission was consistent with the views of the World Bank and the Directorate General for the Budget of the European Commission on the basic conditions for PIC in developed democracies Despite being committed to adopt new Financial Control Act the Czech Government has abandoned this legislative task The reasons for abandonment were similar to the reasons that caused stagnation of PIC and are described in Part 1 of this post At the same time the Czech Government decided to develop a technical amendment to the Financial Control Act that the parliament did not accept A new attempt of the Czech Government to improve the PIC has been the document From Corruption to Integrity Government AntiCorruption Strategy for the years 2013 and 2014 Based on this anticorruption strategy The Ministry of Finance has been charged to draft a new law that would replace the currently valid Financial Control Act The new Financial Control Act should cover the following main objectives to harmonize terminology with new EU legislation in particular Regulation EU EURATOM No 9662012 of the European Parliament and of the European Council of 25 October 2012 on the financial rules applicable to the general budget of the European Union and the abolition of the Regulation EC EUROATOM No 16052002 to establish the functions of the three main elements of FM C IA and CHU within an integrated framework of PIC as the basic conditions for the application of the same system of protection of foreign and national public funds in the entire inspection process to edit the specific control mechanism in the corrective phase of a complete inspection process under the responsibility of the FM C while avoiding the legal conditions for the functioning of duplicate control systems outside of managerial responsibility 82 to create legal conditions for the establishment and maintenance of a centralized internal audit at the central government level to cover FM C systems at all levels of government to minimize duplication of inspection activities using the results of monitoring activities of another inspection body newly developed information system for the coordination of planning and auditing of public funds to establish the conditions for the internationally recognized standard accountability through the newly designed reporting requirements of the FM C IA and Inspection misstatements to strengthen the position of the Ministry of Finance especially CHU as the coordinator of PIC development through supervision quality assurance 83 DENMARK Public internal control Major changes in 20112013 In the Danish contribution to the compendium a short text has been added describing the budget law adopted by Denmark which lays down an expenditure ceiling for the public sector 1 Brief history of the Danish public internal control systems The Danish public internal control system has evolved into its present form over several decades The following events in particular have marked the development of our current internal control setup The establishment of an independent National Audit Office of Denmark Rigsrevision The development of objectives and performance management Expenditure reform The establishment of administrative service centres The Budget Act In 1975 the audit departments were merged as a result of the Auditor General Act whereupon Rigsrevision was established as an institution under the control of the Ministry of Economic Affairs In 1991 Rigsrevision was moved from the control of the Ministry of Economic Affairs to the Folketing the Danish Parliament which is why Rigsrevision today is a fully independent audit authority In addition we are placing an everincreased focus on objectives and performance management in order to discharge our responsibilities efficiently and implement our policy objectives This is being achieved by awarding and monitoring performance contracts with ministerial agencies which has strengthened the use of internal control and monitoring The introduction of accrual principles for accounts and budgets has changed the rules and management perspectives Similarly the establishment of administrative service centres has changed the allocation of basic economic administrative duties leading to an increased focus on business processes and controls in relation to external reporting In 2012 a Budget Act was adopted coming into effect for the Danish budget system from 2014 This came against the background of tougher calls for a sound financial policy not least as regards controlling expenditure throughout the public sector The Budget Act implements parts of the Treaty of 2 March 2012 on Stability Coordination and Governance in the Economic and Monetary Union the Fiscal Compact 84 2 Public internal control environment The state budget provides the basis for state activities during a financial year and is adopted as a Finance Act by the Folketing which has authorising authority and also controls the allocation of appropriations The Minister of Finance is responsible for coordinating the planning of the state budget Budgeting is carried out using a topdown approach based on policy objectives The framework is set at the top and are then implemented in the institutions The ministries and other state institutions may in the course of a financial year incur costs and collect revenues in accordance with the appropriations allocated With regard to the appropriations available checks need to be carried out that this is consistent with the general and special conditions under which the appropriations have been granted and in accordance with other provisions such as acts of parliament orders circulars and internal instructions The allocation and accounting principle for the operational area is based on a full accruals approach while allocation and accounting principles for infrastructure defence various grants and other types of expenditure are mainly based on an acquisition approach modified accrual accounting The state presents its public accounts and an annual report for each state activity The public accounts are prepared in accordance with the same principles as the Finance Act The detailed rules for the public accounts are laid down in the Danish Public Accounting Act and the Public Accounting Order issued pursuant to that Act The public accounts provide the basis for subsequent checks by the Folketing of the administrations use of appropriations including checks that no expenditure is incurred without reference to a particular appropriation All stateowned enterprises must present an annual report containing a report on the enterprise and its key figures performance report accounts endorsement and appendices The annual report is the medium through which the individual state enterprise reports on its professional and financial performance during the year In its annual report the enterprise must provide an income statement and a balance sheet for the operational areas it manages report on the objectives agreed or set by a party other than the enterprise itself and illustrate the scope of the grant schemes it manages etc With few exceptions state institutions use Navision Stat as their local financial system Accounting records are collected centrally in the State Group System Statens Koncern System or SKS and are used for preparing the public accounts amongst other purposes The accounts are approved in the SKS The public accounts are audited by public auditors appointed by the Folketing in cooperation with the Auditor General When auditing the public accounts and in order to prepare a report on the audit of the public accounts Rigsrevision examines the annual reports of enterprises It also examines reports by individual ministries on the need for greater or lesser use of appropriations granted through allocation acts also known as accounting statements 3 The concept of public internal control The structure of the Danish state administrations public internal control system is dealt with below Our main focus has been the introduction of measures which place accountabilityresponsibility and the resulting need for followup on local managers with regard to financial reporting objectives performance management and monitoring the 85 use of appropriations We have also examined the use of internal audit by state institutions and the relationship between the internal and external audit groups 31 Managerial accountabilityresponsibility The Danish state has not set out a Public Internal Control PIC framework in a separate document or in a set of rules However based on the existing regulations eg the Public Accounting Order and prescriptive guidelines Responsibility for Management Guidance on Management from Group to Institution there is a clear framework for the responsibilities allocated to state institutions in order to ensure appropriate internal controls and management of the institution Accountability is placed to some extent on the local institution in particular through requirements for objectives and performance management appropriation management and procedures for the approval of accounts For this reason internal control and accountability are closely linked The Danish public sector is divided into ministerial portfolios whereby each portfolio has a department with subordinate agencies and institutions which together constitute a portfolio group The minister bears the ultimate political responsibility for hisher portfolio Powers of allocation and inspection have been delegated to the administrative level As far as audit is concerned there is a link between the political and administrative levels in relation to public auditors and Rigsrevision The Auditor General is appointed by the Speaker of the Folketing at the recommendation of public auditors and Rigsrevision is a fully independent audit authority which reports on appropriations and accounts to the Folketing Public auditors are appointed by the Folketing Public auditors are the only people who can request that Rigsrevision investigate a particular area In addition public auditors are entitled to criticise ministers and agencies on the basis of Rigsrevisions reports and memoranda The section below explains the management and inspection responsibilities of departments and agencies respectively A department has the overall management and supervisory responsibility for a ministerial portfolio This management responsibility includes establishing and managing the overall financial framework for the ministerial portfolio appropriation management and continuous monitoring of spending utilisation of credit facilities etc Moreover group management covers the professional management of institutions and ensuring continuous efficiency improvements across the group This enables an individual ministry to determine for itself the process and mechanisms for meeting management requirements for continued efficiency improvements The department is entitled to set priorities and monitor the operations of its institutions and thus ensure safe and efficient operation of the entire group Group management covers Appropriation management and monitoring of the overall financial framework Management and supervision by accountants and departments Payroll management Risk management Objectives and performance management Procurement management and tendering Digitisation Group responsibility for interaction with administrative service centres 86 Management and supervision by accountants and departments The Public Accounting Order specifies departments overall responsibility for management accounting and financial monitoring The Public Accounting Order states that departments shall organise the accounting system within a ministry monitor compliance with accounting rules ensure the provision of necessary information for the continuous monitoring of internal accounting periodic reporting and the annual preparation of the public accounts and annual reports Departments have a responsibility to provide the necessary control systems in the subordinate institutions of the ministerial portfolio At the same time the department must itself monitor compliance with the rules on financial reporting and ensure the provision of necessary information for financial management including the monitoring of appropriations in the ministerial portfolio In order to discharge its inspection and supervisory responsibilities the department must as a minimum ensure that formal systems for internal control including instructions and financial reporting are in place in its institutions this is documented in ministerial instructions and the department must approve the instructions to enterprises ensure that the IT use of accounting data takes place appropriately reliably and securely this includes supervision of administrative business processes and controls where responsibilities and tasks are not transferred to a service centre ensure that institutions check and approve their quarterly accounts the department approves the ministrys overall accounts and the institutions annual reports and it is responsible for transfers corrections extensions etc concerning the transfer of appropriations in the ministerial portfolio actively seek relevant information from institutions for example in the form of quarterly figures for financial staff or pay conditions as well as other information which can demonstrate whether an institutions administration and management are functioning appropriately intervene in and address any problems of which they become aware within institutions In discharging its inspection and supervisory role the department has a number of different tools and options to safeguard the standard of the work and inspection procedures within its institutions These include the creation of departmental controller units However it is up to each department to determine how the required supervision and management responsibilities should be exercised Management and supervisory responsibilities of institutions In order to ensure effective institutions which deliver results in keeping with policy objectives state institutions must as minimum set objectives for their work and monitor the results in their annual report This is an essential element in the prioritisation and monitoring of appropriation use Objectives and performance requirements are set on the basis of a dialogue between the institutions management and the department and within the framework of the ministerial portfolios basic management conditions applicable law and legal requirements and budget and appropriation rules 87 In principle risk management of the institutions core activities that is evaluation and management of uncertainties and potential deviations from planned operations and activities is part of the institutions own financial management and its managerial responsibility The Danish state is selfinsured which means that institutions must carry out risk management of their tangible assets The department has a responsibility to ensure that particularly vulnerable institutions which are at high risk of significant losses are taken into account in the budgetary process and that the relevant institutions work on managing these risks Management responsibility in state institutions The institutions management must assure optimum resource utilisation in relation to the institutions objectives Financial management covers the management of the institutions financial resources activities resources and results The basic requirements for the institution include budget contributions appropriation management and budget control as well as accounting and annual reports The department creates a framework for objectives and the performance management process including the management tools that should be used It may contain a timetable and possibly procedures for negotiating on the determination of objectives and reporting monitoring and evaluation of performance and fulfilment of objectives For institutions there are four basic requirements which must be met in order to satisfy the departments overall objectives and performance management 1 The institution must set objectives for its core tasks 2 The institution must establish HR policy quality objectives These may be included in the institutions performance or directors contracts or made public in some other way 3 In its annual report the institution must report on all external objectives ie objectives set out in the Finance Act or otherwise agreed between the relevant department and the institution 4 The institution and the department must review the institutions objectives and results at least once a year As a minimum institutions must report on objectives in their annual reports In this regard the department is required to review and evaluate the institutions progress even if this is sometimes done before the annual report is prepared The head of department may enter into a performancebased salary contract with an agency or institution director which includes a variable pay clause in addition to the fixed salary This practice is aimed at clarifying the objectives and direction for the institutions development and to give the director a financial incentive to ensure the control and management of the institution with a focus on results and impact Reporting and approval Reporting and approval is based on a hierarchy which basically consists of returning institutions enterprises and departments Reports are approved on a quarterly and annual basis in the State Group System SKS Reporting institutions approve for enterprises which approve for departments which in turn approve for the Danish Agency for Governmental Management and Rigsrevision The quarterly and annual approvals are substantive and take place through SKS The quarterly approval includes verifying 88 1 the consistency between data recorded in the budget accounts and data recorded in the local financial system 2 the consistency between recorded appropriations and appropriation acts etc 3 that the use of appropriations is reasonable while taking into account the activities of the previous period 4 the accounting reconciliation between assets and liabilities 5 that assets and liabilities are at a reasonable level 6 that the names of the main accounts and subaccounts used are correct 7 that the accounts contain all accounting sources and subaccounts which the individual institution enterprise and ministerial portfolio is responsible for With regard to points 3 and 5 in particular the management must take active responsibility for deciding whether the circumstances are reasonable This requires the establishment of business procedures and internal controls which can provide feedback to the management and an assurance of the fairness of the arrangements and reliability of the accounts The annual approval involves the same requirements as the quarterly but it also needs to ensure debtors prepaid and accrued amounts etc are recorded in the accounts so that this gives an accurate picture of income and spending as well as of assets and liabilities at the end of the financial year In addition departments must approve ministry accounts by submitting an accounting statement to the Danish Agency for Governmental Management and Rigsrevision containing the following information whether any changes have been made to accounting principles which might be relevant to the evaluation of the relevant years accounts whether the accounts contain all accounting sources and subaccounts which the ministerial portfolio is responsible for whether appropriations are being correctly used whether assets and liabilities have been calculated correctly whether business procedures and internal controls established within the ministerial portfolio ensure as far as possible that the arrangements covered by financial reporting are consistent with the appropriations granted laws and other regulations as well as with the contracts entered into and customary practice Moreover in its accounting statement the department has to confirm that in connection with financial reporting business procedures and internal controls have been set up which ensure as far as possible that the arrangements covered by financial reporting are consistent with the appropriations granted acts and other regulations as well as with the contracts entered into and customary practice Departments must also approve the annual appropriation transfers in connection with the end of the year The state institutions annual report is endorsed by the enterprise management and the relevant ministrys department The endorsement affirms that the annual report is accurate that is that it is free of material misstatements or omissions and that objectives in the annual report have been set and reported on in a satisfactory manner the arrangements covered by financial reporting are consistent with the appropriations granted acts and other regulations as well as with the contracts entered into and customary practice 89 business procedures which ensure financially appropriate management of resources have been set up in the institutions covered by the annual report For each reporting institution accounting instructions which describe how accounting management in the form of business procedures is structured within the institution must be prepared There is no requirement for accounting instructions to be approved by a higher authority but accounting instructions must be prepared in accordance with the guidelines in the relevant enterprises Instructions 32 Internal Audit An internal audit unit may be organised by agreement between the minister concerned and the Auditor General Section 9 of the Auditor General Act hence commonly known as a Section 9 agreement for individual institutions or for institutional or management areas Cooperation between Rigsrevision and internal audit is organised through regular meetings Like Rigsrevision internal auditors must carry out their duties in accordance with the principles of good public auditing practice as provided for by Section 3 of the Auditor General Act The specific content of the audit has evolved in line with the practice developed by Rigsrevision through its cooperation with ministries on the preparation of audit instructions and through its cooperation with other auditors who audit the public accounts Rigsrevision has drawn up a standard Section 9 agreement in order to ensure that the agreements entered into are generally consistent Internal audit extends to several ministerial remits at different levels including the following the Ministry of Finance the Ministry of Defence the Ministry of Food the Ministry of Taxation the Ministry of Justice the Ministry of Transport The duties which internal auditors carry out and the part of the group concerned which is covered by the audit differ from ministry to ministry In the Ministry of Finance internal auditors audit all the groups agencies whereas in some other ministries internal audits are more focused both in terms of the areas audited and the project portfolio The following section is primarily based on how internal audits are carried out in the Ministry of Finance The nature of functional independence The cornerstone of the internal audit is the agreement entered into with Rigsrevision under Section 9 of the Auditor General Act Within the framework of the agreement an internal audit must be independent of management in terms of planning prioritisation organisation and implementation Internal auditors must have access to all information which is in their view necessary for discharging their duties and internal audit must at the earliest possible opportunity be incorporated into planning and modification of accounting systems and organisation of business processes Internal auditors have the opportunity to assist and advise institutional management on an ongoing basis Normally internal audit will be part of the organisation as an independent staff function reporting directly to the head of the institution There is no requirement that an internal 90 audit body must be a part of the organisation it may also be an external auditor or audit firm which carries out the task although this is primarily the case in private institutions and autonomous public enterprises which are mainly financed by the state and are subject to an audit by Rigsrevision In the Ministry of Finance the head of department is entitled to propose focus areas for audit but heshe cannot determine the audit results In addition groupbased audits are focused on the independence of the individual agencies being audited which means that the internal audit body can highlight issues but the solution has to be decided by the agency itself The principle of not making decisions also applies where group audits form part of working groups in which case this is clearly delineated If the internal audit identifies any potential problems concerning independence in the interface between the consulting and audit bodies then Rigsrevision is asked to investigate the matter Internal audit reports and provide free recommendations to management within the framework of the Section 9 agreement and good public auditing practice Internal auditors rarely undertake tasks outside the scope of internal audit but there are times when they are relied upon as a sounding board in the dialogue between the audited institution and Rigsrevision The head of internal audit at the Ministry of Finance is CORcertified COR the Certification Scheme for Public Auditors is a supplementary training and certification course for auditors whose job it is to audit public enterprises The scheme is also aimed at auditors whose job it is to audit enterprises where the public sector provides grants or is otherwise a stakeholder Certification consists of theoretical training practical experience and exams The training requirements for obtaining certification are a 5year masters course and a continuing education programme consisting of a series of theory courses which provide the auditor with a thorough grounding in the public sector and auditing as a profession The theoretical training course can be run concurrently for auditors who wish to obtain a minimum of 3 years practical experience in auditing public accounts Before they can be certified course participants must demonstrate their theoretical and practical skills and must subsequently pass a practical examination in public auditing Internal audit staff must do a course in public auditing which is offered jointly by Rigsrevision and the Copenhagen Business School The head auditor must also be a member of the Institute of Internal Auditors IIA The group audit staff are also required to take some of the IIAs courses To whom internal audit reports Internal auditors report to the head of department Rigsrevision and top management of the agency being audited Internal auditors endorse the accounts and produce the auditors statement notes on the audit and any management letters On concluding the annual audit internal auditors produce a written report on the work they have done and conclusions which may be drawn from the report for the institutions management and the head of department Types of audits performed Internal auditors are required to carry out their audit duties in accordance with the principles of good public auditing practice Internal auditors may also carry out 91 management audits and provide a certain amount of consultancy Group auditors therefore act as advisors and as a sounding board for the head of department and other group management and their duties include the following Checking compliance with legislation regulations etc in connection with accounting and management as well as compliance with internal policies and guidelines Review and critical assessment of internal control systems business processes IT systems procedures etc from an accounting and reporting perspective Managerial consultancy on IT systems internal controls etc from an accounting and reporting perspective IT security ongoing review critical assessment and consultancy concerning the groups procedures etc in order to ensure compliance with DS 484 the Danish information security standard Duties are carried out in close liaison with departmental management and staff and the 5 agencies under the Ministry of Finance as well as with external consultants for example in connection with IT audits It should also be noted that internal auditors do not audit the department which is however audited by Rigsrevision Internal auditors carry out the following types of audit Financial audit the audit verifies that the accounts are correct Compliance audit the audit verifies that the arrangements covered by the financial reporting are consistent with the appropriations granted laws and other regulations agreements entered into and customary practice Management audit the audit assesses whether due financial consideration has been taken of the management of funds and operations of enterprises covered by the accounts Requiring enterprises to take due financial consideration means that their financial management must ensure economy efficiency and effectiveness in the performance of their tasks The different types of audit are carried out to a varying extent depending on the type of institution being audited Formal follow up procedure for managers with regard to internal audit reports A fixed element in an agencys performance contract is that any comments made by group auditors must be implemented within 3 months of submission unless agreed otherwise How duties between internal audit and the financial inspection are separated Not applicable the Danish state does not currently have a central controller unit 33 Internal audit relations with external audit In general cooperation is based on internal auditors carrying out most of the audit with Rigsrevision overseeing auditors work and carrying out an additional audit as needed Rigsrevision retains overall responsibility for the performance of the audit Financial auditing is the main task of internal auditors while Rigsrevision confines itself to supervision and if necessary an additional audit In principle internal audit should 92 also carry out the management audit at least in the form of a continuous management audit which can often be carried out in the same operation as the financial audit Major investigations normally fall outside the remit of internal auditors However it makes sense that internal auditors should assist Rigsrevision in connection with an investigation of the institutional area concerned but that is not always the case Cooperation between internal audit and Rigsrevision is organised through quarterly meetings Rigsrevisions supervision of internal auditors and practical cooperation takes place through ongoing dialogue Audit boards or audit committees The Danish state has no audit boards or audit committees This is probably due to the fact that internal audits within ministries and agencies are limited Another fact that should be taken into account is that Rigsrevision assesses agreements by establishing internal audit groups and assessing the work of internal auditors and that it has responsibility for the overall audit Coordination of public internal control However the Danish state has no central coordination units established to harmonise internal controls across the country or assess the functionality of internal control systems or internal audits across the country 4 Financial Inspection Not applicable see above 5 Ongoing and future reforms With regard to PAR public administration reform and PIC public internal controls there are no ongoing or future reforms With regard to PEM public expenditure management a new spending policy management system with ceilings has been introduced in order to comply with the Budget Acts requirement for budgetary balance And every quarter individual institutions are now required to draw up periodic budgets monthly based for the Finance Ministry explaining and setting out a new monthby month forecast for the rest of the year Legal basis of public internal control The following regulations form the core of the Danish public internal control system The Danish Constitution The Danish Public Accounting Act and related regulations The Danish Auditor General Act and related regulations The budget guide Responsibility for Management Guidance on Management from Group to Institution a framework for accountable governance The Budget Act 93 ESTONIA Public internal control 12 Summary of main changes in 20112013 The project to consolidate support activities for state authorities has been launched The ministries will join the project in stages All the authorities will transfer to the single system by 1 January 2016 The State Support Centre is up and running An e invoice management system has been introduced for processing purchasing invoices and exchanging information with SAP software A standardised SAP version the updated SAP which enables the authorities to keep cashbased and accrualbased accounts of budgetary compliance was introduced on 1 June 2013 The eTreasury functions have been reviewed Since the migration to the new SAP eTreasury reports no longer show budget compliance this is being transferred to SAP BO One of the modules of the civil servant selfservice portal for managing leave requests has been implemented As of the beginning of 2014 the authority will also be able to use the secondment management module and shortly afterwards the asset management module will also become available A system has been developed which forwards to the Commercial Registry system the financial data of companies foundations and nonprofit associations who submit balance files and have to send in xbrl reports A draft State Budget Act and draft implementing acts is currently before parliament These will allow a stepbystep shift to a programmebased budget and will set a framework for strategic management as well as providing far clearer links to the budget strategy and the State budget A new Public Service Act entered into force in 2013 which regulated among other things the number of public sector employees and amended the AntiCorruption Act the main focus of which is to forestall corruption The legal framework governing the professional activities of internal auditors has entered into force Amongst other things new general rules on internal audit and legislative amendments on the implementation of the internal control system in local government bodies have entered into force A professional accreditation system for internal auditors working in the public sector has been implemented From 1 January 2014 practising internal auditors must have an internal auditors qualification or qualification level to work as an independent auditor for example as audit manager An audit activity register containing information on those falling within the scope of the Auditors Activities Act and their activities is being established 12 Contributed by the Ministry of Finance 94 1 History of the public internal control system in Estonia 11 Development of internal control systems and the internal audit function On 21 March 2000 the Government of the Republic appointed by Order No 217k the Ministry of Finance the ministry in charge of public sector internal control and internal audit On 14 February 2000 a financial control department was established in the Ministry of Finance whose duties included coordinating and analysing the internal control system and organisation of internal audit in authorities with executive power and making proposals to improve them On 7 June 2000 the Riigikogu adopted the Government of the Republic Act and the State Public Servants Official Titles and Salary Scale Act Amendment Act under which the heads of authorities with executive power are obliged to ensure the application of an internal control system and the organisation of internal audit activities It imposed the obligation on governmental authorities and state authorities under the administration of governmental authorities to appoint a person responsible for internal audit and if necessary to establish an appropriate structural unit to perform internal audit duties by 1 January 2001 The internal audit system of authorities with executive power in Estonia has continued to function ever since General rules on the internal audit of governmental authorities and state authorities under the administration of governmental authorities were adopted under Government of the Republic Regulation No 329 of 18 October 2000 This Regulation also laid down additional requirements for the employment of internal auditors Until 2005 responsibility for performance of the duties of an internal audit development coordination unit CHU was with an official who reported directly to the head of department and whose duties involved harmonising internal audit methods advising internal auditors and coordinating the development and implementation of the financial control system On 16 March 2005 an internal audit coordination service was established within the financial control department whose duties were to put forward proposals to amend laws regulating the internal control system and the organisation of internal audit develop methodical instructions for organising the work of internal auditors and for assessing internal control systems prepare a strategic plan and an internal audit consolidated work schedule organise internal audit reporting and the exchange of information and in its capacity as internal audit development coordination unit CHU to harmonise internal audit methods At a cabinet meeting on 25 May 2006 the Estonian Government approved Blueprint for the internal audit of authorities with executive power The Blueprint covered the following topics the role of the Ministry of Finance in the system for the internal audit of authorities with executive power government involvement in internal auditrelated issues reorganisation of the internal audit function within the area of government improving the quality of internal audits performance of the duties of an audit body during the European Union budget period of 20072013 In July 2006 the Estonian Government asked the Minister for Finance to develop additional competence requirements and activity quality criteria for internal auditors Strategic goals and performance indicators for the development of the internal auditor 95 profession were set down for the following years in the national budget strategy This specified that the Ministry of Finance should ensure the transfer from using the recommended national best practices to applying international internal audit standards in the professional activities of internal auditors improved quality of internal audits to comply with national and international requirements the development of a professional certification and quality monitoring system for internal auditors and the establishment of the legislative framework needed to implement this system Applying the Blueprint for the development of the internal auditor profession creates methodical continuity in professional training and practices of internal auditors working in the public sector and public interest entities and establishes the basic principles for improving and assessing quality By the end of 2009 the system for internal auditor professional certification and quality monitoring had been developed and the legal framework for the implementation of the system prepared The regulation of this system is based on the recommendations requirements and principles of the international Institute of Internal Auditors IIA and on the International Professional Practices Framework IPPF The Auditors Activities Act which was adopted in January 2010 specifies among other things the requirements for internal auditors the legal basis for the activity of internal auditors the internal auditors right to professional practices and the basic principles for monitoring the quality of internal auditors professional practices The Auditors Activities Act covers the activity of internal auditors in public sector entities and in companies and private sector entities that are classified as public interest entities The draft introduces the IPPFs mandatory guidance definition of internal auditing ethics code international standards for the professional practice of internal auditing that already existed as customary law in the Estonian legal system On 5 April 2010 the Minister for Finance established the Professional Qualifications Committee for Auditors as an advisory committee to address issues relating to the professional practice of internal auditors and quality monitoring The purpose of the Committee is to help develop the professional activity of internal auditors and maintain and uphold high quality in the profession Since autumn 2011 it has been possible to take an examination in Estonian prepared in cooperation with IIA Estonia Eesti Siseaudiitorite Ühing to receive an international certificate Certified Government Auditing Professional CGAP In order to inspect the use of funds the heads of internal audit of the state accounting entities assessed the accuracy of annual reports and the legality of transactions in the 20042010 financial years The National Audit Office assessed the accuracy of the consolidated annual report of the State for which it drew on the work performed by the internal audit units of the state accounting entities In order to increase the degree of independence of assessments given on the accuracy of annual reports and the lawfulness of the transactions of the state accounting entities the competence to assess the accuracy of annual reports and the lawfulness of transactions for 2011 and subsequent years was given to the National Audit Office On 1 January 2013 an amendment to the Local government Organisation Act entered into force under which 96 a council must ensure the implementation of an internal audit system and the organisation of the professional activity of an internal auditor in the local government a rural municipality or city government must implement an internal audit system and bear responsibility for its productivity a local government unit has a right to establish an appropriate position or structural unit for the performance of the professional duties of an internal auditor the local government must apply the provisions set down in the Auditors Activities Act when organising the professional activity of an internal auditor and as the base for hisher professional activity If a local government has created for the performance of the professional duties of an internal auditor a corresponding position or corresponding structural unit the corresponding official or head of the structural unit shall submit an internal auditors report prior to the approval of the annual report to the rural municipality or city government 12 Development of financial management and control In June 1999 the Riigikogu adopted the State Budget Act which mainly regulates the area of financial management The Act was significantly amended in 2002 and 2003 In December of 2003 the Minister for Finance approved the General Rules for Public Sector Accounting which entered into force on 1 January 2004 A major change was that the public sector accounting rules were brought into line with the basic accounting principles of IPSAS International Public Sector Accounting Standards but the Rules also laid down the requirements for consolidated statements as well as rules for submitting statements to the Ministry of Finance based on common accounting principles and the common chart of accounts Accrual accounting of costs started in 1996 and from 1 January 2004 a full transfer to accrual accounting was completed In 2004 comprehensive instructions for public procurement were drawn up to assist those involved in organising public procurements A new public procurement register was launched at the beginning of 2004 In 2005 a Government of the Republic Regulation to put in order the states strategic planning activities was approved The Regulation sets out a system of strategic planning for authorities with executive power and gives a major role to strategic development plans in the process of drawing up the state budget In 2005 for the first time the consolidated annual report of the state for 2004 was prepared using internationally recognised accounting principles similar to those applied in the private sector For the first time a consolidated activity report formed a part of the consolidated annual report of the state in order to give the Riigikogu and the public information about the most significant activities undertaken by the state authorities Since 2005 subsidiaries of local governments have been included in the consolidated financial statements of the state and the consolidated annual report of the state have included the entire public sector In 2006 for the first time the state budget strategy for 20072010 was drawn up with a comprehensive financial framework which also included a strategy and the implementation plans for the European Union structural funds for 20072013 By the end of 2007 an initial concept for developing the states financial management had been formulated by the Ministry of Finance it included the following proposals implementation of performancebased budgeting and transfer from cashbased budgeting to accrualbased budgeting 97 more systematic use of reporting when adopting management decisions and planning strengthening financial discipline improving the efficiency of internal control systems In 2009 two longterm nationwide development projects were initiated a support services consolidation project and a development project for performance management The latter project addresses the issue of creating a clearer link between the states strategic planning and financial management functions including budgeting and financial reporting In 2009 a detailed analysis of the possibilities for consolidating the public sector support services and on transferring financial personnel and payroll accounting to common software was carried out and a schedule and action plan for 20102013 was drawn up The new Auditors Activities Act transposing Directive 200643EC of the European Parliament and of the Council the new 8th Directive entered into force on 8 March 2010 The Act laid down the legal basis for auditors activities in business accounting defines the legal bases for the activities of a sworn auditor and a sworn auditors firm and the legal bases for the activities and liability of internal auditors in the public sector and publicinterest entities As of 2012 companies foundations and nonprofit associations on which business files are submitted began sending in xbrl reports A system has been developed in which the business file information system sends the financial data of entities that are required to report to the Commercial Registry system They can then amend and sign their annual report in the Commercial Registry system From 2010 companies foundations and non profit associations submit an xbrlfile instead of the former pdffile or paper annual report to the registry based on taxonomy ie approved data components and corresponding report formats The principles for drawing up and submitting electronic xbrlbased annual reports that are based on international financial reporting standards IFRS have also been developed In 2013 the budget classification and rules on the execution of payments were updated and the accounting objects used in accounting and budgeting were harmonised The State Support Centre which offers financial and personal accounting services was launched in 2012 2 Internal control environment of the public sector The Ministry of Finance of the Republic of Estonia is responsible for coordinating the planning and implementation of Estonias budget policy and for organising state accounting 21 Drawing up the State budget The legal basis for drawing up the State budget is formed by the Constitution the Government of the Republic Act the State Budget Act the State Budget Act of the respective budget year and tax acts The actual basis for collecting revenues and incurring expenditure is the state budget strategy and the relevant development plans for areas of government which in turn comprise the development plans of various areas The development plan for an area of government is approved by the relevant minister who discusses the plan with the Prime Minister and relevant ministers before approving it Every year development plans are submitted to the Ministry of Finance by 1 March 98 The Ministry of Finance then draws up the state budget strategy for the following four years The state budget strategy is the basis for preparing a draft annual state budget Draft budgets for constitutional institutions and the areas covered by the various ministries are submitted to the Ministry of Finance The Ministry of Finance then draws up a draft state budget and submits it along with an explanatory memorandum to the Government of the Republic The Government of the Republic then submits the draft state budget and the accompanying explanatory memorandum to the Riigikogu together with an overview of the countrys economic situation and the governments main objectives The Riigikogu adopts the state budget as an Act According to the State Budget Act the state budget is prepared and its implementation is monitored on a cash basis whereas accounting and reporting on the government balance is performed on an accrual basis Since public sector accounting is entirely accrualbased but receipts and transfers are recorded in the budget implementation report on a cash basis there are currently differences in the financial management system as a result of the cash and accrualbased principles Therefore it is not possible to link state budget revenues and expenses directly to the accrualbased public sector balance According to the State Budget Act a detailed classification of budget revenues expenses and financial transactions will be defined For the purpose of monitoring the expenses made from the funds allocated from the state budget additional factors in addition to budget classification will be established which will form a state budget classification code to be indicated on payment orders 22 State accounting State accounting is regulated by the Accounting Act the General Rules for State Accounting the guidelines issued by the Estonian Accounting Standards Board and the accounting principles and procedures of an entity Public sector accounting in Estonia complies with International Public Sector Accounting Standards IPSAS except for the cash and accrualbased issue mentioned above In Estonia all central government cash flows and settlements including the investment of state reserves are managed centrally on a uniform basis via the State Treasury The eTreasury system is an online application designed for the authorities served by the State Treasury which enables them to communicate with the State Treasury via the internet 23 Registries The State Budget Information System REIS the state budget information system is used for planning the state budget strategy the state budget state budget classification and implementation of the action plan Databases for reporting the execution of state budget payments 20032008 and from 2009 ie the eTreasury The databases include the state authorities reports on cash based expenditure Since the migration to the new SAP eTreasury reports no longer show budget compliance this is being transferred to SAP BO Balance lists accrualbased balances of account combinations that are used to prepare accrualbased financial statements Public sector entities enter balance lists into the Ministry of Finances balance list information system a webbased application for collecting accrualbased reports and preparing consolidated reports 99 State Budget Analysis System REAS this is a further development of the State Budget Information System REIS that makes it possible to analyse budget implementation and budget requests Public procurement register Epublic procurement this platform offers contracting authorities and tenderers an innovative tool for organising epublic procurements and participating in procurement procedures The system makes it possible to prepare procurements compile electronic tenders and submit and process them There is synergy between the eprocurement platform and the public procurement register Register of state aid and aid of minor importance this register includes all state aid and aid of minor importance granted in Estonia except for aid for agriculture and fishing State Real Estate Register SAP accounting system since 1 June 2013 a standardised SAP system has been in use the new SAP The eAccounting centre is also used to make direct payments SAP BO reporting platform for generating a range of reports from SAP and the balance list IT system In conjunction with the migration to the new SAP performance reports are sent from SAP BO instead of the eTreasury as before The reporting platform is also used to retrieve data from the balance list IT system for the purpose of drawing up consolidated reports Audit activity register this is a state register containing information on those covered by the Auditors Activities Act and their activities 24 Requirements of officials The key legislative acts concerning public service are the Public Service Act and the Employment Contracts Act the Government of the Republic Act the State Assets Act the Administrative Procedures Act the Public Information Act and the AntiCorruption Act A public sector employee must also adhere to special laws concerning the relevant organisation if applicable the statutes of the organisation the internal work organisation rules job descriptions and other legislation Public sector employees are also bound by a code of ethics for public service On 1 April 2013 a new Public Service Act and a new AntiCorruption Act entered into force Under the new Public Service Act public sector staff was regulated and many officials status was changed to that of an employee with an employment contract This amendment also affected the majority of financial workers most of whom were given employment contracts The new Public Service Act also brought many fundamental changes to recruitment and selection So far the requirement has only been to organise open competitions for positions occupied by senior officials However internal or open competitions are now required for posts at all levels In addition to the competition requirements calls for all open competitions must be published on the central public service website13 and the website of the public body to facilitate searches by potential applicants for civil service positions The emphasis in the new AntiCorruption Act is on preventing corruption by obliging authorities with administrative power to ensure the implementation of anticorruption measures and raise officials awareness of the fight against corruption 13 wwwavalikteenistusee 100 All officials must have at least secondary education and deputies for senior managers and the heads of the structural units of official bodies must have a higher education Deputy senior managers the heads of the Prime Ministers Office and the structural units of the ministries must have at least 2 years management experience or failing that at least 3 years work experience in the field of activity of the official body or the position since gaining their higher education qualification The heads of other structural units must have at least 1 year of management experience or 2 years work experience in the field of activity of the official body or the position Officials are also expected to master a foreign language The head of an official body may establish more detailed and additional knowledge and skills requirements if this is necessary to perform the function The requirements of and competences needed by senior managers are laid down separately in a Regulation and the skills needed to work as a senior manager are described in the competency module of senior managers in the Estonian public service Furthermore the requirements for working in the relevant position and the rules and principles for staff selection and recruitment are regulated by the internal human resources departments work rules and guidelines 25 Tone at the top The Ministry of Finance cannot dictate to the ministers how and precisely what they have to do Nevertheless the Ministry of Finance can and must require users of budgetary funds to ensure that their activities for creating common amenities be well planned correctly implemented and transparent The Ministry of Finance cannot require everyone else to do this if it does not meet these requirements itself We set an example by demanding sustainability efficiency and effectiveness 26 External control components A state accounting entity prepares an annual report and submits it to the National Audit Office The financial statements prepared in 2011 and in the following fiscal years are audited by the National Audit Office The state accounting entity forwards the annual report together with the audit report of the National Audit Office to the Ministry of Finance The Minister for Finance forwards the annual reports of the ministries and the State Chancellery together with the audit reports of the National Audit Office to the Government of the Republic The Government of the Republic decides whether to approve the annual reports of the ministries and the State Chancellery The Ministry of Finance prepares a consolidated annual report of the state The National Audit Office audits the report and checks that the transactions were lawful The Ministry of Finance submits the consolidated annual report of the state together with the National Audit Office audit report on the audit of the consolidated annual report of the state and on the lawfulness of transactions to the Government of the Republic for approval and publishes them on its website The Government of the Republic submits the approved consolidated annual report of the state to the Riigikogu for approval The audit report of the National Audit Office is attached to the report 3 Public sector internal control system concept Control environment A significant part of the control environment is formed by various legislative acts guidelines and an organisations internal rules Various IT systems also play a very important role in organising the state administration and shaping the control environment 101 Risk assessment Section 103 of the Government of the Republic Regulation Types of strategic development plans the procedure for their preparation amendment implementation and evaluation and the reporting procedure stipulates that as regards the analysis of the organisations current situation in order to ascertain the readiness of the state authority to achieve the objectives set in the development plan a description of the main risks in relation to the implementation of the development plan and activities to manage these risks a summary of the risk analysis and an analysis of the activity environment must be submitted Other legislative acts do not refer to risk assessment In the third part of the activity report the head of the state accounting entity indicates whether a risk assessment was carried out in the ministry or its area of government during the reporting period The guidelines for risk assessments drawn up by the Ministry of Finance were replaced in 2011 by uptodate risk management guidelines Control activities A large part of control activities is laid down by law and internal rules regulating the work in various sectors For example according to the general rules for state accounting an entitys accounting principles and procedures have to establish requirements for preparing and checking source documents entering data into an accounting information system assessing accounting journals and ledgers and preserving documents The general rules also include requirements for the deadlines for submitting documents and reports The responsibility of staff of an accounting unit is determined by their job description Document control requirements are laid down in the accounting principles and procedures which also establish who is responsible for ensuring that a the document shows the business transaction correctly b the amounts prices and other conditions shown in the document are in line with contracts previously concluded c a transaction is lawful and necessary d a transaction is in compliance with the budget e the terms and conditions of a transaction are in line with the terms and conditions of similar transactions f the contracts were concluded in accordance with the principle of economy When checking documents and preparing transfer documents the staff of an accounting unit must ensure that the following information is checked and entered correctly in the accounting system a the transaction was carried out in accordance with the principles for monitoring budget implementation b the accounts transaction partner field of activity source cash flow and budget classification codes are accurate c the term of payment d the accrual period e information of the recipient including when value added tax is shown on the purchase document performing checks to confirm whether the supplier is registered as a person liable to value added tax and whether the invoice is prepared in compliance with the Value Added Tax Act 102 f whether the particular goods service or other benefit has been paid for beforehand g whether the purchase transaction was checked according to the requirements set for document checks and was approved by the persons authorised to do so The requirements for document checks must ensure that the authorised person signatory and the employee of the accounting unit are separate The head of the authority will appoint the authorised persons within the scope of hisher competence Every source document must be signed by both the authorised person and the employee of the accounting unit If possible two persons foureye principle must be involved in the money transfer process Where electronic transfers are made the rights are assigned so that one person cannot perform a transfer alone In order to fulfil this requirement the person entering a transfer must be different to the person accepting the transfer Another person besides the cashier approves the cash payment order These measures ensure that the responsibilities are separate when transactions are made approving rights are assigned foureye principle is applied and that the information systems include automatic checks of access to resources and data access data are reconciled and supervision is exercised The control measures in information systems are automated and mainly ongoing For example the following checks are run in the system on a payment order entered into the eTreasury a that the payment order has been filled in correctly b that the authority has free state budget funds or for state foundations the balance of eTreasury revenue accounts is checked c that the minimum payment amount to the recipient via a domestic bank transfer is EUR 005 and to a foreign country EUR 190 The control measures within the IT systems are constantly being updated to keep abreast of the rapid development in the IT systems Staff performance is assessed at least once per year in an annual appraisal dialogue with the manager Managers also monitor their subordinates work on an ongoing basis As it is extremely important that the officials who have to apply a range of internal controls when performing their duties are aware of the existing control measures and appreciate the importance of applying these measures regular training information days meetings etc on department organisation area of government state authority level are organised Management of information and the communication process The most critical aspect of the information and communication process is timely notification of the right people In order to ensure that important information is identified recorded and forwarded in a format and at a time that enables employees to perform accurately their duties all legislative acts are available in the electronic state gazette Riigi Teataja httpswwwriigiteatajaee Guides manuals and other necessary information are published on the website of the Ministry of Finance Information days and training are also organised Networks have been established for the purpose of exchanging information and experience information circles registers State budget planning information is available in the state budget information system REIS and the current progress of budget implementation cashbased by the budgetary state 103 authorities and broken down by economic substance is available in the eTreasury system Monitoring Managers are the first to perform monitoring activities Monitoring links reporting and planning activities In terms of the budget it is the Ministry of Finances duty to coordinate the states budget strategy and the drawing up of and negotiations on the state budget assess the efficiency of the use of state resources and implementation of strategic development plans and activity plans and to prepare budgetary policy decisions As the state budget is an annual plan of the state budget strategy annual reports should be the basis for monitoring the implementation of the state budget strategy The rules and procedures entitled Drawing up implementing and monitoring the state budget strategy and the state budget were approved on 21 September 2009 by an Order of the SecretaryGeneral of the Ministry of Finance This was last updated in April 2013 The rules and procedures for monitoring and reporting on the state budget provide for the following activities collecting reports on state budget compliance analysis of state budget implementation analysing the budget position of other government sectors analysing state budget implementation providing an overview of revenue receipts reserves and debt preparing a monthly overview of the economic situation the receipt of state budget revenues and the use of state budget funds analysing the reports on implementation of the activity plan analysing the reports on implementation of the state budget analysing public sector financial indicators etc 31 Accountability and responsibility The final managerial responsibility in Estonian public sector organisations is assigned by law to the head of the respective authority who is politically appointed at ministry level As a rule the exclusive right of instruction principle is usually applied in government authorities There is therefore a chain of responsibility where the lower level manager is accountable to a more senior manager There is no distinct separation of political and administrative power in Estonia especially at ministry level Moreover the roles of chief executive officer and financial executive officer are not described by law The delegation of responsibilities and liability and granting officials the rights necessary for them to perform their work is decided upon by the head of the organisation Within the context of state budget preparation the responsible person is the Minister of Finance to whom other ministers are accountable The Minister of Finance is accountable to the Government of the Republic the next level is the Riigikogu The process of drafting the state budget is based on the state budget strategy on the basis of which the annual State Budget Act is prepared This together with the annual activity plans of the development plans of the ministries areas of government constitute the application documents for the state budget strategy Consequently according to legislation the state budget strategy and the annual state budget are the central governance instruments and policy tools for the government in power According to the Government of the Republic Act the responsibility for creating and applying the internal control system lies with the head of a governmental authority or an authority under its administration The Government of the Republic Act provides that the ministries and the State Chancellery are accountable to the Government of the Republic The heads of suboffices are accountable to the relevant minister or the State Secretary The governmental authorities use state budget funds and prepare reports thereon as specified by law 104 The Government of the Republic Act stipulates the competence of a minister as head of the ministry according to which the minister must make proposals to the Government of the Republic concerning the ministrys draft annual budget of expenditure and revenue and where necessary concerning the draft supplementary budget of the ministry decide on the use of budget funds and monitor the accurate and purposeful implementation of the budget and the appropriate use of the funds aid and grants allocated by the European Union and other foreign aid approve the budgets of state authorities within the ministrys jurisdiction on the basis of the state budget and monitor their implementation and where necessary issue Orders regarding the use of budget funds specify the structure operations and administration of state authorities within the area of government of the ministry unless this is laid down in legislation which takes precedence over a ministerial regulation approve the staff of government authorities within the ministrys jurisdiction unless stipulated otherwise report to the Government of the Republic on the activities of the ministry ensure implementation of the internal control system and the organisation of an internal audit in the ministry the government authorities within the ministrys area of government and the state authorities administered by these government authorities When drawing up the state budget the final responsibility for the state budget principles the preparation of the annual budget and reporting on its implementation to the Government of the Republic is borne by the Minister of Finance as provided for by law The introduction of performancebased budgeting together with the possible introduction of accrualbased accounting principles for budget preparation would increase the responsibility of the heads of state authorities for ensuring efficient planning and effective use of resources This gives rise to a need to supplement the currently inadequate liability mechanisms for failure to comply with budgetary discipline According to the Government of the Republic Act an internal control system is a comprehensive set of measures implemented in the directing of government authorities and state authorities administered by government authorities in order to achieve lawfulness and purposefulness and to ensure compliance with legislation the protection of property from damage caused by squandering nonpurposeful use incompetent management and other similar damage the purposefulness of the activities of the authorities in the performance of their duties the collection storage and publication of accurate updated and reliable information concerning the activities of the authorities The head of a government authority or a state authority administered by a government authority must implement the internal control system in the authority and is liable for the effectiveness of this system According to the State Budget Act and the Accounting Act every state accounting entity is required to prepare an annual report which consists of the annual accounts and the activity reports The annual accounts also contain a report on the implementation of the state budget According to the Accounting Act the activity report included in the annual report of a state accounting entity must contain the 105 assessment of the internal control system by the head of the authority14 and an overview of activities undertaken by the state accounting entity in organising internal audit The activity report must also include an overview of the report on the implementation of the activity report prepared pursuant to the State Budget Act The objective of the relevant consolidated reports is to give the Riigikogu and the public information about the most important activities carried out by the state authorities in the previous budget year This means that an additional report similar to that for the planning process is provided with the consolidated report on the budget implementation Although the reporting system is formally in place the content of the activity report in its current form is very uninformative and the quality of the data submitted is at times poor It is hoped that by developing the concept of the states financial management it will be possible to eliminate the shortcomings referred to above 32 Internal audit Internal audits have been carried out in the public sector since 2001 Due to the development of this function the legal framework has constantly been updated The most important legislative acts and their conceptual interrelationship within the legal framework for internal audit profession are 1 The Government of the Republic Act lays down the concept of the internal audit system the responsibility of the head of an authority to ensure efficient implementation of the internal audit system in government authorities and state authorities under the administration of government authorities and the organisation of internal auditor professional practice in the authority the competence of the minister as the head of the ministry in organising the professional practices of internal auditors in the ministry and its area of government the competence of the Ministry of Finance in coordinating the implementation of the internal control system and the organisation of internal auditor professional practices responsibility for applying the provisions of the Auditors Activities Act when organising the professional practices of internal auditors The Government of the Republic Act also specifies the responsibility of the head of a ministrys internal audit within the ministry as the consolidating entity to evaluate the implementation of the internal control system and its efficiency and to submit a report thereon to the minister or the State Secretary before approving the annual report The purpose of this provision is to give a systematic feedback as regards the use of public sector funds to those responsible for governance about whether risks are managed and decisions are followed 2 The Auditors Activities Act specifies among other things the legal basis for internal auditors activity in the public sector and public interest entities Under the adopted regulation it is possible to check the competence of those who are active in the internal auditor profession primarily their knowledge of professional standards For this purpose for example an applicant for the internal auditor 14 In 2012 the ministries and the State Secretary assessed the internal control system as essentially effective This means that the internal control system functions in practice is in line with the rules of procedure and ensures the legality and sustainability of the authoritys activities and the protection of resources 106 professional level of a public sector entity must pass professional examinations on the special part of public law and on an appropriate subpart essentially IIA CGAP A regulation has also entered into force recognising the results of CGAP and CIA exams and the resulting professional qualifications obtained before the Estonian regulation entered into force As regards the training needed to ensure the high quality of the professional work performed by internal auditors the law sets down requirements concerning education at least a Bachelors Degree or a higher education diploma and a requirement for two years of practical work under the supervision of a certified internal auditor The law also supports the introduction of a system that makes it possible to update the knowledge and skills of internal auditors on a continuous basis and ensure the skills and highquality service of internal auditors is maintained Under the Auditors Activities Act when exercising an independent professional activity such as the role of audit manager as of 1 January 2014 internal auditors working in a public sector body or association must have an internal auditors qualification or qualification level and as of 1 January 2015 the same applies to those working in or providing services to a public interest entity The elements of the system for monitoring the quality of internal auditors professional activities are internal and external assessment of the internal audit unit based on the internal auditor professional activity standards and the obligation on internal auditors to ensure regular professional development Monitoring by the Ministry of Finance and consulting by the Professional Qualifications Committee for internal auditors We measure the results of implementing the professional qualification system for internal auditors on a fiveyearly cycle using the following indicators the number of internal auditors who hold a qualification or a qualification level and their proportion of the target group the percentage of candidates who pass the professional examination the number of internal audit units which have successfully passed an internal and external quality assessment the number and dynamic of those involved in monitoring activities the number and dynamic of workplaces linked to the professional activities of internal auditors 3 The important internal audit framework principles that internal auditors are required to follow when managing the internal audit function planning professional activity performing work and reporting on work findings are adopted as positive law under the Auditors Activities Act and by Minister for Finance Regulation Adoption of internal auditor professional practices standards The above and other implementing legislation based on the Auditors Activities Act have entered into force 4 The general rules for the internal audit of authorities with executive power a regulation to be adopted pursuant to the Government of the Republic Act entered into force on 12 October 2012 regulates the general principles for the professional activity of internal auditors and rules for reporting in an authority with executive power 107 The purpose of the general regulation is to regulate the application in authorities with executive power of the principles laid down in the standard regulation define the key terms of standards within the context of the regulation establish rules for the implementation of and reporting on a quality control and improvement programme The general regulation provides for the drafting and submission of two reports by the head of internal audit the activity report of the internal audit body on the preceding calendar year and an internal auditors report on the implementation of the internal control system and the results obtained These must be sent to the Ministry of Finance as the coordinating body in accordance with the procedure laid down in the general regulation The general regulation specifies the activities involved in organising and managing the work of internal audit units These include focusing attention on the internal audit units budget activities organising the drafting of the internal audit units annual work plan and the approval thereof giving input to the report on the results of the activities of the internal audit unit and the organisation of expost checks establishing a procedure for the quality assessment of the internal audit unit It is the head of internal audit who manages the organisation of internal audits in a ministry and its area of government hereinafter the organisation Decisions on the nomination employment and dismissal of the head of internal audit are taken by a higher management body The scope of centralised internal auditing and other issues regarding the organisation of the professional activities of internal auditors are established in a Regulation for the internal audit of a ministrys area of government The internal audit unit is directly subordinate to the head of the authority thereby ensuring functional independence from the authoritys other activities the necessary work conditions access to important data employees and physical assets necessary for its work and direct contact with the head of the authority The internal audit unit operates on the basis of the units statutes internal regulations on internal audit established by the higher managing body and professional standards The internal auditors who work alone work on the basis of their job descriptions which must also include rights responsibilities and liability pursuant to standards and must be approved by the head of the authority The proportion of an internal auditors professional activity spent on giving assurance is greater than that spent on giving advice although the latter is increasing year on year The head of internal audit sends the findings of the internal audit both to the auditees and directly to the head of the authority and reports on the audit findings to the higher managing authority The principles of the system for monitoring implementation of the recommendations made to management documents etc are laid down in the internal audit regulation When fraud is discovered during an audit the internal auditor has to inform the head of the authority first The principles for taking action in case of fraud and corruption are laid down in the AntiCorruption Act 108 The portion of activities performed by internal audit units over and above the duties of an internal auditor has reduced over the years The most frequent tasks additional to the duties of internal auditors are acting as the keeper of declarations of economic interests participating in working parties conducting internal investigations supervisory control and disciplinary procedures and in several cases participating as an internal auditor of quality management in assessing the quality management system Such activities account for 15 of the internal audit tasks on average Under the Auditors Activities Act an internal auditor in the public sector must participate in 20 academic hours of training and a certified internal auditor must participate in 40 hours of training The period for calculating compliance with the training requirement commences at the start of the calendar year Once the qualification or qualification level as an internal auditor has been obtained the period for compliance with the training requirement commences from the start of the calendar year following that in which the qualification or qualification level was obtained In the past training for practising internal auditors has been organised centrally by a training coordination authority but a significant part of training for internal auditors stems from the specific needs of their unit or of internal auditors Based on data for 2012 internal auditors in the public sector participating on average in more than 30 academic hours of training per internal auditor In 2011 the Ministry of Finance started to develop a network of internal training providers who are internal auditors with a view to training 15 internal auditors working in the public sector They have now started to give training to other public sector internal auditors According to the Government of the Republic Act the heads of internal audit of ministries give an opinion on the implementation of the authoritys internal control system and its efficiency In the first instance the opinion concerning 2011 had to be provided and submitted to the minister prior to approval of the annual report for the fiscal year 321 Internal audit cooperation with external audit Cooperation with the National Audit Office is organised mainly on two levels namely that of the Ministry of Finance and the ministries internal audit units As part of cooperation relating to internal audits the Ministry of Finance involves the National Audit Office in the process of preparing draft legislation as a participant in andor commentator on projects to draw up methodological guidelines as the participant and training provider in internal audit training programmes in the exchange of information with internal auditors the auditors of the National Audit Office have access to the internal auditors extranet they can read the information bulletin intended for the internal auditors and if they wish they can participate in the meetings of the heads of internal audit etc The ministries internal audit units partner up in auditing the annual reports of the state accounting entities The National Audit Office may rely upon the work of internal audit when assessing the accuracy of the consolidated annual report of the state and the lawfulness of transactions To this end the scope of work is agreed upon in order to avoid duplication of work and to exchange working papers The annual work schedules are also discussed to minimize the duplication of work 109 322 Audit committees The nature of an audit committee and the basic principles for establishing and activities of the audit committee are stipulated in the Auditors Activities Act This states that an audit committee is an advisory body in the area of accounting audit risk management internal control and auditing which exercises supervision and prepares the budget and ensures lawful activity The ministries do not have the responsibility to establish an audit committee according to law but when the committee has been established in a ministry then its duties encompass the ministrys entire area of government and the members of the committee are nominated and removed by the minister An audit committee must have at least two members of which at least two must be experts in the field of accounting finance or law A member of an audit committee can be elected only when heshe has given hisher written consent A member of an audit committee may not be an internal auditor a member of the management board or a procurator an assistant minister or the secretarygeneral of a ministry or a person performing audits 33 Coordination of the implementation of internal control systems in the public sector According to the Government of the Republic Act the coordination of the implementation of the internal control system and the organisation of internal auditing in the government sector falls within the area of government of the Ministry of Finance The tasks of the Ministry of Finance in implementing the organisations internal control system and coordinating the organisation of professional practices of internal auditors are the following 1 When coordinating and analysing the implementation of the internal control system the Ministry of Finance must give methodical instructions for implementing and assessing the internal control system where necessary organise a comparative analysis of the internal control systems established in authorities and make proposals for improving their efficiency collect and analyse information on the implementation of the internal control system of the authorities and its efficiency 2 When coordinating the organisation of professional practices of internal auditors the Ministry of Finance must provide interpretation of the internal auditor professional practices standard or part thereof assess and analyse the influence of regulations for organising the professional practices of internal auditors and make proposals to improve them collect and analyse information on the organisation of the professional practices of internal auditors 3 To organise the assessment of the professional activity of internal auditors or its organisation the Ministry of Finance must where necessary advise authorities during internal quality assessment conducted pursuant to the internal auditor professional practices standards undertake external quality assessments of the internal audit function pursuant to the internal auditor professional practices standards 110 In addition the Ministry of Finance must 1 organise training in coordinated areas 2 manage regional cooperation networks 3 manage the auditors activities portal through which public information on auditors activities is made available to the public including on regulations guidelines and quality development The registration and accounting of those involved in auditors activities are done through the auditors activities portal which is also used to create possibilities for forwarding information and documents electronically and provide the conditions and possibilities for updating this electronically 4 manage the Implementation of internal control systems website on which legislation in this area guidelines information sheets references to various sectorspecific material etc is available to the public 5 publish quarterly information bulletins 6 provide advice for internal auditors and other officials The implementation of internal control systems and tasks involved in coordinating the management of the professional activities of internal auditors is split within the Ministry of Finance between various structural units 4 Inspection of use of funds In Estonia there is no central governmental authority ie the socalled financial inspection body The Ministry of Finance has a central role as the local partner of OLAF in terms of processing violations relating to the use of external funds the detection of corruption and fraud as regards other state budget funds is conducted by other authorities and at other levels The internal audit plays a major role in detecting violations and corruption within an organisation During audits it must assess the likelihood of fraud and upon detecting violations must notify the head of the authority and if necessary law enforcement authorities The National Audit Office also deals with possible violations relating to state budget funds with the objective of giving the Riigikogu and the public assurance through an economic audit that public sector funds are used legally and efficiently The National Audit Office is an integral part of the public sector inspection system because it audits the performance of activity legality and use of funds by the public sector authorities Potential fraud and irregularities are prevented primarily by updating checking mechanisms in the organisations internal control system regular risk assessment and by organising internal audits Some internal audit units conduct internal investigations and perform supervisory control The grounds for supervisory control are laid down in the Government of the Republic Act There are general restrictions that apply to all employees in the public sector and specific restrictions that apply only to officials which are regulated by the AntiCorruption Act There are no direct penalties for infringements of the State Budget Act The principles of action in cases of suspected corruption and fraud are laid down in the AntiCorruption Act The investigation of cases of fraud and corruption is the competence of investigation bodies Where there is reasonable doubt that an official has broken the law made wrongful use of state assets abused hisher powers or performed other corruption related transactions or actions the following authorities must be notified thereof in person or by submitting a report to 111 the nearest police prefecture if the case involves officials working in local government or state authorities and private companiesnonprofit associations the Estonian Internal Security Service if highranking state public servants are involved the President a member of the Riigikogu the Auditor General the Chancellor of Justice a judge a prosecutor or a senior official of a governmental authority the Chancellery of the Riigikogu the Office of the President the Office of the Chancellor of Justice the National Audit Office or a court Public Prosecutors Office if officials employed in law enforcement authorities are involved eg a police officer 5 Ongoing and future reforms 51 Centralisation of support services at state authorities financial accounting15 personnel recording and payroll accounting consolidating recording in a sectorspecific or national service unit and transferring them into a single business software program The project involves the introduction of einvoicing and other edocuments for forwarding to the central service units information in the fields of activity of the relevant authorities a self service platform for state authorities and an online reporting system which will facilitate the submission of reports at the level of authorities areas of government and at state level The aim of this reform is to increase the quality of the states financial management by ensuring a more detailed and userfriendly overview of state requirements obligations and investment needs The first stage of the project the migration of the authorities budget and financial accounting to the single business software brought to light significant differences in the principles for budget and accounting which prevented this objective being achieved The transfer of the authorities accounting to the business software as part of the support services project was therefore suspended and efforts were focused more on harmonising budgeting and accounting principles standardising accounting objects and installing business software in line with the new requirements Once the new common software has been introduced the state authorities will begin planning the budget in an accrualbased as well as a cashbased manner The ebudget management system for processing purchasing invoices and exchanging information with SAP software has been introduced as part of the purchase of services Since early 2012 the State Support Centre has been operating in the area of government of the Ministry of Finance by purchasing the current accounting and personnel recording and salary calculation services for four authorities in the Ministrys jurisdiction The first of the modules finalised for part I of the selfservice portal for state officials was the leave management module As of the beginning of 2014 the authorities will also be able to use the secondment management module and shortly afterwards the asset management module will also become available The updated SAP software in which the authorities are able to keep reports on the implementation of both the cashbased and the accrualbased budget was introduced for the first time on 1 June 2013 Identifying new budget and accounting objects and drawing up an accrualbased budget as part of the process for installing the updated SAP business software was considered 15 The personnel recording and financial accounting of all state authorities will be transferred to the single SAP software 112 more time consuming than originally anticipated Since the main objective of the project to consolidate support services is to improve the quality of financial and personnel management it is appropriate to extend the project period to allow the authorities to make the changes in a more thoughtthrough way that is coordinated across the area of government The new schedule for the project is expected to be sent to the government in early 2014 for approval The ministries will join the project in stages All the authorities will transfer to the single system by 1 January 2016 52 Development of a strategic planning and financial management framework16 The integration of strategic planning and budgeting frameworks to improve the monitoring of administration costs improve policy performance and prioritise objectives in the face of limited resources Developing a sustainable method for setting performance indicators and objectives for performancebased budgeting and using strategic planning Improving the integration of performance indicators into management and budgeting processes through the introduction of programmebased performance budgeting Introducing accrual based budgeting principles Providing decision makers with accrualbased budget information in addition to the information that is currently available from the cashbased budget Developing a method for budgeting programme expenditure costs for the public sector In 2013 the Government of the Republic sent the draft State Budget Act supporting these developments to the Riigikogu The Ministry of Finance also sent the relevant draft implementation acts which will allow a stepbystep migration to a programmebased budget and will set a framework for strategic management as well as far clearer links to the budget strategy and the State budget 53 Development of the Budget Information System the purpose of creating an information system for state budget planning is to make it possible to integrate state strategic planning budgeting and reporting and related tasks and activities into a coherent whole in an effective and streamlined way The completed information system will help improve the quality of data support the states financial management process for instance by reducing the amount of and the time spent on manually performed tasks The system to be created must be flexible and ready to support future changes as well as current processes The development of the Budget Information System is currently in the procurement stage 16 Since 2009 the Ministry of Finance has run development programmes for strategic planning and performancebased budgeting as parts of measures to develop performance management in general The overall objective is to create a clear and a much stronger link between strategic planning budgeting and reporting frameworks in the administration of the Estonian public sector 113 FINLAND Public Internal Control No major changes in the period 20112013 1 Brief history of the public internal control PIC system Since the 1990s the internal control of central government finances and related legislation in particular has undergone significant reform and development The concepts of internal control and to some degree its principles have been reformed during this period Budget statutes define and enact internal control as an activity to be carried out under the responsibility of top management Nowadays internal control is an integral part of management and the related risk management in accordance with the principles of sound governance and as such it is an essential element of performance management and accountability systems By the beginning of the 2000s basic requirements for internal control had been included in budget statutes However there were still shortcomings with internal control in terms of guidance and uniform operating policies In practice internal control had not yet been sufficiently integrated into management systems and procedures as part of performance management In addition no uniform system existed at the level of government and central government finances as a whole to ensure the adequacy of internal control For this reason the Ministry of Finance set up a working group on 18 December 2001 to examine ways of improving endofyear accounting procedures in central government and to propose legislative changes as necessary The working group cooperated closely with another working group on the reporting process established by the Speakers Council of Parliament The importance of internal control was further emphasized in the accountability reform in 2003 and the related amendments to budget statutes These changes included the following the basic criteria for accountability and performance were redefined in legislation the governments financial status report and the States financial statement and report were merged into a new report on the central government final accounts to be presented to Parliament the structure of financial reporting by government agencies and ministries was clarified in terms of accountability and performance and in particular the preparation of performance reports on the achievement of the performance targets set an obligatory declaration assessing the functioning of internal control and risk management was included in financial reporting by government agencies and ministries the responsibility of ministries in steering their administrative and policy sectors and implementing accountability was emphasized by requiring them to provide an 114 annual evaluation and opinion on the final accounts and audit reports of their subordinate units responsible for preparing their own accounts a joint government financial controller position was established at the Ministry of Finance for preparing the report on the central government final accounts ensuring that a true and fair report is given carrying out internal control of the state of central government finances using reports and evaluations as well as developing steering and reporting systems for central government operations and finances an advisory board for internal control and risk management was set up in order to develop internal control and in particular to plan crosssector cooperation and prepare its implementation with all ministries and certain key internal control bodies being represented an internal audit division was established for coordinating and developing internal auditing with a representative from the internal auditing function of each ministry 2 Public internal control environment 21 Principles of budget preparation After any changes Parliament approves the budget presented by the government as well as any supplementary budgets The budget is prepared for one financial year at a time The financial year corresponds to the calendar year The estimates of annual revenue and the appropriations for annual expenditure are entered in the budget as gross amounts deducting neither the expenditure from revenue nor revenue from expenditure gross budgeting Provisions can be laid down by law that in the case of certain revenue and expenditure only the estimated revenues or appropriations equalling the balance between them may be entered in the budget net budgeting The budget may contain three types of appropriations 1 A fixed appropriation which cannot be exceeded or transferred to a later financial year 2 An estimated appropriation which cannot be transferred to a later financial year Permission to exceed an estimated appropriation may be granted if the excess is based on a statutory or comparable need or on some other compelling unforeseen need or a need that is difficult to estimate 3 Transferable appropriations which cannot be exceeded A transferable appropriation may in accordance with what is decided in the budget be carried over for use during a period not exceeding two financial years following the financial year in question In the budget items of revenue or expenditure are allocated to the financial year to which they primarily apply Allocation is generally made on the basis of the delivery of a product or service or the receipt of a factor of production For example procurement expenditure is budgeted for the calendar year when the purchased product or service is received Expenditure is not carried forward in the budget 22 Principles of central government accounting and preparation of central government final accounts The State is required to keep accounts on its budget economy The budget economy is divided into accounting units which comprise ministries government agencies and public 115 bodies Accounting data from the accounting units are compiled into the States consolidated accounts for the preparation of the central government final accounts The State treasury collects the accounting data and manages consolidated accounting The accounting units are responsible for their payment transactions and accounting and as government agencies and public bodies prepare their annual accounts and report on their operations Central government accounting comprises budget accounts and general accounts The accounting must comply with good accounting practices Budget accounting monitors the implementation of the budget while the general accounts show income and expenditure as well as the financial position regarding assets and liabilities Government agencies and public bodies must provide true and fair information on their compliance with the budget their revenues and expenditure their financial position and their operational performance in their annual accounts and in the report on their operations which is compiled in order to implement accountability For each financial year the government submits the report on the central government final accounts to Parliament The report includes the central government final accounts and other necessary information on central governments financial management and compliance with the budget as well as information on the most important aspects regarding the societal effectiveness of central government activities and the development of performance The report also includes key information on trends in societal effectiveness and performance in the ministries areas of responsibility The central government final accounts include a a statement on the implementation of the budget broken down by budget section or sector and chapter and item b a statement on revenue and expenditure c a balance sheet illustrating the financial position on the final day of the financial year d a cash flow statement showing cash flows e any notes required to provide true and fair information 23 External audit The National Audit Office of Finland the audit institution is an independent body operating within Parliament The remit of the National Audit Office is to audit national financial administration in order to ensure that it is appropriate and complies with legislation and the budget In addition the National Audit Office handles the tasks laid down in the Act on the implementation of the legislative provisions in the Treaty on Stability Coordination and Governance in the Economic and Monetary Union on the application of the Treaty and on the requirements for the Multiannual Budgetary Frameworks By the end of September each year the National Audit Office submits a report to Parliament on its operations and special reports when necessary 116 3 Public internal control 31 Managerial accountability and responsibility In central government internal control refers to procedures included in the agencys guidance and operating processes organisational solutions and operating methods that can be used to obtain reasonable assurance of 1 the legality of operations 2 the security of funds 3 operational performance and 4 the production of true and fair information on finances and performance in accordance with Section 24 b of the Budget Act government agencies and public bodies must ensure that appropriate arrangements are made for internal control in respect of their own operations and activities for which they are responsible Risk management identifies evaluates and manages factors that may hinder the achievement of objectives included in the four categories mentioned above Risk management has the same goals as internal control Ideally internal control and risk management procedures are integrated into the agencys usual planning management and operating processes Typical examples of such procedures are the planning of objectives and operations and the identification and evaluation of risks that may hinder the achievement of objectives management of information required in operations using information systems technical control and reporting procedures for exceptional situations included in information systems differentiation of tasks In accordance with Section 24 b of the Budget Act the management of each agency is responsible for organising internal control and for its appropriateness and adequacy The top management of an agency bears primary responsibility for organising and managing internal control in the same way as it is responsible for meeting the organisations targets and organising related activities Management carries out the necessary measures by delegating tasks to various levels of the organisation in accordance with their management system With regard to internal control delegation often means allocating tasks and responsibilities to subunits making them responsible for their own operations and the identification management and reporting of related risks Pursuant to Section 65 of the State Budget Decree the report on operations included in the final accounts of an accounting office must include an assessment of the appropriateness and adequacy of internal control and related risk management as well as a declaration on the status of internal control and key development targets drawn up on the basis of the assessment assessment and declaration of assurance of internal control The assessment should be 1 Genuine not apparent 117 2 Systematic it should be based on a comparison of the present state with accepted criteria in the framework 3 Sufficiently extensive it should cover all relevant operational and support processes in activities for which the agency is responsible 4 Documented it should cover all relevant operational and support processes in activities for which the agency is responsible 5 Approved by the management it should enable the evaluation of internal control which is the managements responsibility In 2005 the advisory board for internal control and risk management established by the government prepared a recommendation for government agencies and public bodies on approaches to internal control and risk management and assessing how they function The recommendation is intended as a tool to help government agencies public bodies and funds evaluate and develop their own internal control and risk management processes Efficient internal control and risk management enhance the operating units performance and are an essential element of sound governance In 2008 a more concise version of the recommendation was issued which can be used as an alternative to the more extensive framework for instance in smaller agencies When applying the evaluation frameworks the functionality of internal control and risk management is assessed by examining the following aspects influencing it 1 the agencys operating environment 2 the setting of objectives 3 the identification evaluation and management of risks 4 controls control measures 5 communication and the flow of information and 6 the monitoring of internal control and risk management performance Government agencies and public bodies can also use other commonly approved evaluation frameworks for instance COSO COSOERM CoCo to evaluate the the functioning of internal control and risk management Using a generally approved framework makes for the systematic and documented evaluation of internal control The evaluation framework should always be adapted to meet the agencys needs The internal control assessment can be carried out in different ways These include self assessment by the management group decentralised selfassessment assessment supported by an internal audit or information gathering and assessment with the help of an external specialist Responsibility for the evaluation of the various aspects can be assigned in a number of ways Information obtained in the assessment must be utilised in the planning and execution of the agencys operations On the basis of the assessment findings the agency can prepare the assessment and declaration of assurance of internal control and risk management to be included in the report on operations The assessment and declaration of assurance of internal control included in a government agencys report on operations should feature the following elements set out in brief a statement on managerial responsibility the method of assessment implementation reference to the framework for instance 118 conclusions on the state of internal control and possible development targets 32 Internal auditing Internal auditing supports the efficiency of internal control and risk management at ministries and government agencies Management within ministries and agencies are responsible for the due implementation of internal control and risk management As laid down in Section 70 of the State Budget Decree internal auditing is organised at the discretion of the ministrys and agencys management In their consideration the management should evaluate the need for an internal audit in the light of internal control needs and the requirements of European Union law The internal audit may be carried out by the ministry or agency or outsourced partly or entirely The ministrys and agencys management must organise an internal audit if there is justified need for an audit on the basis of internal control procedures The purpose of an internal audit is to clarify for the management the appropriateness and adequacy of internal control and to perform the auditing duties prescribed by the management Common standards and recommendations concerning internal auditing must be taken into account when organising the internal audit The rules on internal auditing procedures and the status of internal audits in the organisation of the government agency or public body are provided in the rules of procedure on internal auditing which are confirmed by the government agency or public body itself The rules of procedure on internal auditing must be notified to the ministry concerned and the National Audit Office A model of the rules of procedure has been drawn up for the purpose of an internal audit organised independently by an agency Government agencies and public bodies must critically evaluate the models applicability to their own operations and where necessary add or remove content or adapt it to better suit their own operations The model may also be used when preparing rules of procedure on an internal audit that is carried out as an outsourced service provided that it is first ascertained that the rules of procedure apply to the agencys operations The agencys management decides on the organisational status of the internal auditing unit if applicable Most commonly internal auditing is directly subordinate to a ministry or the senior officials of an agency In this case the internal auditing unit reports directly to top management from which it also receives its powers 33 Coordination of internal control Since 2004 a government financial controller has operated within the Ministry of Finance The government financial controller is the governments joint supervisor of performance and finances Heshe serves as an advisor to the government and top management at ministries as an administrative controller and as an independent supervisory authority in guaranteeing and developing the quality of the control and reporting system on central government finances and in ensuring financial accountability The government financial controllers role is to ensure that the report on the central government final accounts provides a true and fair picture of central government finances 119 and performance The government financial controller steers coordinates and develops the reporting and assessment of central government finances and financial performance The range of duties includes the assessment of performance and finances strategic accounting and steering and developing the assessment of the financial implications of legislation The controller also sees to the guidance coordination and development of internal control and related risk management and to the organisation of government level activities and reporting related to controlling and preventing the misuse of EU funds for which the State is liable In carrying out its duties the government financial controller draws on the expertise of the Ministry of Finance and other ministries and authorities An advisory board for internal control and risk management operates within the Ministry of Finance The advisory boards remit includes 1 monitoring and evaluating the state and procedures of internal control and related risk management within central government and its methods and general development as well as the functioning and use of internal control procedures in guiding and managing finances and operations 2 taking initiatives to improve internal control and related risk management 3 coordinating the procedures of various authorities and government agencies and public bodies in internal control and the administrative monitoring of financial management and preparing the required measures 4 monitoring and evaluating the state of internal audit arrangements the quality and performance of internal auditing its utilisation in management and guidance as well as the procedures and general development of internal auditing and taking the initiative to improve internal auditing and its utilisation 5 organising cooperation between internal auditing at different government agencies and public bodies and where appropriate coordinating the internal audit operations and the utilisation of results in different agencies 6 monitoring and evaluating the control and audit of EU funds in Finland as well as related reporting and coordinating and developing the related measures and procedures of various authorities government agencies and public bodies while preparing measures required for coordination and development 7 preliminary handling of Finlands reply to the Commission of the European Communities regarding the Court of Auditors annual report as referred to in Article 1436 of Council Regulation EC Euratom No 16052002 on the Financial Regulation applicable to the general budget of the European Union 8 monitoring and evaluating the situation concerning misuse or violations committed in the operations of government agencies and public bodies or aimed at State funds or assets or funds or assets for which the State is responsible and coordinating and developing the operations and procedures of various authorities and government agencies and public bodies as well as reporting on misuse and errors 9 preliminary handling of the information on Finland compiled for the report referred to in Article 2805 of the Treaty establishing the European Union and 10 organising training and cooperation and compiling and disseminating good practices as well as preparing proposals for recommendations and issuing statements on matters falling within the boards sphere of competence The advisory board for internal control and risk management is chaired by the government controller general with the government deputy controller general acting as deputy chair The government appoints the advisory board and its members and their 120 deputies for three years at a time so that the advisory board includes a representative from each ministry as well as representatives from key cooperation partners in the sector if necessary The advisory board has an internal audit division for the assessment and development of internal auditing with representation from all ministries and the State treasury The division develops internal audit procedures by preparing joint recommendations and describing good practices for internal auditing It does not however have authority over the internal audit units of ministries and government agencies 4 Financial inspection No such body exists in Finland 5 Ongoing and forthcoming reforms Amendments regarding internal control and risk management may be made to the budget statutes There have been discussions on the need to focus operations more clearly particularly as regards the tasks of the government financial controller and the advisory board for internal control and risk management With regard to internal auditing it has been debated for some time whether ministries and government agencies should be required to organise internal audits and how this should be done The following arrangements have been considered among others centralising sector specific internal auditing in ministries for example centralising internal auditing at the government level creating an internal audit service centre and cooperating more closely at the administrative sector level and coordinating internal auditing The current recommended model for an internal control framework is based on the COSOERM model Recently discussions have been initiated on whether ministries and government agencies should be supported in the possible implementation of the ISO 31000 risk management standard and related standards 121 FRANCE Public Internal Control Major changes in 20112013 The changes made to the December 2011 version of the French contribution mainly concern the need to update the document in line with these new pieces of legislation Decree 20121246 of 7 November 2012 on budget management and public accounting which replaces Decree 621587 of 29 December 1962 establishing the general regulation on public accounting and Decree 200554 of 27 January 2005 on financial control in state administrations Decree 2011775 of 28 June 2011 on internal audits in the administration and the Prime Ministers Circular No 5540 of 30 June 2011 This new version also takes account of the outcome of moves that were still at the planning stage in 2011 completion of the merger process which led to the establishment of the Directorate General for Public Finance wholesale deployment of Chorus software and actual introduction of ministerial internal audit system new developments in 2012 reunification of the Ministry of Economic Affairs and Finance and disappearance of the Inter ministerial Committee for Programme Auditing In addition some clarifications are provided that were not included in the previous version Thus the main parts updated are the introduction and the following sections 11 An accounting and financial organisation of the State structured around a centralised and unified accounting network 214 The States financial statements 215 An integrated financial information system 222 Internal coordination authorities updated and section added on the ministerial financial manager 223 Horizontal harmonisation authorities updated and section added on the Internal Auditing Harmonisation Committee 23 The systematic control 4 Extension of risk control updated and section added on the organisation of the States internal auditing system The text of the document has been fully revised and where necessary modified to maintain overall consistency 122 INTRODUCTION The French public administration has a long tradition of publicaffairs control notably based on the principles of the Declaration of the Rights of Man17 and enshrined in the Constitution18 which is also reflected in the legal rules set out for instance in general19 and specific civil service regulations and in the Public Procurement Contracts Code In 2006 the entry into force of the Organic Law governing Budget Laws La loi organique relative aux lois de finances LOLF of 1 August 2001 provided an opportunity to rethink the management of public expenditure and was accompanied by an evolution in the role of the main actors involved in the control and management of the States public finance An objectivebased public policy management a resultsoriented budget a new system of responsibility strengthened accountability and a new accounting system constitute the key features of the reform implemented in the French public administration Against the background of an accounting and financial organisation of the French State structured around a centralised accounting network which guarantees the financial uniformity of the French administration and the separation of the functions and tasks assigned to the authorising officer and the accounting officer the French public administration relies on a robust internal control environment 1 and 2 Within this environment an internal control system was developed based on the accounting and financial function The certification of the States accounts required by the LOLF served as a catalyst for the development and implementation of an effective internal control and audit system which focuses on accounting and aims at guaranteeing the quality of the States accounts Gradually the internal control system was extended to the budgetary area 3 The Decree of 28 June 2011 on internal audits in the administration is the culmination of a drive to control the risks related to the management of public policies under the responsibility of the ministries This reform has made it possible to extend the scope of internal control to all professions and functions within ministerial departments and to establish an effective internal audit policy in the State administration 4 17 Declaration of the Rights of Man and of the Citizen of 1789 Article 15 Society has the right to require of every public agent an account of his administration 18 French Constitution of 4 October 1958 19 Title I Law No 83634 of 13 July 1983 establishing the rights and obligations of civil servants Title II Law No 8416 of 11 January 1984 establishing statutory provisions on the national civil service Title III Law No 8453 of 26 January 1984 establishing statutory provisions on the local civil service Title IV Law No 8633 of 9 January 1986 establishing provisions on the hospitals civil service 123 1 Two characteristics underlying the current internal control environment 11 An accounting and financial organisation of the State structured around a centralised and unified accounting network The accounting and financial organisation applicable to the State and to national public institutions to regional authorities and to the public institutions attached to them public bodies was until 2012 set out in a Decree20 of 29 December 1962 establishing the general regulation on public accounting While adapting this regulation to the modern world the Decree of 7 November 2012 on budget management and public accounting retains the principles which have for over a century shaped the French accounting and financial system in particular the separation of functions between the authorising officers and public accounting officers who are responsible for financial and accounting operations resulting from budget implementation These operations concern the income expenditure cashflow and assets of public bodies The authorising officer administrator function and the public accounting officer function are incompatible and are organised as follows Authorising officers decide on the execution of income and expenditure To this end they certify the entitlements of public bodies calculate income and issue recovery orders They commit and pay expenditure and issue orders to pay Authorising officers are responsible for the certification they issue Public accounting officers are exclusively responsible for handling public funds and keeping the accounts of public bodies They are solely responsible for keeping general accounts and depending on the authorising officers powers keeping budget accounts taking over and collecting demands for payments remitted by the authorising officers claims resulting from contracts title deeds or other enforcement orders and for collecting cash entitlements and any type of revenue that public bodies are authorised to collect paying the expenditure based on orders delivered by accredited authorising officers on claims presented by creditors or on their own initiative as well as following up complaints concerning payments and other notifications keeping and preserving funds and assets belonging or entrusted to the public bodies handling funds and cash account movements and keeping the supporting documents and accounting records for the operations produced by the authorising officers Public accounting officers are appointed by the minister responsible for the budget They must submit accounts each year Those who are principal accountants must produce the accounts for the court of auditors Public accounting officers are personally and financially responsible for the actions and controls within their remit Public accounting officers are organised in a network placed under the authority of the DirectorateGeneral for Public Finance DGFiP Direction générale des Finances publiques The DGFiP a directorate of the Ministry of Economic Affairs and Finance stands at the centre of public financial operations cf infra Its competences cover a number of areas public domain execution of revenue and expenditure bookkeeping for regional authorities and their public institutions economic and financial expertise field management etc the drawing up collection and inspection of taxes payment of State expenditure and State accounting As such the DGFiP is the States accounting and financial operator It leads the States accounting function through its network of public 20 Decree No 621587 of 29 December 1962 establishing the general regulation on public accounting 124 accountants cf supra This networkbased organisation confers the great unity to accounting and finance which is a characteristic of the French administrative organisation 12 A budgetary and accounting reference framework thoroughly reviewed in 2001 At the end of the 1990s the French Parliament started a debate on the effectiveness of public expenditure and the role of the assemblies in budgetary matters which led to political consensus on the need to update the rules of budgetary and accounting management The Organic Law21 governing Budget Laws the LOLF was passed unanimously on 1 August 2001 thus establishing a new reference framework for the budgetary and accounting rules applicable to public administration Before the LOLF the powers of the Government and of the Parliament as regards the preparation vote and implementation of the State budget were regulated by the Organic Order of 2 January 1959 That was a fundamental piece of legislation that provided a global framework for the budgetary procedure in the context of the rationalised parliamentarism of the 5th Republic The LOLF resulted from a National Assembly bill tabled in June 2000 which capitalised on a political agreement with the Senate and a consensus with the Government The text of the Organic Law was discussed between 7 February and 28 June 2001 and was validated by the Constitutional Council on 25 July 2001 It was adopted on 1 August 2001 and fully entered into force on 1 January 2006 The LOLF is the new financial constitution of the State The Budget Law for 2006 was the first law that was fully prepared adopted and implemented in accordance with the new budgetary framework The key principles of the LOLF A new structure for the State budget budget planning according to public policies Under the LOLF the budget is no longer presented according to the nature of the expenditure operating investment intervention etc but according to public policies security culture health justice etc The Parliament and citizens are therefore able to assess the overall resources employed in order to implement each State policy A new approach to public management objectiveoriented management One of the major issues of the public management reform was to make the State pass from a meansbased culture to a resultsbased culture so that each euro spent could be more useful and more effective Thus performance ie the ability to attain the results expected lies at the centre of the new budgetary framework Consequently Parliamentary debates both to vote on the adoption of the budget initial budget law and to examine budget implementation budget review law no longer refer only to the appropriations and their justification but also to the strategies and objectives of public policies A chain of responsibilities was thereby established in the administration in which public authorising officers play a major part A new view of State accounts the Governments General Accounts The LOLF introduced a major reform of accounts established henceforth according to the new accounting standards22 which draw to a large extent on the practice of private companies Starting from 2006 a major step was made in the modernisation of Government accounting Accounts are more comprehensive and clearer they offer a 21 Organic laws are laws governing the organisation and functioning of public authorities Adopted by Parliament they complement and clarify the Constitution 22 The Central Government Accounting Standards are available in French and English on the website of the Public Sector Accounting Standards Council Conseil de Normalisation des Comptes Publics CNOCP 125 better evaluation of the assets and allow the State to render a better account of its actions 2 A solid internal control environment 21 A budgetary and accounting system based on transparency 211 A general budget structured on three levels mission programme action The States major policies are transposed into missions The Parliament votes on the budget per mission A mission is established at the Governments initiative and can be ministerial or interministerial The mission contains programmes The Parliament can alter the expenditure distribution among programmes within the same mission The programmes or the allocations define the implementation framework of public policies the programme is the unit for parliamentary authorisation23 It constitutes a global and restrictive package of appropriations It issues from a single ministry and includes a coherent group of actions It is assigned to a manager appointed by the relevant minister Each programme is associated with specific objectives and expected results An indicative component of the programme the action provides details on the intended destination of the appropriations The voting procedure distinguishing between commitment authorisations and payment appropriations makes it possible to follow up and cover Government liabilities All the appropriations irrespective of the nature of the expenditure concerned are voted on the one hand as commitment authorisations capacity to engage the State in legally binding commitments and on the other hand as payment appropriations volume of payments needed throughout the year to cover the commitments made or to be made This distinction between commitment authorisations CA and payments appropriations PA supports a multiannual view of expenditure payments made by PAs resulting from past commitments initiation of CAs that do not involve immediate payments etc In order to identify the use of public funds each programme displays a double presentation of its appropriations by destination actions and by type of expenditure staff operating investment intervention etc 212 Budget planning according to public policy objective Each programme has a corresponding strategy objectives and quantified performance indicators These elements are included in the annual performance plans APP annexed to the draft budget law Under the authority of the respective minister the project manager undertakes to meet these requirements Heshe reports the results obtained to the Parliament when the budget review law is being examined in the annual performance report APR The State operators public agencies which implement certain sections of public policies are included in the APP in order to identify and assess their contribution The introduction in the same document of financial elements and performance assessment encourages the continuous improvement of public expenditure effectiveness The relevance reliability and truthfulness of the indicators are evaluated by the Court of Auditors cf infra 23 The programme is the level of speciality of appropriations for budgetary implementation 126 Therefore in order to allow the members of Parliament and by their agency citizens to have a clear and documented perspective on public expenditure the budget presentation is based on Justifying expenditure from the first euro the Government departments explain in their APP how they plan to use the appropriations and staff available from the first euro They explain the actual implementation in their APR at the end of the year Analysing the cost of public policies this consists in submitting to the Parliament complementary information on the resources actually used within the programme in order to fulfil its objectives The assessment of the overall expenditure required for the implementation of public policies is presented ex ante for the appropriations in the APP and ex post in the APR for the expenditure incurred In order to provide a faithful view of the States financial situation the full costs based on the budgetary data plus expenditure from the general accounts are subsequently evaluated and analysed in the APR 213 Threetier State accounting The LOLF introduces threetier accounting for the State24 The general accounting of operations relying on the principles of accrualbased accounting Budgetary accounting on an annual basis making it possible to follow up and return expenditure at the time it is paid and revenue at the time it is collected This offers a cash register perspective This budgetary accounting which makes it possible to monitor authorisation granted for payment appropriations is complemented by monitoring of the deployment of commitment authorisations Accounting that analyses the costs of the actions that are part of the programmes which completes the view of the budget The financial statements established in the general accounting system and presented in the States General Accounts offer a global perspective on the assets and the financial and property situation of the State Thoroughly retracing the expenditure corresponding to a financial year they offer insight into the costs of public policies 214 The States financial statements According to the provisions of the LOLF the Governments General Accounts25 are based on accounting standards that draw to a large extent on the accounting standards used by private companies in France26 and on international standards IFRS IPSAS but also take into consideration the specific features of the State Their format allows clear and concise consultation of Government accounts The General Accounts consist of the balance sheet the profit and loss statement the cash flows table and the annex Under the LOLF the Governments General Accounts are submitted to the Court of Auditors for certification In addition to the provisions of the Organic Law governing Finance Laws they must also comply with Article 472 of the Constitution27 the accounts of public 24 Article 27 of LOLF24 The State keeps accounts of the budgetary revenue and expenditure and general accounts of its operations Moreover it applies an accounting system that analyses the costs of the various actions initiated within the programmes 25 Accessible on the website of the Ministry of Economic Affairs and Finance Le Forum de la performance 26 Generally Accepted Accounting Principles GAAP France 27 Provision introduced by Constitutional Law No 2008724 of 23 July 2008 127 administrations must be regular and true They must reflect faithfully the result of the management assets and financial situation of these administrations In this context The General Accounts list and record the value of all the assets controlled by the State buildings roads stocks etc and all the amounts it has to or may have to pay in the future for current obligations Providing an overall vision of State assets and commitments of expenditure the General Accounts represent an essential tool for the operational management of public finance offering high addedvalue which complements budgetary accounting for Parliament the ministries and citizens The General Accounts supplemented especially as regards offbalance sheet commitments28 assets and liabilities support the strengthening of internal accounting control cf infra and permit the performance of risk analysis in the ministries The General Accounts also lead to the improvement of governance within the State and encourage parliamentary control over public accounts Due especially to the census of real estate properties and stocks the General Accounts provide a clearer picture of the assets and encourage the development of more effective management By introducing the concepts of provisions and accruals the General Accounts give authorising officers a sense of responsibility for the mediumterm costs and risks associated with their actions The General Accounts therefore help improve public management 215 An integrated financial information system The Chorus information system integrated management software package based on technology produced by SAP is the Governments financial information system It manages expenditure nontax revenue fixed assets and stocks and keeps the Governments accounts It has been used in all central and decentralised State administrations since the end of 2010 Chorus is a centralised system for keeping accounts and a steering system This application is shared by all the financial actors of the States central and decentralised services authorising officers financial controllers accounting officers prefects etc Chorus is used for the management of the entire national budget which is implemented by the Government the general budget programmes the special accounts programmes earmarked accounts financial assistance accounts business accounts monetary transactions accounts etc and includes the programmes of additional budgets 22 The effective governance of public management 221 An organisation based on managerial responsibility The programme manager29 is the central link of public management integrating political responsibility borne by the minister and managerial responsibility borne by the programme manager Under the ministers authority the programme manager is involved in drafting the strategic objectives of the programme under hisher responsibility heshe guarantees operational implementation and undertakes to fulfil the relevant objectives The minister and the programme manager become accountable for 28 Potential liabilities 29 Introduced in accordance with the LOLF hisher main function is defined in Decree 20121246 of 7 November 2012 on budgetary management and public accounting 128 the objectives and indicators specified in the APP These national objectives are adapted if necessary for each government service The programme manager delegates the management of the programme by establishing operational programme budgets placed under the authority of appointed managers The Directors of Financial Affairs Departments prepare together with the programme managers and the directors of human resources departments the decisions and choices in the budgetary field They establish a framework for the ministerial management doctrines and for the decisions on the use of resources eg purchasing policies building policy They conduct cost analyses within ministries coordinate and strengthen the programme managers reporting requirements and coordinate the internal accounting and budgetary control tools They have consulting expertise and assistance roles They are the official contacts of the financial control authorities and of the ministerial accounting departments 222 Internal coordination authorities The SecretariesGeneral of the Ministries have been enlisted to implement the LOLF and they now ensure the development of public management systems with a view to modernising public policy They play a major role in the organisation of Ministries and have played their part in promoting the implementation of internal accounting control systems They now deal with internal budgetary control and the general deployment of risk control and internal control in the context of the professions and missions of ministries In each ministry a ministerial financial manager30 is appointed by the Minister Heshe coordinates the preparation presentation and implementation of the budget ensuring the implementation of internal budgetary and accounting control mechanisms and where necessary a cost accounting system A ministerial budgetary controller and accounting officer31 has been appointed in each ministry They are accountants with paying authority as regards ministerial expenditure and as such form part of the network of the DirectorateGeneral for Public Finance DGFiP32 They look after budgetary control in the ministries under the authority of the Minister for the Budget Budgetary control concerns the implementation of the budget law and is intended to ensure that budgetary planning and management are sustainable from the point of view of budgetary authorisations commitment authorisations and payment appropriations The budgetary controller and accounting officers ensure the quality of general accounting and budgetary accounting They are full members of the ministerial audit committees 223 Horizontal harmonisation authorities The Directorate for the Budget is responsible under the authority of the Minister responsible for the Budget for establishing the framework for public finance and preparing the national budget 30 Position defined in Decree 20121246 of 7 November 2012 on public budgetary and accounting management 31 Decree 20121246 of 7 November 2012 on public budgetary and accounting management comprising the provisions set out in Decree 20051429 of 18 November 205 on the organisation and management positions of ministerial budgetary and accounting control services 32 On this DirectorateGeneral cf infra 129 The Directorate for the Budget is also responsible for the implementation of LOLF concepts being accountable in this respect to the ministries and Parliament as well as for the preparation of and compliance with budgetary standards performancebased management drawing up of annual performance projects and annual performance reports justification to the last euro development of costanalysis accounting budgeting and management rules followup on staff costs etc The Directorate for the Budget is also responsible for the evolution of budgetary control As such it is in charge of training and running the network of budgetary control actors the budgetary controller and accounting officers in the central administration and the regional Directors of Public Finance in decentralised departments in regions The DirectorateGeneral for Public Finance DGFiP set up by the merger of the two major directorates in the Ministry for the Budget33 DirectorateGeneral for Taxes and DirectorateGeneral for Public Accounting takes practical actions at central and local level This DirectorateGeneral performs a series of taxationrelated tasks drawing up laws and rules on taxation on the land registry and title registration on the tax base the control of tax returns the collection of revenues etc and public management tasks keeping the accounts of the Government local authorities and their institutions and keeping the Governments cashflow accounts and deposit accounts of national public institutions and other legal or natural persons It manages the States centralised accounting function cf supra and is a key actor in the implementation of the new public accounting and of the certification process The regional Directors of Public Finance also ensure budgetary control and make up together with the budgetary controller and accounting officers the network of budgetary control officers led by the Budget Directorate cf supra The Interministerial Committee for Programme Auditing was set up in 2002 when the LOLF was implemented It was an interministerial auditing structure within the public administration Its mission was twofold on the one hand to assess for each programme the correct application of the principles stipulated in the LOLF and on the other hand to ensure the relevance and reliability of the information annexed to the draft finance laws that provides background for the debates and the Parliaments vote It was therefore responsible for assessing for each programme audited the area of the programme and the breakdown of appropriations per action the performance system objectives and indicators associated with the programme the operational diversification of the programme and the managerial dialogue the justification of appropriations from the first euro the cost analysis accounting per action The Interministerial Committee for Programme Auditing drew up an activity programme every year and used the resources of the general ministerial inspectorates for carrying out its missions The Parliament and the Court of Auditors received the audit reports the responses of the ministries and the Interministerial Committees opinion by virtue of their right to communication 33 In 2007 the Ministry for Economic Affairs and Finance was split into two separate ministries one responsible for the Budget and the other one responsible for Economic Affairs and Finance It was reunified in 2012 The Minister for Economic Affairs and Finance has a Minister of State for the Budget 130 Moreover it published an annual progress report which presented the main lessons learnt from its audit campaigns and its suggestions on the methods that should be implemented in order to improve service management under the LOLF and the quality of the information submitted in support of financial draft laws Ten years after the LOLF was adopted it was decided given the maturity of the performance measurement mechanism and the growing importance of internal ministerial audits to dissolve the Interministerial Committee for Programme Auditing and to entrust its tasks to the internal audit missions of different ministries coordinated by the Internal Audit Harmonisation Committee The Internal Auditing Harmonisation Committee is an interministerial body within the administration which guarantees the implementation of internal auditing policy throughout the State administration Set up by the Decree of 28 June 2011 the Committee which is under the supervision of the minister responsible for government reform consists of the managers of the eleven internal ministerial auditing teams a representative of the DirectorGeneral of Public Finance a representative of the Director of the Budget and three competent persons appointed by decision of the Prime Minister It has the following tasks drawing up the internal auditing reference framework in the administration and ensuring it is applied harmonising the ministries auditing methodology and disseminating good practices developing the internal auditing methodology relating to crosscutting functions examining the internal auditing policies of ministerial departments each year and making recommendations defining and planning the audits relating to projects and annual performance reports associated with ministerial programmes cf supra in relation to the Interministerial Committee for Programme Auditing The Internal Auditing Harmonisation Committee also guarantees the consistency and credibility of the internal auditing policy of all ministerial departments 224 The Parliaments role The Parliament decides on all appropriations Each mission is subject to vote The Members of Parliament can take the initiative to increase the appropriations of a programme provided that the total amount of the mission to which the programme belongs does not increase They can also create eliminate or modify a programme Parliamentary control also involves several other types of leverage monitoring the movements of appropriations during the year investigatory powers of the finance committees34 which allows them to carry out any types of investigations on specific items and on the spot and to organise any hearings deemed necessary precise definition of the mission to assist the Parliament entrusted to the Court of Auditors35 34 Article 57 of the LOLF 35 Article 58 of the LOLF 131 Parliamentary control is solid especially as exercised by the finance committees To ensure the effective and full implementation of the LOLF by the Government and authorities the finance committee of the National Assembly established a factfinding mission on the LOLF Since 1999 it performs several evaluation and control missions every year focusing mainly on the efficiency of public expenditure Within the Senate the special rapporteurs of the finance committee belonging to the majority and to the opposition publish an increasing number of control reports Moreover the Court of Auditors in its assistance mission cf infra contributes to the Parliamentary control of the implementation of budget laws in other words control of compliance with the budget authorisation voted by the two assemblies As such it submits to the Parliament a preliminary report on the implementation results from the previous year for the public finance guidance debate a report on the results of the previous financial year and on the budget management annexed to the draft budget review law and management report an explanatory report to the Parliament when the Government performs movements of appropriations which must be ratified by the following budget law advance decrees Since 2002 the Court of Auditors is bound to answer any assistance requests from the president and the rapporteur general of the finance committees of each assembly Moreover it has the obligation to carry out on their request any investigation on the management of services and to present its findings within eight months 225 The role of the Court of Auditors The Court of Auditors traditionally examines the accounts of public accounting officers and reports on the proper implementation of public expenditure It controls the regularity and the effectiveness of expenditure For this purpose it establishes the schedule of its controls independently from the Government and the Parliament In accordance with Article 472 of the Constitution the Court of Auditors must assist Parliament in monitoring Government policy This Article also states that it must assist Parliament and the Government in monitoring the implementation of budget laws and the application of laws on social security financing and in the assessment of public policies This assistance mission is formalised in the LOLF and in the similar law on social security36 The Court of Auditors is responsible for certifying the regularity the truthfulness and the faithfulness of State accounts of the accounts of national entities within the general scheme of the mixed accounts of branches and of collection operations within the general social security scheme This mission was assigned to the Court of Auditors by the LOLF in 2001 as regards the State and by the Organic Law governing social security financing laws as regards social security 23 The systematic control of legality within the State administration and the fight against fraud and financial irregularities Taking over in this connection the provisions of the 1962 General Regulation on Public Accounting Decree 20121246 of 7 November 2012 on budgetary management and public accounting sets out the control methods for budget operations In fact there is a systematic control on the authorising officers management and on the public accounting 36 Article 58 of the LOLF and Article 1VIII of the Organic Law governing social security financing laws of 2 August 2005 132 officers management The authorising officers management is controlled according to the rules specific to each public body by the Parliament qualified legislative bodies competent audit bodies and committees and the Minister of Finance The public accounting officers management is controlled according to the rules specific to each category of accounting officers by the Minister of Finance hierarchical superiors and the competent control bodies The management accounts they produce in their capacity as principal accountants are examined by a court of auditors either the national Court of Auditors or regional Auditors Divisions The Minister of Finance performs the controls mentioned above through the General Inspectorate of Finance and other bodies or agents authorised for this purpose by specific legislation The general inspection services or the inspection services specific to each ministry are responsible in particular within the public administration for the fight against fraud andor irregularities by means of financial inspections The general inspection services or administration inspection services have variable scopes of competence a central administration directorate and its network a whole ministry and in several cases an interministerial competence area According to the intervention area these services are assigned to the highest level of the organisation minister or directorgeneral The typical missions of the administration services in the field of financial inspections are performed in the case of the occurrence of an undesirable event leading to disciplinary sanctions or criminal penalties Financial inspection missions target primarily the rectification of major irregularities or malfunctions 3 A public internal control system built on the accounting and financial functions Any risk control measure only makes sense in relation to the objectives of the organisation The entry into force of the LOLF in 2006 enabled for the first time the systematic formalisation of the objectives of the administration The LOLF directs the legislator to adopt each year by budget laws the strategic objectives assigned to the Government on the whole and within the Government to each ministry The programme managers then assign the objectives to the manager of each operational programme budget BOP The accountability requirement presupposes that the programme managers the ministers and the Government are able to verify the fulfilment of the objectives set out in the budget law to justify the discrepancies found and to suggest corrective measures or the reconsideration of certain performance objectives Until recently the administrative culture and the management framework favoured external control actions on the one hand external control during the operations such as the control traditionally performed by public accounting officers or budgetary controllers cf infra on the other hand inspection activity which consists in carrying out isolated usually unexpected external controls in order to analyse rectify and if necessary sanction major irregularities or malfunctions The administration also has to ensure the strict application of the legal rules issuing for instance from general and special civil service regulations or from the Government Procurement Code Additionally automatic controls are performed for large computerised systems and procedural rules specific to public bodies or public practices are applied On this basis as part of the public management reform the development and implementation of an internal accounting and financial and more recently budgetary control system have been encouraged 133 31 An internal control system based on the accounting and financial processes in view of the certification of State accounts In order to ensure that State accounts can be certified with minimum reserves the Government encouraged the implementation of an accounting and financial internal control system and of the internal audit function associated thereto In order to assure the quality of the accounts presented by the State to its external auditor the Court of Auditors internal auditors evaluate according to the professional rules governing the practice of internal audit37 the existing accounting and financial internal control system or assist by means of advisory missions the functioning of the accounting and financial internal control system Within this framework the work relationship between external and internal auditors is regulated by standard ISA 61038 Internal control has thus been centred on the accounting and financial function at the initiative of the Directorate General for Public Finance as a part of its responsibilities related to the keeping of State accounts As such it is subject to the control of the Court of Auditors which has the responsibility to certify that the States accounts are legitimate truthful and reflect accurately its financial situation DGFiP services are present throughout the public administration in the central services of the ministries as ministerial accounting and budgetary control MABC services which are also functionally attached to the Directorate for the Budget as regards their competence as financial controllers and at decentralised level throughout the network of public accountants of the DGFiP39 By means of its network DGFiP leads and organises the accounting and financial internal control system throughout the State administration In partnership with the Secretaries General and the Directors of Financial Affairs MABC services implement control measures in the ministries assuring the accounting quality of the operations The accounting and financial internal control is formalised by standards that apply to the work process throughout the entire chain of expenditure and revenue In all ministries these standards are supported by a mapping of accounting and financial risks updated regularly by the relevant managers The application of these standards is subject to internal audit missions conducted by the DGFiP auditors40 often carried out jointly with the internal auditors of the relevant ministries On the whole the accounting and financial function was the first to be subjected to an internal control system in all ministries This situation results from the interministerial responsibilities of DGFiP as a partner of the Court of Auditors with relays in all ministries it was able to guide the establishment of accounting and financial internal control at interministerial level and to assist all ministries in its implementation 32 The extension of accounting and financial internal control to the budgetary area during the financial control reform The means of exercising financial control41 now described as budgetary redefined by the Decree of 7 November 2012 on budgetary and public accounts management are based on a balance between the managers responsibility and the control of his or her actions Its objectives focus on the identification and prevention of budgetary risks by 37 International rules on internal audit of The Institute of Internal Auditors 38 International Standard on Auditing ISA 610 Using the work of internal auditors 39 Within its own structure DGFiP also created two complementary systems of internal audit and risk control regulated by two circulars of the Director General of 30 July 2009 40 The DGFiP auditors form part of a national audit team and a local audit network at regional and departmental levels and are managed by the Risks and Audit team attached to the DirectorGeneral for Public Finance The audit tasks of the DGFiP are supervised by an audit committee 41 Decree No 200554 of 27 January 2005 on financial control in State administrations 134 ensuring that the State and its representatives responsible for expenditure make commitments within the limits and conditions sustainable by the budget now and for the future in compliance with Parliaments authorisation The controller guarantees a priori that budgetary planning is consistent and sustainable at its different levels ie the programme and the operational programme budget BOP and that it falls within the limits of Parliaments authorisation secures budget implementation by ensuring an accounting followup of the ministrys commitments and either a priori or a posteriori control of the main documents and procedures leading to expenditure commitments informs based on analyses all the stakeholders namely the minister responsible for the expenditure the Minister for the Budget and Parliament on the levels and determinants of expenditure and if necessary participates in regulating it serves as an adviser to the budget manager by offering clarifications and guidance in the framework of the control dialogue The financial control reform was conceived with the aim of developing internal budgetary control Instead of a control performed systematically during the operations which may slow down the implementation of expenditure and consequently affect the efficiency and the effectiveness of public action financial control encourages the authorising officers to equip themselves with tools and methods in order to control their operations Under the supervision of the financial controller they perform the controls themselves on the basis of a risk analysis of budgetary sustainability The budgetary function is thus subject to a process similar to the accounting function The Directorate for the Budget has embarked on the introduction of a budgetary internal control system in all ministries A budgetary audit and internal control service MACIB placed under the functional authority of the budget director is charged with disseminating budgetary internal control standards and the risk management system for the State budget Like accounting internal control the budgetary controller and accounting officers which for every ministry play the role of budgetary controller on behalf of the Directorate for the Budget guide its implementation Budgetary internal control is intended to complement the accounting internal control in order to ensure operational control all along the expenditure chain from planning to payment 4 Extension of risk management to all public policies After having been developed in relation to the accounting and financial function and then extended to the budgetary area the Decree of 28 June 201142 extended the scope of internal control and internal auditing of the State to all the functions and professions within the ministries The aim is to ensure a relevant and consistent development of the States internal control and internal audit policy by means of better risk management Risk control henceforth an essential issue of public management in France The implementation of the LOLF as well as the need to control risks in all public policy sectors requires the deployment of an effective internal control and internal audit system For this purpose an internal control and internal audit system has been implemented in each ministry that is adequate for its missions and structure of services and which aims at ensuring the control of risks related to the management of the public policies under its responsibility 42 Decree No 2011775 of 28 June 2011 on internal auditing in the State administration 135 41 An internal audit system within the State administration in accordance with international standards Based on a solid internal control environment the French administration decided in 201043 to implement a global internal State audit policy in pursuit of three major objectives strengthening the internal control systems in each ministry under the coordination of the SecretariesGeneral in order to ensure the control of risks related to the management of the public policies under the ministrys responsibility organising ministerial internal auditing creating an Internal Auditing Harmonisation Committee under the authority of the Minister for State Reform in order to guarantee the credibility and consistency of the States internal audit policy and its implementation cf supra Decree No 2011775 of 28 June 2011 on internal auditing in the administration prescribed in the Prime Ministers circular of 30 June 2011 introduced across the board internal auditing for all professions and functions in ministries making it compulsory for each ministry to have a risk control system based on internal control and internal audits The Internal Auditing Harmonisation Committee added to these provisions in 2013 by adopting and publishing a code of ethics for the States internal auditors together with qualification and operating standards for internal audits based on the best international practices and complying with the international standards for professional practice set down by the Institute of Internal Auditors IIA in its International Professional Practices Framework 42 Internal auditing by ministries based on a common framework The Prime Ministers circular of 30 June 201144 sets out the common principles of organisation and operation that guarantee overall consistency an internal audit function attached to the highest level of the organisation and functionally depending on the ministerial internal audit committee an independent ministerial internal audit committee charged with monitoring the ministrys overall audit policy a ministerial internal audit mission placed under the authority of a ministerial internal audit manager an internal audit chart defining the functions scope of competence and the activity of the internal audit mission Each one of the eleven ministerial internal audit missions operates in conjunction with the following an internal audit committee tasked with defining the ministrys internal audit policy and ensuring the quality of the internal control and risk control arrangements The guarantor of the independence of the internal audit function it approves the ministerial audit plan and takes the followup action decided upon after the audits Presided over by the minister the committee consists of a small number of members chosen mainly from people outside the ministry or not having operational responsibilities in it 43 Decision of the 4th Public Policy Modernisation Council of June 2010 44 Prime Ministers circular No 5540 of 30 June 2011 136 A ministerial internal audit mission competent to deal with all public policies professions and functions the manager of which is a full member of the Internal Auditing Harmonisation Committee Reporting directly to the minister it is responsible for drawing up the ministerial internal audit plan using a riskbased analysis carrying out or organising planned quality assurance and advisory missions ensuring the dissemination of good practices within public bodies and agencies coming under the aegis of the ministry issuing recommendations in this respect and where necessary arranging audits The general application of this risk control approach to all public policies is one aspect of the government reform and modernisation of public policy which France has been carrying out for a number of years 137 GERMANY Public internal control 45 The country did not propose an update for this edition of the Compendium 1 Brief history of the public internal control PIC system 2 Public internal control environment 21 Budget The German budget which is drawn up every year by the Federal Ministry of Finance and passed by the German Bundestag contains all Germanys revenue expenditure and commitment appropriations budgetary funds for a specific calendar year The 2011 budget is divided into 22 sections 178 chapters and 6 542 headings of which 986 relate to revenue and 5 556 to expenditure The inclusion of expenditure in an expenditure heading means that the administration is authorised to make payments to third parties during the current financial year If the administration is already authorised in the current financial year to make commitments of payments in future financial years commitment appropriations must also exist for each of the expenditure headings in question The budget does not contain any targets for the administration No products are generated No kind of performance budgeting whatsoever takes place 22 Basic features of managing budgetary funds Management is carried out on the basis of the headings At the beginning of the budgetary year the Federal Ministry of Finance makes the budgetary funds for each heading available in its central IT system to the supreme federal authorities responsible for a specific section ie the constitutional authorities Federal President Bundestag Bundesrat Federal Constitutional Court the Federal Chancellery and the ministries The authorised budget officers of the supreme federal authorities distribute the funds as far as possible and necessary to subordinate authorities and also to other bodies within the supreme federal authority Funds can be distributed in several steps with each heading finally having at least one heading administrator who is authorised to use the commitment appropriation assigned to him when implementing the budget or make disbursements There are over 8 000 heading administrators for the federal budget Under Section 70 of the Federal Budget Code BHO payments can be accepted or made only by the cash and payment offices The heading administrator must therefore issue instructions to a federal cash office for all receipts and payments by means of a written or in most cases electronic payment order The federal cash office checks whether the 45 Contribution of the Federal Ministry of Finance This contribution relates to the federation only 138 payment order has been filled in correctly and signed by authorised persons whose signatures are recorded there It books the payment in the central federal IT system Almost all payments are processed through federal accounts held at the German Federal Bank The Federal Ministry of Finance and its authorised offices such as the federal treasury offices have sole access to the accounts unlike an administrator distributor of funds or heading administrator from a federal authority with budgetary funds at his disposal When creating a payment order it is necessary to observe the dual principle ie two people must always be involved The federal cash offices are monitored by the cash office supervisory authority which is an independent body belonging organisationally to the Federal Centre for Cash and Accounts The cash office supervisory authority checks the federal cash offices without prior warning 3 The concept of public internal control 31 Managerial accountability Top managers assume their responsibility for establishing an adequate internal control system by setting up and supporting an organisational control unit called the Interne Revision hereafter internal audit Managerial accountability is carried out by the head of the authority The internal audit unit reports directly to the management which cannot transfer its competence to other offices in the authority Under Section 9 of the BHO an authorised budget officer is to be appointed for every department that manages revenue and expenditure in so far as the manager of the department does not perform this task himself The authorised officer is to report directly to the head of the department The authorised budget officer must draw up the financial planning documents and the documents for drafting and executing the budget He is to be involved in all financially significant measures He can delegate tasks involved in executing the budget and is also responsible for reporting The management can establish which specialist departments are to be entrusted by the authorised budget officer with managing budgetary funds As a rule the amount of expenditure an authority can devote to each purpose is already laid down in the budget The management normally delegates the decision on which specialised departments can make payments and the volume of these payments to the authorised budget officer Please refer to the explanations in the following section for the objectives of the internal control system internal audit Internal audit covers all the aspects mentioned above The management of the authority always determines the focus of the audits It is not possible to monitor all the ongoing financial decisions in the authority The internal audit unit always performs its monitoring on a selective and random basis only 32 Internal audit Internal audits are carried out in all departments of the federal administration There is no legal basis but all departments follow the Recommendations for internal audits in the 139 Federal Administration produced by the Federal Ministry of the Interior in agreement with the other ministries The internal audit unit does not take instructions from top management when drawing up audit reports After completing an audit it immediately submits the final audit report to the management of the directly superior authority On the basis of a threat or risk analysis relating to the authority and taking into account the costbenefit ratio the internal audit unit draws up a catalogue of audit topics on which it bases its audit plan It then submits this plan to the management for approval The internal audit does not accept duties that are outside the scope of internal audit but fall under managerial responsibility including rules to solve conflicts of interest The internal audit unit takes suitable measures to ensure the quality of its work These can include taskspecific basic and further training the exchange of experiences with other internal audit units and observing other internal audit units The relevant ministries ensure the exchange of internal experiences while the Federal Ministry of the Interior ensures the exchange of crossministerial experiences There is no public certification procedure Audits can take the form of rulebased audits inventory audits systembased audits especially motivated audits inspection audits checking whether previous instructions and recommendations have been implemented Depending on their focus the audits are carried out according to the following criteria in particular legality correctness security costefficiency durability usefulness effectiveness and impact The management decides how the internal audit units recommendations are to be implemented The auditee itself is responsible for implementation 33 Internal audit relations with external audit There is no relationship between the two Internal audit is an instrument whose purpose is to support management in assuming its overall responsibility The Federal Court of Auditors and its audit offices carry out external audits independently of the internal audit units As a rule the Federal Court of Auditors has no knowledge of the results of the internal audit units work 34 Audit boards or audit committees There are no audit boards and audit committees in Germany Clearly bodies of this type have not been considered necessary up to now 35 Coordination of public internal control Each authority has only one internal audit unit There are no other units acting as central coordination or harmonisation units in dealing with questions of public internal control 4 Financial Inspection There is no financial inspection department in Germany 5 Ongoing andor future reforms No concrete reforms are being considered 140 GREECE Public Internal Control 1 Brief history of your present public internal control systems Control of public expenditure is carried out by the Executive National Administration the Judiciary Court of Auditors and the Legislature parliament approves the state budget and ratifies the state final report and balance sheet Control by the Executive is carried out under Basic Law No 23621995 on Public accounting and control of state expenditure At administrative level control of expenditure comprises internal control by the authorising officer 1st stage financial control by the Financial Control Services of the Ministry of Finance a body independent of the agency that carried out the expenditure 2nd stage and ex ante control by the Court of Auditors which approves payment of the expenditure 3rd stage in the framework of administrative internal control The rapid developments of recent years with the devolution of central government powers to the regions and the new organisational structure of local government and legal Major changes in 20112013 The update of our original contribution to the Compendium of Public Internal Control Systems in the 27 EU Member States which outlines the situation in Greece in 2011 shows the following substantive changes 1 Following the amendment of Law 349206 by Law 408112 The Supervision Committee and the Objection Committee have been merged to form the Audit Coordination Committee ensuring flexible operation of the DirectorateGeneral and the principle of independence in accordance with international auditing standards One of the Audit Coordination Committees tasks is to assess whether to conduct extraordinary audits other than those carried out at the request of the European Commission or by order of the public prosecutor Section 31 PIC Internal Audit Units are to be set up by joint ministerial decision and not by the lengthy process of issuing Presidential Decrees and provisions have been laid down concerning their responsibilities and staffing Section 32 PIC 2 a In 2012 the DirectorateGeneral of Fiscal Audits officially began its audit activities and in 2013 audits were carried out in accordance with the provisions of Law 349206 as amended Section 5 b The process has already begun of setting up Internal Audit Units in the countrys Ministries Decentralised Administrations and the bodies supervised by them Section 5 c There is to be a Single Accounting Plan for General Government with a view to uniform accounting for the bodies of General Government Section 5 141 entities under public law and public undertakings and organisations which receive substantial resources in the form of funding or grants the management of which has to be controlled by the Finance Minister have resulted in the need to reform the public expenditure control system At the same time there was also a need to organise public accounting operations by putting into effect the Public Accounting Plan which was done by Law No 236295 aimed at establishing the doubleentry bookkeeping system the standardisation of public accounts the valuation of public assets and the preparation of financial statements Following all this on the initiative of the Ministry of Finance an ad hoc committee was set up within the State General Accounting Office to submit proposals to reform the public expenditure control system 2 Public internal control environment Law No 38172010 on Financial management and accountability amended and supplemented the provisions of Law No 236295 setting out the new public internal control environment Specifically with regard to state budget issues The State General Accounting Office a draws up the MediumTerm Fiscal Framework for each financial year and any updates thereof which is submitted by the Finance Minister to parliament for approval and contains the mediumterm financial objectives and targets regarding general results and forecasts for the year and the next three years a summary of the main policy measures being examined for the annual budget and a statement of the principal sources of risk to the financial standing of general government b establishes the draft annual state budget which is submitted by the Finance Minister to parliament for approval and contains specific proposals for the appropriations for the bodies of general government central government first level and secondlevel local authorities and social security bodies and monitors its implementation c draws up the states final report and balance sheet and the other financial statements of central administration Ministries Devolved Administrations and Independent Authorities which are submitted by the Finance Minister to parliament for approval The state budget is normally prepared on a cash basis ie it shows expenditure made and revenue received over the financial year All public financial transactions of general government revenue and expenditure are structured and classified in the same category for both the budget and the accounting These classifications which correspond to accounts in the accounting plan are structured in a way that ensures the comprehensive presentation of all revenue and expenditure in the annual state budget As regards accounting systems the State General Accounting Office manages the general governments accounting system known as the General Government Accounting Plan a system which aims to account for central governments transactions in a homogeneous way to give a true picture of its financial and asset structure to assess its creditworthiness and to extract reliable data to simplify and facilitate all forms of control 142 The General Government Accounting Plan is established by Presidential Decree No 152011 as doubleentry bookkeeping in accordance with adjusted cashbasis accounting the system based on the principle of accrual of revenue and expenditure The balance sheet the statement of financial performance the statement of the change in the net worth of citizens and the cashflow statement are drawn up in line with the rules on doubleentry bookkeeping and in accordance with the principles of adjusted cashbasis accounting The central accounting system of the central administration shows all the expenditure and revenue managed by the State General Accounting Office and the receipts and payments of local tax offices DOY relating to tax policy In the framework of external control all public expenditure of local authorities and other legal entities under public law and their revenue are subject to control by the Court of Auditors 3 The concept of public internal control PIC in the national administration of Greece Law 34922006 Government Gazette Series I No 210 of 51006 instituted the organisation of a control system to safeguard sound fiscal management of the State Budget and of agencies not included in the State Budget The aforementioned law defines an internal control system as the overall system of managerial and other controls including controls of the organisational structure methodologies procedures and internal audit implemented by the Administration on the operations of an agency in order to support the pursuit of its objectives in an efficient effective and economical manner The internal control system ensures compliance with Administration policies it safeguards the agencys assets and resources by certifying the completeness and accuracy of accounting documents and it provides timely and reliable information on healthy sound fiscal management 31 Managerial accountabilityresponsibility A DirectorateGeneral of Fiscal Audits was established by virtue of the aforementioned Law at the Ministry of Finance Its mission is to safeguard sound fiscal management of the State Budget and of agencies not included in the State Budget as determined in a joint decision issued by the Minister of Finance and the competent Minister as required In order to realise its mission the DirectorateGeneral of Fiscal Audits a employs staff with increased formal and substantial qualifications b uses methods and models applied by international audit bodies c carries out audits on the management of agency budgets in order to determine if the amounts granted to these agencies are used for the purposes for which they were approved if the fiscal provisions in force are observed when expenditures are made if the necessary measures for ensuring the collection of revenues are taken and if revenues are collected and appear in accordance with provisions in force on management and control systems in order to determine their adequacy d takes or recommends appropriate measures for improving the management and control systems of bodies in order to contribute to protecting their financial 143 interests to the lawful and effective management of their expenditures to combat fraud bribery and any other illegal activity e imposes the sanctions provided by law f cooperates with corresponding services of all other states and particularly those of the European Union in regard to issues related to its responsibilities g prepares an annual control report containing the conclusions and evaluations of its audits this report forms the basis for the provision of adequate assurances to the Minister of Finance or for the expression of reservations in regard to part or the whole of the state fiscal management and control system The DirectorateGeneral of Fiscal Audits comes under the General Secretariat of Fiscal Policy of the Ministry of Finance the Secretariat is headed by the Secretary General of Fiscal Policy who holds political office The Secretary General of Fiscal Policy supervises the DirectorateGeneral of Fiscal Audits and has the following responsibilities a heshe is responsible for the successful carrying out of the mission of the DirectorateGeneral of Fiscal Audits b heshe guarantees the integrity effectiveness objectivity and validity of the audit carried out by the DirectorateGeneral of Fiscal Audits as well as safeguarding the confidentiality of information received during the audit c heshe supervises and directs the personnel employed by the Directorate General of Fiscal Audits d heshe takes or recommends appropriate measures for the protection of financial interests for the lawful and effective management of expenditures for combating fraud bribery and any other illegal activity e heshe prepares and submits the annual control report of the Directorate General of Fiscal Audits The DirectorateGeneral of Fiscal Audits includes three Directorates established by the aforementioned law Directorate for the audit of ministries public law bodies and 1st 2nd degree local authorities Directorate for the audit of entities providing health and social solidarity services public corporations and organisations legal entities of private law and other entities Directorate for support and communication Under Law 408112 which amended relevant provisions of Law 349206 an Audit Coordination Committee is established within the DirectorateGeneral of Fiscal Audits comprising the Head of the DirectorateGeneral of Fiscal Audits as chair the Heads of the above Directorates the Head of the Directorate of Coordination and Control of Application of Financial Provisions and two persons from the public or private sector with experience in audit matters The above Committee henceforth takes the role of the Supervision Committee and the Objection Committee set up under Law 349206 The Audit Coordination Committee has the following main responsibilities a recommending for approval by the Minister of Finance of methodological tools for the audit procedures of the DirectorateGeneral a approving the annual audit schedule c monitoring the progress of audits 144 d evaluating the audit work e approving the annual audit report f recommending the taking of additional measures in cases of noncompliance of audited parties with the recommendations of auditors g submitting recommendations to the Minister of Finance or any other competent Minister for the improvement of management and control systems h monitoring and evaluating investigations to combat fraud and recommending measures to render these investigations more effective i examining objections submitted by audited bodies against the audit report j assessing the need for extraordinary audits other than those carried out at the request of the European Commission or by order of the public prosecutor Through its Directorates the DirectorateGeneral of Fiscal Audits achieves the objectives of its mission for preparing and carrying out audits in order to achieve substantial conclusions and appropriate recommendations for taking corrective measures in order to improve management and control systems and to provide adequate assurance for part or the whole of the states fiscal affairs The position of Head of the DirectorateGeneral of Fiscal Audits Secretary of Fiscal Policy is filled by an employee of university education of the fiscal sector of the State General Accounting Office with at least three years of audit experience The positions of the Heads of the above Directorates and Departments are filled by employees of university education of the Fiscal Engineering Geotechnical and IT sectors of the State General Accounting Office The personnel of these Directorates includes employees of the Fiscal Engineering Geotechnical IT and Translation sectors of University or Technological education Fiscal audits are conducted by order of the Head of the DirectorateGeneral of Fiscal Audits and include routine audits based on an annual schedule prepared under care of the Directorates by the DirectorateGeneral and approved by the Audit Coordination Committee and extraordinary audits which are conducted following complaints or a request by the European Commission or an order by the competent public prosecutor The fiscal auditors are responsible for a checking the adequacy of a bodies management and control systems b checking the legality and regularity of expenditure the sound management of resources and the correct collection of revenue by the bodies as well as their asset management and detection of abuse waste or corruption c checking the wages of the bodies staff d assessing the programming for and performance of the bodies projects e verifying that the bodies have adhered to management rules f assessing performance of the audited body g checking the handling of imprests and public administrators If the fiscal auditors over and above the scope of their audit become aware of any risk to the financial interests of the audited body or detect and practices which may incur criminal liability they must inform the Head of the DirectorateGeneral of Fiscal Audits of these additional elements It there are any indications that a tax infringement has been committed they must inform the competent tax authorities for checks to be carried out If they identify any unduly or unlawfully paid amounts on which preventive checks have been carried out by the Court of Auditors the Head of the DirectorateGeneral must 145 inform the Court of Auditors thereof This may lead to the certification of the expenditure being revoked or recovery being sought from those responsible After the audit has been conducted fiscal auditors prepare an audit report and submit it to the competent audit Directorate which having checked the completeness of the report certifies it and notifies it to the audited body as well as to individuals against whom unduly or unlawfully paid amounts are sought or who may bear disciplinary or criminal liability The audited bodies and the aforementioned individuals have the right to submit objections against the audit report The Audit Coordination Committee examines and decides whether to accept or reject the said objections if the objections are rejected and Financial Corrections must be imposed a recovery order to that effect is issued and signed by the Head of the DirectorateGeneral of Fiscal Audits If no objections are submitted and the audit report imposes fiscal corrections a recovery order to that effect is issued per level of hierarchy auditorHead of DepartmentHead of DirectorateHead of DirectorateGeneral depending on the amount imposed If the body competent for issuing the recovery order disagrees with the conclusions of the audit report this dispute is resolved by the Audit Coordination Committee and a corresponding act is signed by the Head of the DirectorateGeneral of Fiscal Audits Recovery orders are notified to interested parties in accordance with the Code of Administrative Court Procedure The competent Directorate of audits notifies the audit report any objections the decision by the Audit Coordination Committee and the recovery orders to the Directorate of Support and Communication so that the latter may monitor the compliance of bodies and the implementation of measures taken The Directorate in question evaluates the implementation measures taken by the bodies in compliance with the findings of the auditors and notifies the Audit Coordination Committee on taking additional measures in cases of noncompliance The above are included in the annual control report prepared by the Directorate of Support and Communication and approved by the Audit Coordination Committee 32 Internal audit Law 34922006 defines internal audit as the independent auditingconsulting activity providing assurance on the adequacy of a bodys management and control systems aiming at improving its operation and achieving its objectives using systemic and structured methodologies that mainly aim at improving the effectiveness of the processes that govern its operation risk management processes and control processes The aforementioned law instituted the establishment of Internal Audit Units in all Ministries and Devolved Administrations of the country and in the bodies supervised by them with a budget of over three million euros Law 40812012 updated the provisions concerning the establishment of the Internal Audit Units stipulating a that they be established by joint decision of the Ministers for Administrative Reform and eGovernance Finance and the appropriate Minister in each case b that they answer directly to the relevant Minister or the relevant Head of Devolved Administration c that they be staffed from the existing staff of the corresponding body and d their responsibilities in the above definition of internal audit With regard to the work of the internal audit units the aforementioned law provides for a responsibility for imposition of Financial Corrections by the internal audit unit of each body in cases where individual or systemic irregularities are identified in the services of the body or the services supervised by that body provided those bodies do not have an internal audit unit b in addition to the auditingadvisory responsibilities and additional responsibilities provided for by the above definition 146 1 routine audit of imprests 2 financial management audit of public administrators and public management 3 carrying out of sworn administrative investigations regarding the loss of supporting documents for the payment of public expenditures 4 investigation into the failure to present an advance payment order These were formerly the responsibilities of the Financial Inspectorate of the Ministry of Finance They were transferred to the DirectorateGeneral of Fiscal Audits and will be transferred to the internal audit units once they begin operating c the basic relationships process flowchart between the DirectorateGeneral of Fiscal Audits and the internal audit units of Ministries and Devolved Administrations Specifically the DirectorateGeneral of Fiscal Audits formulates standards and methodologies for the management and internal audit systems of the Ministries Devolved Administrations and other bodies which must be fully implemented by the internal audit units receives information from internal audit units in regard to audit findings provides directions to internal audit units in regard to the imposition of fiscal corrections and monitors the execution of such corrections provides instructions to internal audit units in regard to the evaluation of corrective measures taken by the audited bodies and monitors their accurate implementation evaluates audits and findings by internal audit units and includes them in its annual control report In line with the Standards and Methodologies of Internal Audit Units drawn up by the DirectorateGeneral of Fiscal Audits their responsibilities are analysed to enable them to complete their task of providing assurance on the adequacy of the management and control systems of the body and putting forward proposals for measures to improve those systems to ensure that the body functions efficiently There are also guidelines on the Code of Conduct for the Internal Audit Unit auditors the Strategy and Planning of Audits Conducting Audits and Followup to Audit Results Other internal audit services InspectorsAuditors Body for Public Administration SEEDD SEEDD was established by virtue of Law 24771997 and was upgraded by Law 30742002 SEEDDs mission is to safeguard the proper and effective operation of public administration by identifying phenomena of maladministration nontransparent processes ineffectiveness and poor quality services The main responsibilities of SEEDD include carrying out inspections audits and investigations carrying out disciplinary prosecutions and referring the individuals responsible to the competent public prosecutors office so that accountability is attributed carrying out audits on the assets of the employees of audited bodies carrying out preliminary examinations or investigations at the request of the public prosecutor collecting evidence for criminal or disciplinary prosecution 147 The scope of SEEDD audits covers Public Services Legal Entities of Public Law 1st 2nd degree Local Authorities state Legal Entities of Private Law and Public Enterprises SEEDD is headed by the Special Secretary of the Inspectors Body of Public Administration who holds political office SEEDD is staffed by 80 inspectorsauditors and employees of the Secretariat Directorate and carries out audits and investigations following orders independently issued by the Special Secretary or following orders by a Minister Secretary General of a Region the General Inspector of Public Administration the Greek Ombudsman or the head of an Independent Administrative Authority The General Inspector of Public Administration The Authority of the General Inspector of Public Administration was established by virtue of Law 30742002 Its mission is to safeguard the proper and effective operation of public administration to monitor and evaluate the work of the InspectorsAuditors Body for Public Administration and all particular Bodies and Services for the Inspection and Control of Public Administration and to identify cases of corruption and maladministration The General Inspector of Public Administration on his own initiative orders SEEDD and particular Inspection and Audit Bodies to carry out inspections audits investigations on Public Services Legal Entities of Public Law 1st 2nd degree Local Authorities state Legal Entities of Private Law and Public Enterprises monitors the action and progress of audits carried out by SEEDD and particular Inspection and Control Bodies and evaluates their work carries out audits repeat audits and investigations into Public Services Legal Entities of Public Law 1st 2nd degree Local Authorities state Legal Entities of Private Law and Public Enterprises carries out audits on the annual financial statements of all inspection and control bodies investigates complaints concerning instances of maladministration presides over the Coordinating Body for Inspection and Audit The post of General Inspector of Public Administration is assigned to a distinguished individual of broad public acceptance who is assisted by four assistant General Inspectors of Public Administration and supported by eight special inspectors and the Secretariat Directorate 33 Coordination of public internal control The Directorate General of Fiscal Audits of the State General Accounting Office which falls under the General Secretariat of Fiscal Policy of the Ministry of Finance is mainly responsible for coordinating public internal control Its Directorates will be responsible for carrying out its audit work including internal audit procedures of the audited bodies and an evaluative assessment thereof The conclusions of its checks the evaluation of its findings and the assessment of the work of the internal control teams together with the relevant recommendations are contained in the Directorate Generals annual report This report forms the basis for the provision of adequate assurances to the Minister of Finance or for the expression of reservations in regard to part or the whole of the state fiscal management and control 148 system The annual audit report for a given year accompanies the General State Budget for the second following year In addition the DirectorateGeneral of Fiscal Audits prepares and submits to the Prime Minister the Speaker of Parliament and the Ministerial Council an annual report on the main findings of the auditors evaluates the work of the audit bodies and makes proposals on how to improve the way they operate and their performance 4 Financial inspection I Through the aforementioned law the Directorate of Inspection of Public Management Legal Entities and Public Enterprises and Organisations of the DirectorateGeneral of Financial Inspection of the Ministry of Finance is renamed as Directorate of Inspection of Management of National Endowments with the main competency of carrying out controls on National Endowments The other competencies of the former Directorate of Inspection of Public Management Legal Entities and Public Enterprises and Organisations concerning the carrying out of inspections on Public Enterprises Legal Entities of Public and Private Law as well as Public Enterprises Organisations are transferred to the Directorate General of Fiscal Audits A Directorate for the Supervision of Internal Audits was established within the Directorate General of Financial Inspection of the Ministry of Finance in 2008 and has been operating since that year Its mission is to monitor evaluate and redefine if necessary the Internal Audit and Administrative Hierarchical Audit systems of the Services of the Ministry of Finance This Directorate carries out controls on all services of the Ministry of Finance as these controls are carried out through its internal auditors who have no hierarchical or other independence on the services and individuals being controlled the independence of the controls of the Financial Inspectorate is guaranteed ΙΙ Financial and Economic Crime Unit SDOE The Financial and Economic Crime Unit is a special audit service of the Ministry of Finance that was established in 1995 through Law 234395 Its main mission is to combat tax evasion smuggling financial and economic crimes fraud violations and unlawful acts under the competency of the Ministry of Finance that were carried out against the economic interests of the Greek State By virtue of Presidential Decree 1571997 this units activity was expanded to cover economic and financial crimes carried out against the economic interests of the European Union at the same time its mandate included other crimes such as counterfeiting public procurements unlawful stock exchange activities etc By virtue of Law 32962004 SDOE was renamed Special Audit Service and provisions for this Service organisation were instituted by Presidential Decree 852005 Law 38242010 renamed the Special Audit Service back to Financial and Economic Crime Unit SDOE keeping its current competencies and providing for specific interventions to combat tax evasion and to recover assets gained from criminal activities Currently the mission of SDOE includes investigating identifying and suppressing financial and economic interventions carrying out preventive controls on the application of taxation provisions investigating exposing and combating unlawful transactions carried out with the use of electronic means preventing pursuing and combating other provisions narcotics weapons hazardous substances antiquities 149 monitoring the countrys marine space in order to combat tax evasion and smuggling protecting the coastline and public property from unauthorised encroachment SDOE is headed by a Special Secretary who holds political office and staffed by 1 200 employees who are distributed among the three Directorates of the Central Service the Directorates for Special Cases in Athens and Thessaloniki and thirteen regional Directorates throughout the country SDOE activities include carrying out daily audits investigating complaints lodged by citizens providing aid during audits at the request of other ministries carrying out audits at the request of public prosecutor investigations executing operational plans on the basis of the correlations of the General Secretariat for Information Systems as well as targeted interventions 5 Ongoing andor future reforms As part of the management of public expenditure the General Government Accounting Plan was implemented for the first time in 2011 The balance sheet the statement of financial performance the statement of the change in the net worth of citizens and the cash flow statement are drawn up in line with the rules on doubleentry bookkeeping and in accordance with the principles of adjusted cashbasis accounting As regards the General Government Accounting Plan the doubleentry bookkeeping system will continue to be used to prepare the balance sheet the final report and the financial statements in accordance with the relevant presidential decree in each area Implementation of the Single Accounting Plan for all General Government bodies has been included in the ERP with funding from the NSRF Once the General Government Single Accounting Plan has been completed the existing presidential decrees will be replaced with a view to establishing uniform accounting within General Government A Working Group was set up recently including external experts to monitor and examine the adoption in General Government accounting systems of IPSAS International Public Sector Accounting Standards and their conversion to ΕPSAS European Public Sector Accounting Standards Public Internal Control PIC procedures as described in detail in section 3 above started in 2012 and the DirectorateGeneral of Fiscal Audits was officially launched on 1 November 2012 In order to set up the new control approach in 2013 a the institutional framework of the scope of Law 349206 was established b all the methodological tools provided for in that Law Rules on Operation Financial Corrections Conducting of Audits Investigations and Code of Conduct for Fiscal Auditors were completed c the annual programme of routine audits for the year 2013 was drawn up based on a risk analysis in line with the method and procedure laid down in the Rules on the Conducting of Audits and Investigations of the DirectorateGeneral of Fiscal Audits d a circular on Standards and Methodologies of Internal Audit Units of the Ministries Devolved Administrations and Other Bodies was drawn up and sent to all relevant bodies In addition Law 41512013 improved the Public Internal Control PIC management and control system through measures such as a setting up the Directorate for Extraordinary Fiscal Matters which is added to the list of Directorates of the Directorate General of Fiscal Audits see section 3 above to deal with the extraordinary fiscal actions and audits of the Financial Inspectorate formerly under the responsibility of the DirectorateGeneral of Fiscal Audits b determining the duration of the term of office of 150 the Fiscal Auditors of the DirectorateGeneral of Fiscal Audits c establishing and maintaining the Register of Fiscal Auditors and the Register of Financial Control Experts and the inclusion of public officials and experts in that register In 2013 the DirectorateGeneral of Fiscal Audits developed auditing activities concerning the conducting of a twelve routine audits based on the annual programme on bodies selected by risk analysis b forty extraordinary audits by order of the public prosecutor or at the request of the political leadership c thirtynine targeted audits concerning compliance with the Commitments Register As regards the Internal Audit system the DirectorateGeneral of Fiscal Audits has sent the circular on Standards and Methodologies of Internal Audit Units of the Ministries Devolved Administrations and Other Bodies to all relevant bodies and the process of setting up the Internal Audit Units in those bodies has begun Their establishment will contribute significantly to the system of management and control 151 HUNGARY Public internal control 46 46 Contributed by the Ministry for National Economy of Hungary Summary of major changes in 20112013 Regulatory background changes The Act No XXXVIII of 1992 on public finances PFA has been replaced by Act No CXCV of 2011 on public finances new PFA The simplification process of the PFA resulted that a lot of regulations have been delegated to government decree level The PFA regulates the public internal control system but the implementation and other detailed rules were in two separated government decrees these two decrees were merged into one simplified one Government Decree No 3702011 XII 31 on the public budgetary organisations internal control system and internal audit PBOICS As the result of implementation Council Directive 201185EU of 8 November 2011 on requirements for budgetary frameworks of the Member States some regulations of the PFA and the PBOICS is widened to all organisations belonging to the government sector Since 1 January 2012 the Government Control Office of Hungary regulated by Government Decree No 3552011 XII 30 which is brought a significant change the GCOs procedures now are separated from the procedural rules relating to internal audit New Ministry for National Economy decree No 282011 VIII 3 regulate the PBOs internal auditors registering process and the PIFC training commitment for internal auditors heads and financial managers of public budgetary organisations The crucial part of the accountability is publicity and transparency The publicity rules are based on Act No CXII of 2011 on the right of informational self determination and freedom of information Internal audit manual internal audit standards internal control standards code of ethics and guidelines for the annual audit plan has been updated and new guidelines were issued as guidelines for monitoring guidelines for report on implementation of action plans guidelines for preparation of EU audit on EU funds Functional changes Budgetary supervisor activity Fight against corruption New anticorruption programme Coordinated ethical rules The Green Book Open Government Partnership Strengthened system for whistleblowers International cooperation with the UNs implementation review group The structure of curriculum at vocational trainings changed due to changes in regulatory background 152 1 Brief history of the public internal control system The roots of the Hungarian regulation of the public control system go back to 1989 This was the date of the establishment of the State Audit Office SAO the Hungarian supreme audit institution SAI The next milestone was in 1992 when the parliament accepted the Act No XXXVIII of 1992 on public finances PFA The PFA describes the framework of the budgetary system the main procedures of planning and implementation of the budget the rules of establishing supervising and functioning of the public budgetary organisations PBOs In the first years there was no change concerning the cash management of the PBOs the functioning of the decentralised system continued In 1995 in order to decrease the needs of external financing and to ensure the transparency of public finances the parliament created the Hungarian state treasury hereinafter the treasury The treasurys main role was to ensure the centralised man agement of the public finances As a result of the accession negotiations and as a part of the legislative and amendment process the PFA was amended with provisions concerning the budget auditing only in three articles and its implementation was regulated by the Government Decree 151999 II 5 The scope of the regulation included the government inspections and supervisory audits and the internal audit system of public budgetary organisations The internal audit system of public budgetary organisations had three components managerial control ongoing controls and the independent internal audit At this stage the regulation did not meet completely with the requirements of the European Commission The financial audit department within the Ministry of Finance MoF was established in 2000 and it was the precursor of the later central harmonisation unit The establishment of the new public internal financial control system PIFC in compliance with the new terminology was a result of the recommendation of the European Commission Accession Negotiations Chapter 28 Financial Control and of the proposal of the national audit bodies The Hungarian PIFC Development Strategy hereinafter the policy paper considered the following important financial audit related documents as crucial starting points EU Common Position CONFH 3000 07062000 the Accession Partnership of 2002 and the annual reports 2001 and 2002 The government accepted the policy paper in 2003 After the acceptance of the policy paper the central harmonisation unit CHU responsible for the development of the PIFC system was strengthened by appointing a ministerial commissioner as head of the unit by increasing the staff numbers and involving external human resources In the elaboration of the PIFC methodology the MoF used external help within the framework of the twinning programme As a result the legislative basis for a harmonised PIFC with the components 1 financial management and control FMC 2 internal audit 3 central harmonisation unit had been set up Also in 2003 the MoF adopted the IIA standards for use by the public sector A full law harmonisation has been realised in the area of PIFC most of the methodologies and guidelines were elaborated and published in 2004 on the MoF website and in the Official Journal of the MoF Finally PIFC for the local governments was elaborated in the municipal law in 2005 During 2008 in line with national and international professional developments the PIFC system was reviewed and new legislation entered into force on 1 January 2009 The new public internal control PIC system is based on the COSO model The internal control system of the PBOs in accordance with the COSO model contains five wellknown components With the implementation of the COSO model and its components the internal control system is covering all operational functions of the public budgetary organisations the relevant regulations and internal instructions control environment the identification of possible factors which can hinder the legal and effective im plementation of the functions risk management the establishment of legal functioning assurance provisions control activities the related continuous communication tasks and it covers the continuous monitoring and internal auditing of the public budgetary 153 organisations monitoring The regulation on the internal control system described in the PFA reflects not only international best practice in using the INTOSAI and COSO recommendations but also the principles of corporate governance The Directorate General for Audit of European Funds DGAEF was established on 1 July 2010 as an autonomously operating central budgetary organisation within the chapter of the Ministry for National Economy Its task is to carry out audit authority tasks regarding European Union and other international funds determined by the Government promoting the effective and regular use of funds from the European Union protecting the financial interests of Hungary Since 1 January 2012 the regulatory background changed entirely the old acts and government decrees have been replaced by new ones The Act No XXXVIII of 1992 on public finances PFA has been replaced by Act No CXCV of 2011 on public finances In this document unless we indicate it otherwise we will use the regular PFA abbreviation for this new PFA which has a simpler more transparent framework The simplification process of the PFA resulted that a lot of regulations have been delegated to government decree level Therefore the Government Decree No 292 of 2009 XII 19 on the rules of operation of public finances ROPF has been replaced by Government Decree No 3682011 XII 31 on the implementation of the public finance act IPF The PFA regulates the public internal control system but the implementation and other detailed rules were in two separated government decrees ROPF IAPBO These two decrees were merged into one simplified one Government Decree No 3702011 XII 31 on the public budgetary organisations internal control system and internal audit PBOICS Since 1 January 2012 we distinguish three levels of government controls external legislative level government level and organisational level Since 1 January 2014 the rules of internal controls regulated in the PFA and the PBOICS is widened to all organisations belonging to the government sector with some specialized requirements This is the result of implantation Council Directive 201185EU of 8 November 2011 on requirements for budgetary frameworks of the Member States 2 Public internal control environment The elements of the PIC system have been described in the PFA which expand and extend to all subsystems of the public budget central and local governments The implementing regulations of the PIC system are described in special government regulations and guidelines and there are also methodologies and manuals which support the practical implementation The Minister for National Economy MNE former Minister of Finance is responsible for the harmonisation and development of the PIC system The external audit of the public finance system is performed by the Hungarian supreme audit institution the State Audit Office The tasks authority and organisational structure of the SAO are determined in Act No LXVI of 2011 The SAO is the financialeconomic audit body subordinated to the parliament and acts which is independent from any other organisation The SAO audits the final account of the implementation of the central budget management of the public finance within the framework of this the substance of the budget proposal fulfilment of the appropriations of the income management of the local and minority governments operation of the chapters which are in the frame of the central budget use of separate state funds national health service funds regularity and expediency of the application of the appropriations of investments which link with government commitments application and repayment of borrowing of the budget The SAO audits the management of the assets which is the part of the subsystems of the public finance The SAOs audit reports are public 154 The governmental control function is performed by the Government Control Office GCO The tasks organisation and operation rules of the GCO are laid down in a government decree The controls performed by GCO includes regulatory and expediency controls The scope of its activities cover the monitoring of the implementation of government decisions and ex post controls of the state budget extrabudgetary state funds social security funds the centrallevel PBOs stateowned enterprises public foundations micro regional county territorial and regional development councils as well as social organisations that receive subsidies from the budget Since 1 January 2012 the GCOs legal status its organisational structure its control scope and procedures its heads and the order of their appointment are defined in Art 6367 of PFA and by Government Decree No 3552011 XII 30 on the Government Control Office Since then the GCOs procedures are entirely separated from the procedural rules of internal audit Budgetary planning is performed by the line ministries led by the MNE The draft of the Budget Act is submitted by the government to the parliament which accepts it until the end of the current year The ministries and the chapters report on the implementation of the years budget within the framework of a final account The Hungarian state treasury hereinafter treasury is a key element of the PIC environment The Treasury performs firstlevel control activities concerning the financial implementation of the budget and ex post controls in case of certain subsidies The treasury management system was established in 1995 in order to achieve the objectives of the public finance reform The main objective of the treasury is ensuring sound financial management In order to meet this requirement the treasury has tasks concerning the financial implementation of the budget and also performs control activities The control function of the treasury includes several activities The most important activity is the control function during the financial implementation of the budget This control covers the classic treasury cash management and control functions as well as certain ex post control functions concerning the implementation of national and EU subsidies Fulfilment of monitoring activity of public debt and commitment registration activities is also a control function The treasury monitoring system with disclosure and registration of the supporting basic data applies to avoid accumulation of subsidiesdouble financing Another important control activity covers the authority controls performed by the regional directorates in respect of the local governments and recipients of several social assistances A new feature of the public control system is the budgetary supervisor activity which has been established in 2010 This activity enforces preventive public controls based on the Governments decision The MNE is in charge to assign a budgetary chief supervisor to any chapter governing body any public budgetary organisation any state funds or any social security related financial organisation which is under control or under supervision of the Government The budgetary chief supervisor may take any measures regulated by government decree to maintain the consistency of budget policy and the efficient formulary and effective operation The managerial rights on budgetary supervisors are performed by the Head of Treasury 21 Fight against corruption Each and every public body is involved in the fight against fraud and corruption even local governments For the purpose of making a commitment to the fight against corruption the State Audit Office the Supreme Court the Attorney General the Minister of Public Administration and Justice signed a joint declaration on 18 November 2011 A new Government Decree No 11042012 IV 6 on government anticorruption actions and ratification of the Administrative Corruption Prevention Programme has been established in order to significantly and noticeably reduce the extent of corruption in the public sector The aim was to develop a corruption resistance ability to the public bodies 155 The Ministry of Public Administration and Justice MPAJ in order to implement the government decree has created an AntiCorruption Working Group In order to facilitate coordinated ethical rules within public bodies a so called Green Book has been established The Green Book which was also released for public consultation by the MPAJ seeks to gather the professional ethical standards of the public sector The national assembly of the Hungarian Government Officials accepted the Professional Code of Ethics on 21 June 2013 In June 2013 the government officials elected the members of the ethics committee who are responsible for discuss and judge events violating the ethical rules 211 Open Government Partnership OGP In 2012 the Hungarian Government decided to join in the Open Government Partnership initiative which have been established by the United States the United Kingdom Norway and five other states on 20 September 2011 With this act the Government further widened the joint activities on corruption prevention with the international organisations Government Decree No 502013 II 25 on the system of public budgetary organisations integrity management and the rules of reception of lobbyists have been approved in 2013 According to this government decree the PBOs should assess corruption related risks annually until 31 December in the actual fiscal year and establish a corruption prevention action plan to manage risk In addition a general procedure should be established about the following topics complaints about misusage and irreguralirities are related to the operation of an entity reception of whistleblowers complaints about corruption related risk According to this Gov decree an integrity adviser should be designated to each PBOs The integrity advisers task is to contribute in the survey of corruption risks related to the operation of the entity and to prepare the integrity report which contains the action plans about how to manage these risks 212 Strengthened whistleblower protection system The Government asked the Minister of Public Administration and Justice to review the whistleblower protection systems legal background and if its necessary propose adjustments and implement detailed rules of procedures The Parliament committed to increasing public confidence in the functioning of public bodies recognising the importance of complaints and public interest disclosures in improving the functioning of the state having regard to the international obligations of Hungary undertaken in connection with action against corruption as well as the recommendations of international organisations recognising the efforts made by whistleblowers in order to promote public interests and ensuring the measures needed for the fullest protection of whistleblowers has adopted the Act No CXLV of 2013 213 International cooperation The Implementation Review Group IRG of the United Nations Convention against Corruption started its regular review process of the implementation of the Convention by Hungary in the last third of 2012 The main objective of the United Nations Convention against Corruption is to facilitate more efficient and successful anticorruption measures ease and support international cooperation and promote fair accountable and adequate handling of public property 156 The review of the Conventions implementation consists of three main phases In the first phase reviewed countries complete and return the implementation questionnaire prepared by the UN IRG This is followed by the phase where representatives of the reviewing and the reviewed countries hold consultations at expert level The last phase of the process results in the final country report which will be prepared about Hungary by Moldova and Jamaica Based on Government Decree No 622012 IV 2 on grant agreement for the project OECD Hungary partnership in public administration reform programme a report has been made about the evaluation of anticorruption efforts The report designates the assessment of corruption related risks the implementation of the integrity management system and the integrity related trainings as good practices 3 The concept of public internal control To better understand the Hungarian PIC system we present the regulation system in a three level structure The essence of the internal control system as an integrated approach to corporate governance is that it covers regulations procedures functional methods and organisational structures aiming to achieve the objectives of management Internal control shall prevent detect andor correct events which endanger such objectives The HPBO will decide on the methods and forms of implementation ie review the current internal regulations or create new ones First level Act The internal control system is an integral process that is designed to obtain reasonable assurance and to ensure assessing risks The aim of the internal control system is to ensure that the PBOs achieve the following objectives legality of the transactions and the requirements of economy efficiency and effectiveness accountability protection of the resources from losses and inappropriate use According to the responsibilities described in the PFA the head of a public budgetary organisation HPBO is responsible for the establishment of the PBOs internal control system and liable for developing operating and also following up and analysing the proper working of a suitable control environment risk management policies control activities information communication and monitoring 157 Second level Government decree The detailed instructions concerning the internal control system are laid down in IPF The IPF regulations are connected to the PFAs regulations and clearly determine the scope of duties about establishing and operating the internal control system Ministry for National Economys decree No 282011 VIII 3 regulate the PBOs internal auditors registering process and the PIFC training commitment for internal auditors heads and financial managers of public budgetary organisations The HPBO is responsible for establishing operating and developing the organisations internal control system including internal audit While establishing internal controls the HPBO should follow the guidelines on internal control standards and contents as published in the directive of the MoF The internal control system includes all principles processes and internal regulations that ensure the management of the PBO in accordance with the principle of sound financial management Recommendations and suggestions from the public external audit and internal audit organisations have to be taken into account while developing the internal control system Exposition of the five elements 1 Control environment The HPBO shall establish the control environment which stands for a clear structure of the organisation clear relations and tasks about accountability and jurisdiction ethical rules for all levels of the organisation and transparent HR management The HPBO shall establish such regulations implement and operate such processes which ensure the proper regulated economical efficient and productive use of available resources The HPBO shall establish and regularly update the PBOs audit trail which is a holistic description of the operational and financial processes of the PBO which specially includes the accountability and information levels and relations management and control processes either in text form andor tabulated andor illustrated with flowcharts allowing monitoring and ex post audit activity on these processes Furthermore the HPBO is liable for regulating the procedures about treatment of irregularities which with the exception of ministries the prime ministers office and government offices is part of the PBOs organisational and operational rules Its the HPBOs responsibility to enforce the professionalism impartiality unpretentiousness and moral integrity and also to focus on public interests instead of individual ones integrity management 2 Risk management The HPBO is responsible for risk management policies and for the operation of a risk management system During risk assessment the risks of the organisations activity and management shall be estimated and action plan should be determined to mitigate them The risk management system should consist a followup activity to assess of effectiveness of management of risks 158 3 Control activities The head of the PBO shall establish control activities dealing with the acknowledged risks and contribute to the achievement of the organisations objectives The internal procedural rules shall regulate at least the following procedures of authorisation and approval access to information physical controls access to equipment procedures of reporting 4 Information and communication system The HPBO shall establish and operate systems assuring a correct and timely information flow to the right organisationunitperson The reporting system has to be effective reliable and precise and the levels deadlines and methods of reporting are precisely determined 5 Monitoring system The HPBO shall operate a monitoring system which helps to monitor the activities of the organisation and the achievement of its objectives Within the operational functions the ongoing and adhoc monitoring and in the nonoperative functions the functionally independent internal audit creates the PBOs monitoring system One of the main tasks of the internal audit activity is to facilitate the improvement of the quality of the internal control system of the PBOs The internal audit activity of the PBOs has been regulated by a government decree Third level Standards and guidelines Hungarian standards of PIC last updated in 2013 are based on the recommendations of internationally recognised institutions like COSO and INTOSAI These standards contain the main principles the practical implementation shall vary amongst organisations The HPBO has the right and duty to determine the quantity quality and rigidity of the controls within the system Laws and decrees determine only some of them directives and guidelines provide for suggestions for further refinement Control activities shall be applied as exante processbuilt and ex post controls It is important to note that the development of various regulations referred by standards do not always mean that the PBO has to establish new ones because in many cases they are already part of other documents like memorandum and articles of association organisational and operational rules or exist otherwise It is the HPBOs responsibility to determine the additional elements of the internal control system where necessary The standards related to the five elements which have been mentioned on the first level and detailed on the second here we mention briefly only headings as follows Control environment o Objectives and organisational structure o Internal regulation o Scope of duties and responsibilities o Definition and documentation of processes o Human resources management 159 o Ethical values and integrity Risk management o The determination and assessment of risks o Risk analysis o Risk management o Regular review of the whole process of risk management o Fraud corruption risks Control activities o Control strategies and methods o Separation of duties o Continuity of tasks Information and communication system o Regulation of information and communication o System of file registration o Report of incompleteness irregularities and corruption Monitoring system o Monitoring of the realisation of organisational goals o Evaluation of internal controls o Internal audit The full description of internal audit standards can be found at the internal audit section of this contribution The internal control manual the IC manual issued by the MNE is a document that elaborates the internal control standards in detail It supports a proper and equivalent interpretation of laws and other government decrees a flexible adaptation and a high standard of work Its contents are basically recommendations practical guides which support the HPBO in establishing and operating a lawful internal control system Besides the detailed standards there are control issues that can assist the selfassessment of the compliance of the internal control system The IC manual supports the HPBOs to raise confidence about their internal control system legitimacy at organisational and department levels Irregularities concerning public finances represent a high level of risk Aggravated cases intentional irregularities like fraud andor corruption have to be treated with high priority because of their damaging nature The IC manual deals with procedures on treating irregularities within the legal framework Regarding the guidelines on internal audit more information can be found at the internal audit section of this contribution Risks occurring within the public finances are considered as significant risks Intentionally committed irregularities fraud corruption are extremely dangerous because of their injurious nature The IC manual contains relevant procedures and standards to deal with irregularities 160 31 Managerial accountabilityresponsibility Managerial accountabilityresponsibility in the public sector is a high priority issue This is why the regulation of managerial accountabilityresponsibility appears also in other legislation that was not previously involved The PFA stipulates that the head of PBO is responsible for the fulfilment of activities prescribed in the deed of foundation and in line with the requirements determined in legal regulation of the managing organisation The PFA stipulates that the head of PBO is also responsible for ensuring effective and sound financial management concerning all activities of the PBO like the use of public assets The head of PBO is also responsible for the establishment operation and development of the internal control system The head of PBO may delegate his tasks and duties in the organisational and operational rules of the PBO and in the job description to lowerlevel hierarchy The managers take the responsibility for the work of employees at the subordinated organisational units The managers have the right to report and to request a report The detailed rules of the responsibilities are set out in separate laws The head of the subordinated PBOs must report on the functioning of the internal control system of the PBO to the head of the budgetary chapter ie line ministry who reports directly to the MNE about the internal control systems including internal audit of the ministry and the subordinated PBOs The abovementioned report on the internal control system so called declaration of assurance is the No 1 annex of Gov decree PBOICS According to the content of the declaration the head of the PBO who is aware of the legal responsibilities declares that the internal control system ensures economical efficient and effective functioning Furthermore heshe ensures that any public assets are used in the PBO in accordance with legislation the available appropriations are properly used the functioning of PBOs follows the requirements of economy efficiency and effectiveness planning reporting information providing responsibilities and their verifications are well performed the commitments are in line with the budget an institutional accounting system exists a system has been introduced that provides appropriate legal and regular assurance of the procedures and ensures that the accountability is in compliance with national and EU laws the responsibilities within the PBO are clearly defined that all managers are aware of the objectives and that they have tools at their disposal to complete the given tasks and evaluate the result The procedure is continuously evaluated through the managerial report system In the report heshe declares that the submitted financial statements give in compliance with legal requirements a clear and precise picture of the current annual budgetary revenues and expenditures The head of the PBO briefly summarises how the internal control provisions have been completed in compliance with the five components In the report heshe outlines the need for improving the internal controls of the PBO and also certifies that the CFO chief financial officer of the PBO has fulfilled the biannual internal control training obligations 161 Since 2010 47 the operational head of the ministry as a PBO is the Administrative State Secretary In the case of ministries the Administrative State Secretary is responsible for the establishment of the internal control system of the ministry and for the accountability of the organisational unit managers The crucial part of the accountability is publicity and transparency The publicity rules are based on Act No CXII of 2011 on the right of informational selfdetermination and freedom of information The main purpose of this act to ensure that the privacy of individuals are respected by data managers to achieve the transparency of public affairs through the enforcement of cognition and dissemination of public information Data of public interest shall mean any information or knowledge not falling under the definition of personal data processed by an agency or person performing a state or local government function or other public function determined by a rule of law 32 Internal audit According to the PBOICS and in accordance with international standards the internal auditing is an independent objective assurance and consulting activity designed to add value and improve an organisations activities It helps an organisation accomplish its objectives by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management control and governance process The concept of internal audit is embedded in the regulations of the PFA and in the government decree supplemented by standards and guidelines The content of national standards are the followings 1000 Tasks of internal audit 2000 Independence and objectivity 3000 Expertise and due professional care 4000 Chief Auditor Executives tasks 5000 Planning 6000 Implementation 7000 Audit report 8000 Quality assurance 9000 Followup Many guidelines were published in connection with internal audit activities of the PBOs The most important of these are internal audit manual template last updated in 2013 code of ethics for internal auditors in public sector last updated in 2012 internal audit standards for public sector last updated in 2012 methodology for performance audits methodology for systembased audits guidelines for the annual audit plan and summary annual audit plan annual audit report and summary annual audit report last updated in 2013 According to the rules and regulations the head of PBO shall guarantee functional opera tional independence of the internal auditors especially in relation to the 47 Article 61 of the Act No XLIII of 2010 on the Central Administrative Bodies and the Legal Status of the Members of the Government and of the Secretaries of State 162 drawing up of the annual audit plan based on risk assessment methods with taking into account the ad hoc audit activities preparation and implementation of the audit programme selection of audit methods drawing up of conclusions and audit recommendations preparing audit report Aside from the objective assurance and consulting activity the internal auditors shall not be involved in any other management function The PBOs internal auditor has to be authorised by the MNE which means that the auditor has to be registered The vocational trainings of internal auditors are regulated by PFA PBOICS and MNE Decree No 28 of 2011 VIII 3 on the registration and training of internal auditors and PBOs heads and financial managers public internal control themed training Internal auditors head and financial managers of PBOs are obliged to attend vocational training every two years This training is organised by Public Internal Financial Control Methodology and Training Centre hereinafter MTC The MNE is responsible for the establishment operation and professional management of the MTC Currently the MTC works within the organisation of the National Tax and Customs Administrations Health and Cultural Institute Internal auditors must take an exam in the subject of the Public Internal Financial Control I with three obligatory modules in the next year when they have been registered and then they must perform one freely selected module from the modules of the PIFC II once in every two years Failing to complete these obligations the internal auditor will be revoked from the registry Since 2014 these trainings are considered as magisterial trainings so according to the regulatory changes the structure of the training programmes were revised and modified PIFC I is structured as follows The public finance system The functioning of the EU EU institutions and fiscal relations between the EU and Hungary Control system of the public administration The conception and theoretical basics of public controls Legal basis of PIC Guidelines issued by the MNE National and international internal audit standards Development and operation of the public internal control system PIFC II moduls Public accounting IT audit Audit of public procurement System audit Performance audit Control system of EU funds Risk based planning for internal auditors 163 Risk management for heads and financial managers of PBOs Civil servants who work as internal auditors shall take a basic administrative vocational exam one year after their appointment and another advanced exam after two years Internal audit presents draft audit findings and recommendations to the head of PBO in compliance with laws and internal regulations economy efficiency and effectiveness The internal auditor or the internal audit unit perform their duties directly subordinated to the head of PBO and report directly to himher The audit team leader is responsible for drafting the audit report and drawing conclusions Internal auditors are responsible for trustworthiness of the audit results In case of objective assurance activity internal auditors shall perform legality regularity audit financial audit systemsbased audit performance audit and IT audit The internal auditors shall send the draft audit report to the auditee for contradictory procedure The audit is closed when the final audit report has been sent to the auditee If during the course of the audit the suspicion of an act negligence or deficiency arises that may result in a criminal infringement liability or disciplinary procedure it is the responsibility of the head of the PBO or in case of involvement of the head of the PBO the head of the governing body to take the necessary measures however this does not influence the closure of the audit In case of internal audit the preparation and implementation of the action plan and the reporting about the measures taken are the responsibility of the head of the audited entity and the head of department The preparation of the action plan have to contain the persons responsible for implementing the measures and the designate deadlines The task associated deadlines shall be determined in an accountable way The action plan should be prepared within 8 days from the receipt of the closed audit report then it should be sent to the HPBO and the chief audit executive CAE for approval The head of the audited department may require before the expiry of the deadline modification of the deadline or the task on one occasion to implement the tasks from the action plan The HPBO will decide on consultation with the CAE whether to accept or reject the request and inform the head of the audited department about the decision Sending a written report about the executed tasks specified in the action plan should be carried out within 8 days after the last deadline The report should be sent to the HPBO and a copy to the CAE The report includes a brief description of the measures taken the cause of unperformed tasks and the deadlinetasks modifying request if there were any The CAE based on these reports maintain a register with an annual breakdown so shehe could keep track of the implementation of the internal audit report findings recommendations and action plans This register shall include the proposals from the audit report the approved action plan the brief description of the measures taken and the cause of unperformed tasks In case of external audit the preparation and implementation of the action plan and the reporting about the measures taken are the responsibility of the head of the audited entity and the head of department The content of the action plan is the same as in the case of internal audit If the audit is carried out by the governing body then the preparation and reconciliation methods should be the same as in case of internal audit The head of department in case of an audited unit or the HPBO in case of an audited subordinated PBO reports in the manner provided by law or in the absence of legislation by joint agreement about the measures taken stipulated in the action plan If the audit is carried out by the governing body then the head of the audited department or the HPBO may require before the expiry of the deadline modification of the deadline or the task on one occasion to implement the tasks from the action plan The head of the auditing PBO will decide on consultation with the CAE whether to accept or reject the request and inform the head of the audited department or PBO and both the auditing and the audited bodys CAE In case of external audit the head of the audited PBO ensures coordination of external audits and maintain a register with an annual breakdown so 164 shehe could keep track of the implementation of action plans based on the findings of external audit The HPBO can delegate this task to the head of any department The head of the audited PBO prepare a report to the head of the governing body and to its CAE in 31 of January following the actual fiscal year The annual audit report and annual summary audit report shall contain the following the scope of activities mentioned in the audit plan the reasons for deviating from the plan and the justification of any adhoc audits the quality the staff and material conditions of the audits as well as the factors promoting or hindering the audit activity based on selfassessment according to the following o evaluation of the tasks included in the annual audit plan o the facilitating and obstructive factors of assurance activities o presentation of the advisory activity evaluation of the operation of the internal control system based on the audit experiences according to the following o the main findings and recommendations for the improvement of the internal control systems regularity economy efficiency and effectiveness o evaluation of the internal controls five element o the implementation of the action plans 321 Internal audit relations with external audit The SAO and internal audit cooperate and complement each others work The SAO often uses internal audit reports by external auditing of a PBO Internal audit usually assists mainly acting as a contact point the external audits of the SAO The SAO has the right to participate on advisory basis in the meetings of the PIC WG see in 322 Audited organisations shall report on the followup of the SAOs recommendations until 31 January of the year following audit activity 322 Audit boards and audit committees The Public Internal Control Working Group hereinafter PIC WG has been established to provide guidance to the improvement of the PIC system the cooperation coordination harmonisation and preparation of further needed developments Under its terms of refer ence the PIC WG shall assume the following tasks through its theme groups Support the MNE management in the area of overview of PIC operations along with regulation coordination and harmonisation of the system giving an opinion on the annual plans strategies and reports as required by EU legislation Elaboration of recommendations on the improvement and operation of the PIC system including o opinion on draft legislative provisions practice manuals nationally and internationally accepted standards relating to internal audit o monitoring of the application and implementation of draft legislative provisions practice manuals nationally and internationally accepted standards relating to internal audit 165 o monitoring of the application and implementation of draft legislative provisions practice manuals and PIC standards relating to the internal control system o coordinations support and continuous monitoring of audit activity relating to use of EU funds ESF ERDF CF other EU and international assistance o evaluation and support of functional independence of internal auditors o form an opinion and propose in issues related with breaches of ethical rules o facilitate the public internal controls and within the internal audits enhancement Coordination of planning and implementation of government audits Elaboration of documents for the special needs of local governments Finding solutions to specific questions asked by the MNE or PBOs representatives Discussion of the MNEs annual report on PIC 33 Coordination of public internal control systems The MNE is responsible for development preparation of regulation coordination and harmonisation of the internal control systems relating to the subsystems of the public finances The minister coordinates and harmonises the control systems for national and international funds and makes recommendations for drafting and adopting relevant legislation elaborates issues and regularly reviews directives and methodological guidelines to be used for the internal control system and is responsible for the establishment and operation of the PIC WG for developing its rules and procedures and for organising the internal control systemrelated training The tasks of the central harmonisation unit are performed by the Department of Public Internal Control within the Ministry for National Economy The main responsibilities of the department are the coordination and harmonisation of the internal control systems relating to the subsystems of the public finances the evaluation and development of the procedures and methodologies of the system of the budgetary supervisors the elaboration of the proposals and concepts related to planning implementation of audits and reporting the coordination of the annual audit planning procedure processing and analysing the audit plans forwarded to the minister from the chapter manager organisations preparing the annual report for the minister to be used concerning the situation and the function of the PIC report and as a part of this preparing proposals related to the internal control system including rule modifications for the government based on the annual audit reports forwarded to the minister providing professional supervision for the internal audit support IT system inspecting and monitoring the compliance of the PIC systems quality within the framework of quality assurance and assessing the implementation of the international audit and control standards related to acts directives and methodological guidelines coordinating the managerial accountability system processing and analysing the managerial assurance declarations forwarded to the minister by the chapter manager organisations 166 the establishment operation and professional supervision of the PIFC Methodology and Training Centre operating the Hungarian Internal Auditors Forum liaising with the national professional organisations arranging professional conferences the development of the internal control system of the EU funds including the FMC establishing and developing the relevant regulations and methodological guidelines professional supervision of the audit authority the Directorate General for Auditing European Funds drawing up professional opinions and guidelines related to the internal control system of the EU funds adapting the EU recommendations related to the internal control system of the EU funds participating in the coordination and harmonisation of the EU and international funds in relation to the internal controls monitoring and inspecting the application and the implementation of the laws methodological guidelines and international audit standards to be used concerning the participating countries in the implementation of the EU support transactions 4 Financial inspection The task of the government control shall be performed by the Government Control Office the GCO The GCO is subordinated to the Prime Ministers Office The duties of the GCO are monitoring of the implementation of government decisions ex post control of the state budget nonbudgetary state funds national health service funds and the centrallevel PBOs except organisations that are outside the supervision of the government or the minister ex post control of economic enterprises public foundations foundations microregional county territorial and regional development councils as well as social organisations with the exception of political parties who obtained support from the state government and funds or aid and support from international contracts monitoring of the stateowned economic entities excluding the Hungarian National Bank ex post control of foundations public foundations established andor sponsored by the government members of the government ex post control of the legitimacy of the undertaking and the redemption of state guarantees within this framework along with the state budget it may examine both the original obliged party and the entitled party with regard to whether the conditions of the guarantee contract have been observed ex post control of private pension funds and financial mechanisms of the transfer of private pension funds to the state pension fund ex post control of transactions and subcontractors in connection with the subsections above performance of these contracts in this connection the 167 parties of the contracts who are responsible for the performance of who participate in the contracts other ex post control tasks determined in separate law or in other regulation According to the PFA the GCO carries out regularity and expediency ex post controls concerning the execution of the budget transaction of the national and international assistances utilisation of the governmentowned properties operation of the governmentowned economic entities transaction of public procurements and execution of the governmental decisions Previously GCO activities were performed according to the regulations of the internal audit of budgetary bodies but the special regulation on the rules of procedure of governmental control activity was adopted in January 2012 Based on the new regulation the government control activity is an objective factfinding proposal drawn activity which is operating independently from the audited PBO and primarily deals with the following the use of public funds management and protection of the national wealth providing efficient economic and effective public functions According to the new regulation the GCOs control activity are based on annual work plan but in case of government decision Prime Ministerial decision or the decision of the Deputy State Secretary of Legal Affairs in the Prime Ministers Office the chairman of the GCO can initiate an ad hoc control task which is not in the annual work plan Basically anyone is entitled to propose an inspection even by citizen notifications but its not mandatory to the GCO to initiate a control activity The GCO carries out mainly ex post controls but ex ante controls as well GCOs reports shall be received by the government or the personbody which is assigned by the act If the GCO during its control activity identify any misuse or wasteful use of public fundsproperty it has the right to contact the competent authority to prevent loss The GCO and the internal audit units of the ministries coordinate their activity and share their observations through the Government Control Theme Group of the PIC WG mentioned above 5 Ongoing andor future developments The Department for Public Internal Control System of the Ministry of the National Economy seeks to introduce the following improvements to the PIC systems the further development of the public internal control system with a focus on managerial accountability reduction of the administrative burdens concerning control and audit activities further widening the scope of public internal audit to cover governmentowned economic entities reinforcement of the control activities of the Treasury and other PBOs participating in the work of the AntiCorruption Working Group enhancing the central harmonisation of the internal control and internal audit at the level of local governments with development of manuals and targeted guides together review of the data and information content of the MNE Report on the PIC system in order to make the information readily available and usable to the government continuous development of methodology for internal control and internal audit systems development of a new quality assessment methodology 168 development of proposals for improving the training system participating in the accreditation methods where needed promoting recognition of internal audit as a profession at higher education levels enhancing cooperation between the audit organisations State Audit Office Government Control Office DGAEF and professional organisations and strengthen professional relationships 169 IRELAND Public internal control system 48 Summary of the major changes in 20112012 The updated compendium entry includes further information on the programme of public service reform This includes in particular developments relating to the legislative framework governing ministerial responsibility and accountability of civil servants A consultation process on Strengthening Civil Service Accountability and Performance has commenced to inform and promote public debate both within and outside the civil service on the key themes policy and legislative options to deliver on more effective accountability arrangements On the budgetary side performance information is included as part of the annual budget process where departmental budgets have been restructured on a strategic programme basis consistent with the presentation of Departments Statements of Strategy This includes key performance information for programme outputs and impacts and is part of an ongoing initiative to facilitate the work of the Dáil and it Committees in holding Ministers and Heads of Government Departments to account for the proposed allocation and effective utilisation of public funds In relation to the public internal control environment following a change of Government in 2011 the public service management functions of the Department of Finance transferred to a new Department of Public Expenditure and Reform This Department has responsibility amongst other things for the accounting risk management and internal audit policy for government departments and offices as well as the code of practice for the governance of state bodies and guidelines for ethics in public office The principle development in internal audit relates to the adoption of the International Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors which includes the Definition of Internal Auditing the Code of Ethics and the International Standards for the Professional Practice of Internal Auditing 1 Brief history of the present public internal control system The principles of the current system of accountability and control are mainly derived from the Constitution and from the institutional and financial relationships between parliament and the executive which have developed over the years While the Irish system is grounded in the Constitution of Ireland and in legislation it has its origins in the reforms of the UK financial administration undertaken in the 1860s The impact of these reforms in terms of parliamentary scrutiny of expenditure the establishment of the position of Comptroller and Auditor General now a Constitutional position and the statutory requirement for Accounting Officers of government departments and offices to produce annual accounts is still evident 48 Contributed by the Department of Public Expenditure and Reform 170 Upon independence in 1922 the practices and procedures established by UK Parliament mainly between 1866 and 1921 were substantially adopted In turn the 1937 Constitution adopted most of the financial procedure principles of the 1922 Constitution Other significant Constitutional developments which have relevance for public financial procedures relate to Irelands membership of the European Union In recent decades there has been a continuous programme of modernisation of the Irish Public Service which has included developments relevant to internal public control In the 1980s the emphasis was on managing results and improved management systems The focus of the 1990s was on improved control delivery of services and management of public finances The modernisation programme of the 1990s set out a wide ranging agenda for change primarily in the Civil Service although its broad thrust was intended to impact across the entire Public Service This programme has been advanced both centrally and by individual organisations since that time through a variety of initiatives including the upgrading of financial management systems and enhanced accountability internal audit and risk management processes and procedures In the context of internal control the reform process also brought about a focus on the authority responsibility and accountability of senior officials of central government organisations ie of secretaries general and other accounting officers in relation to the management of public money As a result accounting officers now submit with the Appropriation Accounts the annual accounts of government departments and offices a descriptive statement of internal financial control This signed statement by the accounting officer to hisher minister about the departments system of internal financial control confirms that the responsibility for the system of internal financial control has been accepted a sound financial control environment is in place a framework of administrative controls and management reporting exists the department has an internal audit function with appropriately trained personnel procurement guidelines are being complied with This statement is reviewed by the Comptroller and Auditor General for consistency with information arising during the audit The current decade has seen a particular focus on evaluation culture Good progress has also been made in implementing reform through a central Reform Delivery Office in terms of reducing costs improving productivity more online delivery of services and implementing shared services models 2 Public internal control environment Central Departments With the change of Government in 2011 a number of the functions of the Department of Finance transferred to a new Department of Public Expenditure and Reform Both the Department of Public Expenditure and Reform and the Department of Finance have a central role in the public internal control environment The Department of Public Expenditure and Reform was established in July 2011 with functions including the entirety of functions relating to the management of the public service 171 public service reform functions responsibility for managing public expenditure within the overall envelope set by the Government As part of this role the Department determines accounting policy for the Appropriation Accounts the annual departmental accounts and for internal audit and risk management policy for government departments and offices The Department also has responsibility for the Code of Practice for the Governance of State Bodies and legislation and guidelines for ethics in public office The Department of Finance is responsible amongst other things for the collection and expenditure of the revenues of Ireland unless otherwise provided by law including responsibility for overall national budgetary parameters The Department is required by law to prepare and present to the Dáil the annual account of the Central Fund the Exchequer Account known as the Finance Accounts The Secretary General of the Department of Finance is responsible for the preparation and signing of the Accounts The accountability framework The public sector framework of accountability consists of guidelines on expenditure management and control accounting audit financial procedures and governance as well as law In the central government area traditional emphasis on access to services equity of treatment process propriety and compliance with regulations has expanded to include a focus on outputs and outcomes and the delivery of value for money The annual accounts of government departments and offices is a cash account which presents budgeted and actual expenditure for the year of account together with the previous years outturn Accruals information is presented in the notes to the Accounts including a balance sheet and operating cost statement The associated performance information is included as part of the annual budgetary process The budgets for Departments have been restructured on a strategic programme basis consistent with the presentation of Departments Statements of Strategy This includes key performance information for programme outputs and impacts and is part of an ongoing initiative intended to facilitate the work of the Dáil and its Committees in holding Ministers and Heads of Department to account for the proposed allocation and effective utilisation of public funds 3 The concept of public internal control Managerial accountability and responsibility A principle of accountability is that the participants in the process are known and their roles and interrelationships clearly defined and understood The participants in the accountability regime are the Constitution arrangements for control and accountability are rooted in the Constitution which governs the financial relationships between the parliament and departments and offices and provides for the independent external audit function Comptroller and Auditor General Parliamentary Committees including the Public Accounts Committee a committee of Dáil lower house established to examine and report to the Dáil on the accounts of sums appropriated by the Dáil meets in public to examine accounting officers on their Appropriation Accounts PAC reports are published and the recommendations in these reports are addressed by the appropriate departments in a reply to the PAC coordinated by the Department of Public Expenditure Reform 172 Accounting Officers usually the head of a civil service department or office responsible for the safeguarding and the regularity and propriety of public funds prepares the Appropriation Account for the CAG and is answerable to the PAC Secretaries General all secretaries general are accounting officers and in addition to their accountability to parliament and also accountable to their respective ministers for the management of their departments the Department of Public Expenditure Reform responsible for the administration and business generally of the public finances presents estimates to government and monitors expenditure by departments provides a framework for civil service control and accountability through issue of instructionscirculars and publication of public financial procedures The Department of Finance responsible for the management of the Central Fund and the preparation of the associated accounts the Finance Accounts The Role of the Accounting Officer Accounting officers have statutory duties in giving evidence to the Public Accounts Committee of the Dáil in relation to the public funds for which they are responsible This involves regularity propriety economy and efficiency in the use of resources and the systems practices and procedures used to evaluate effectiveness Since the mid1990s the CAG has been carrying out valueformoney examinations which result in stand alone reports dealing with economy and efficiency as well as with the systems procedures and practices employed to evaluate the effectiveness of the departments or offices operations The public scrutiny process The Dáil votes annually on the estimates budget of the government departments and offices It does this after the estimates have been examined by a group of sector based joint committees of the Dáil These committees examine on behalf of the government the estimate for the relevant departments and ministerial attendance is required The Comptroller and Auditor General audits the Annual Appropriation Account with the current estimate and the prior year outturn as comparisons The Public Accounts Committee or PAC is the nominated review arm of the Dáil in the scrutiny process The current public sector accountability framework focuses on the oversight by the PAC of the accounting officers use of voted monies supported by the CAGs annual report on each departmental vote Following the presentation of the CAGs report the PAC together with the relevant accounting officers review the Appropriation Account Transcripts of the examination sessions are available from the PAC website The examination sessions are broadcast and are accessible to the Media The PAC report to the Dáil following which a copy of the report is sent to the Minister for Public Expenditure Reform who replies on behalf of the Government to any issues raised following consultation with relevant Ministers Internal audit Government Departments and Offices and State Bodies are required to have an internal audit function or to engage appropriate external expertise The internal audit function covers the whole network of the systems of a government department or office or state body Its primary objectives are to review and appraise 173 the systems and procedures financial and managerial that are intended to control operations the adequacy reliability and integrity of the information being provided for decisionmaking and accountability the degree of compliance with legislation with requirements laid down centrally eg by the Department of Public Expenditure and Reform and with management plans procedures and policies the procedures for the acquisition and disposal of assets and the safeguarding of assets and interests from losses including those arising from fraud malpractice and irregularity and the arrangements for economic and efficient use of resources The internal audit function may also be required from time to time to carry out special investigations and provide a consultative role to management In some cases for example in the Department of Public Expenditure Reform and the Department of Agriculture and Food internal audit also has specific EU funds responsibilities While risk management is the responsibility of management internal audit has an important role in providing assurance or otherwise on systems of internal control and is well positioned to independently assess the adequacy or otherwise of the systems in place to assess and manage risk In 2012 following a review of internal audit standards for government departments and offices the International Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors IIA were adopted The Standards comprise the Definition of Internal Auditing the Code of Ethics and the International Standards for the Professional Practice of Internal Auditing Audit committees Government Departments and Offices and other State Agencies are required to have Audit Committees performing the following functions act as another source of independent advice to accounting officers review the plans and reports of the internal audit unit and assure the quality of service provided by the unit assess whether appropriate action is taken to deal with key issues identified by the internal audit unit and by external audit examine and monitor the implementation of the departments risk management strategy and provided they have representatives external to the department facilitate improvements in internal audit and internal control through the exchange of information between i departmentsoffices and ii between the private and public sectors Each audit committee operates under a written charter has significant external representation at least two members including in the normal course representatives from the private sector with appropriate expertise The chairperson of the committee should come from outside the department or office prepares an annual report to the accounting officer reviewing its operations 174 invites the Comptroller and Auditor General or his nominee to meet the committee at least once a year Risk management Government Departments and Offices and State Bodies are required to have risk management systems in place State Bodies are required to have risk management policies and the Board of the State Body is required to approve the risk management framework and monitor its effectiveness Boards are required to appoint a Chief Risk Officer or empower a suitable management alternative An external review of the risk management framework is required on a periodic basis Similarly Department and Offices are required to manage risk management as an integral and ongoing part of their management process The Management Boards of departments and offices are required to put in place effective mechanisms to carry out risk management Departments risk management systems are required to provide for monitoring and reporting at various levels of management External audit The Comptroller and Auditor General plays a central role in the public accountability process by providing assurance to Dáil Éireann on the manner in which public funds have been administered and providing it with reports on matters arising out of audits and other statutory examinations These reports are considered by the Committee of Public Accounts The core work of the Office is the conduct of financial audits which culminates in an annual opinion on all accounts of State and Statesponsored bodies falling within the audit remit of the Comptroller and Auditor General CAG typically government departmentsoffices VECs Noncommercial state bodies NorthSouth Bodies The CAG in carrying out his audit of the accounts of government departments has particular regard to the system of internal control in place in the organisation and highlights in his reports instances of the financial consequences of weaknesses in the system of internal control Internal financial control The requirements of parliamentary accountability have meant that there has traditionally been an emphasis on internal control particularly internal financial control in government departments and offices Internal financial control includes a system of delegation and accountability proper authority for the making of payments eg Department of Public Expenditure Reform approval segregation of duties particularly where the processing of transactions is involved careful selection of officers with responsibility for money including ensuring that they have the skills commensurate with their responsibilities and that they are appropriately monitored documentary and physical controls to safeguard assets information and reporting arrangements to management documented financial policies and procedures including ensuring that they are available throughout the department systems to ensure budgetary control and systems to review and evaluate controls eg internal audit 175 Coordination of public internal control Policy matters with regard to expenditure management government accounting internal audit and risk management in the central government sector are the responsibility of Department of Public Expenditure Reform A Network of the heads of internal audit meet periodically to discuss matters of relevance to the practice of internal audit and a similar Network operates for Finance Officers on accounting and financial management matters 4 Financial inspection There is no additional financial inspection body 5 Ongoing andor future reforms Significant progress has been made on the Governments programme of political and legislative reform There has been real progress in reducing costs improving efficiency and enhancing service delivery Currently the Programme for Government sets out significant changes to the legislative framework governing ministerial responsibility and the accountability of civil servants A consultation process on Strengthening Civil Service Accountability and Performance has commenced to inform and promote public debate both within and outside the civil service on the key themes policy and legislative options to deliver on more effective accountability arrangements 176 ITALY Public internal control Main changes in the period 20112013 We should mention the reform of controls following the delegation of powers to the government under Legislative decree No 123 of 30 June 2011 This decree provides for the reform and strengthening of the system of accounting controls and the programme of analysis and evaluation of expenditure It comprehensively reforms the provisions on controls of administrative and accounting regularity carried out by accounts departments and introduces instruments to improve them by way of procedural innovations especially by simplifying streamlining and revising the terms of ex ante and ex post controls It has comprehensively reformed the provisions on controls of administrative and accounting regularity carried out by accounts departments and introduced instruments to improve them by way of procedural innovations In particular it has comprehensively reformed ex ante and ex post control procedures simplified and streamlined them and revised the terms The decree is made up of five titles Title I Articles 1 4 General principles and guiding criteria Title II Articles 518 Controls on the administrative and accounting regularity of acts of the state administration Title III Articles 1922 Controls of the audit committees or boards in public institutions and entities Title IV Articles 23 24 Controls of the Public Finance Inspection Services Title V Articles 2528 Analysis and evaluation of expenditure Title I sets out the general principles common to all types of control Article 2 states that the controls on administrative and accounting regularity are aimed at acts that impact on the balances of the state of other public administrations and of public entities Controls on acts having financial impact is carried out by the bodies specifically set up for the purpose in the various sectors of the public administration and in the case of the state administrations by the relevant offices of the State General Accounting Department namely the UCBs and RTS Constitutional bodies and bodies of constitutional significance Constitutional Court Parliament the Presidency of the Council of Ministers the Council of State the Court of Auditors the Council of the Judiciary remain outside their scope Title II provides for controls on the administrative and accounting regularity of acts of state administrations excluding however ex ante controls on acts with financial impact adopted by state administrations organisations and entities with financial and accounting autonomy Title III covers the controls of audit committees or boards in public institutions and entities Relevant to the work and duties of such audit bodies in public entities is the impact on the entities and internal audit bodies covered by Legislative decree No 39 of 27 January 2009 sic 2010 on the statutory audit of the consolidated or annual accounts 177 This legislative decree implements Directive 200643EC on statutory audits of annual accounts and consolidated accounts and repealing Directive 84253EEC Eighth Directive on statutory audits of accounting documents Directive 200643EC implemented by Legislative decree No 39continues a series of acts expressly concerned with entities required to keep income and expenditure and balancesheet accounts Many statutory audit methods eg fixed asset cycles the valuation of securities and investments etc specifically concern this type of accounting record We should add that the statutory audit regime is a unitary system and the reliability that it can confer on accounting records depends on the proper application of all its constituent methods In other words application of only some methods of the statutory audit does not constitute completion of the statutory audit all the audit measures routinely in use must be fully applicable to the entity in question in order to constitute the statutory audit of a public body For Legislative decree No 392011 sic to be applicable to a public entity there must be as well as income and expenditure and balancesheet accounts an express legal provision or statute laying down such a requirement for the entity In particular given that the term statutory audit was introduced by Directive 200643EC and introduced into national law by Legislative decree No 39 Italian law needs to provide for a specific requirement for statutory audits auditing of accounts certification of financial statements official audits or other forms of equivalent controls which is quite demanding in terms of both substance and terminology In the absence of such provisions the components of the control body cannot be required to control obligations that are specifically related to the activity of statutory auditing and it is sufficient that they carry out the tasks required by Legislative decree No 123 of 2011 Title IV covers the controls of the Public Finance Inspection Services Subject to such controls is the administrativeaccounting management of all public administrations except the regions and the autonomous provinces of Trento and Bolzano In these cases the Inspection Services may however carry out checks concerning any deviation from publicfinance objectives Title V contains provisions on the analysis and evaluation of the expenditure of central state administrations by the State General Accounting Department 1 Brief history of present public internal control systems Internal controls in the Italian public administration date back to the early years of the new Italian state to Law No 5026 of 1869 on public accounts Over the following decades a legal framework was gradually developed that was set out in Royal Decree No 2440 of 1923 which tasked the Treasury with checking not only legitimacy and accounting but also the soundness of expenditure a type of control that looks at the merits and appropriateness of expenditure The focus thus shifts from merely formal assessments to assessments that also examine the proper management of resources According to many experts however this provision remained a dead letter until the 1990s in practice internal controls of public expenditure were confined to checking the formal legitimacy of the measures After an interlude of almost a century internal controls were again addressed in some important reforms of the 1970s Presidential Decree No 7481972 bestowed independent negotiating powers on senior managers in the public administration and as a counterweight gave these managers specific responsibility for the results of the organisation of work and the activities of their departments This was perhaps the first real effort to involve senior administrators directly in the management of public policies However the most striking innovation of this period was Law No 4681978 which reformed the national budget This law made important overall changes to the budget 178 process such as multiannual budgeting and the finance law The multiannual budget forecast running alongside the annual budget was designed to be a useful support for various attempts at national economic planning something that had never been implemented before The finance law in contrast was intended to provide a tool for periodically adapting financial legislation to the needs of the budget policy Lastly in the 1990s a series of laws introduced a number of important changes Law No 2411990 known as the law on transparency obliged administrative bodies to identify the internal organisational units and persons responsible for the results to be achieved Law No 1421990 introduced for the first time the fundamental principle of the separation of powers and responsibilities political and administrative policy and the results of administrative management which is a fundamental pillar of the reform of the Italian public administration Legislative Decree No 291993 required public administrations to set up internal control offices to assess steer and correct the work of departments according to the objectives and responsibilities assigned to them Law 201994 known as the State Audit Court Reform Law strengthened internal and external monitoring of the results of administrative action the consistency of the action with policy programmes the cost and performance of the services and user satisfaction Legislative Decree No 2861999 this act sums up this first reform phase revising and clarifying the entire system of internal controls by identifying the different types of control and those responsible for them In particular it provides for four different types of internal control on administrative and accounting regularity which have to guarantee the legitimacy regularity and correctness of the administrative action and are conducted by the accounting departments and by the inspection services on management which has to check the effectiveness efficiency and good value of the administrative action in order to optimise the costbenefit ratio and is conducted by departments that collaborate directly with the head of the department manager evaluation which involves evaluating the work of managers in order to renew managerial appointments on strategy which evaluates the choices made when implementing the plans programmes and other tools for determining the political direction in terms of consistency between results achieved and objectives and is conducted by structures that answer directly to political and administrative steering bodies The State general accounting department and the accounting system The State General Accounting Department Dipartimento della Ragioneria Generale dello Stato is one of the four departments of the Italian Ministry of the Economy and Finance It is a central body that supports and verifies policies processes and budget implementation for Parliament and the Government and its main institutional objective is to ensure the correct programming and rigorous management of public resources One of the main duties of the State General Accounting Department is the supervision and control of public financial management The control and supervision functions are conducted through an integrated system of publicfinance controls that operates over the entire country This system comprises 179 the accounting checks conducted by the Central Accounts Offices Uffici Centrali del Bilancio UCBs and by the Local Accounts Units Ragionerie territoriali dello Stato RTS the inspections conducted by the Public Finance Inspection Services SIFiP supervision and control of nonlocal public bodies by representatives of the Treasury on the boards of the statutory auditors and external auditors The accounting system of the State General Accounting Department thus consists of the Central Accounts Offices UCBs and the Local Accounts Units RTS The UCBs are located in the ministries and are the essential link between the State General Accounting Department and the central administrations They provide support and supervision in order to ensure correct financial management and application of the budget lines The main functions are keeping accounting records of the management of the administrations checking the regularity of the individual expenditure documents issued by the administrations evaluation of the charges for institutional functions and services and programmes and projects in order to draw up the budget In particular the UCBs receive from the administrations all the information relating to the income statement drawn up for cost centres evaluate the related charges and supervise compliance with the rules governing the protection of state assets ascertaining exactly income and the correct management of budget funds The RTS are located in each of the 103 administrative capitals of the Italian Provinces and are the network that liaises with the territorial administrations They mainly monitor the financial data and the administrative processes of local government administrations providing support to these bodies for the correct and proper application of laws and regulations To sum up the main tasks of the RTS consist of checking the administrative documents issued by the various local administrations in Italy accounting and bookkeeping recording expenditure commitments and collecting data for the income statement estimating the costs of services and functions controlling and monitoring public finances monitoring the activity of the boards of statutory auditors of educational institutions monitoring and analysing the data on staff 2 Public internal control environment The draft annual budget of the Italian state is the subject of a single bill and consists of the revenue forecast the expenditure forecast for the ministries with the attached budgets of the autonomous agencies and administrations and the general summary framework The Italian budget is drawn up according to both accrual and cashbased accounting The budget therefore indicates 180 the income and expenditure forecast for the period under consideration regardless of whether the right to collect or use funds arose in the period under consideration or in the previous period cashbased accounting and in a column alongside the respective income and expenditure that may be collected and disbursed in the period considered regardless of whether said income and expenditure are collected or paid over the period in question accrual based accounting The reform process for the state budget and current legislation Law No 196 of 31 December 2009 the Law Governing Public Accounts and Finances which replaces the previous law on public accounts Law No 468 of 1978 overhauls all the rules and laws governing the tools for managing public accounts and the Italian budget Law No 196 confirms and consolidates the structuring of the budget into missions and programmes already adopted in 2008 This budget approach shifts the focus from reporting accounting data in terms of responsibility where administrative responsibility lies to that of the aims of the underlying policies The classification meets the need to highlight the functional aspects of expenditure in order to better inform the government parliament and citizens of the total resources available for the specific institutional aims Missions refer to the main functions and strategic objectives of the expenditure Programmes constitute aggregates to achieve the objectives set by the missions and are the new parliamentary voting units The budget bill is submitted to parliament by 15 October each year In the economicfinancial programming cycle the budget bill is the tool used to finalise the allocation of resources It offers a way to propose amendments to expenditure provided for in existing laws legislative factors and the funding of the operations of public bodies can be quantified The reform implemented by Law No 1962009 assigns a mediumterm programming function to the budget on the basis of which the budget is effectively a threeyear budget The administrations must provide proposals for each of the three years covered by the budget and provide not only accrualbased but also cashbased forecasts The main innovations of law No 1962009 Law No 1962009 on the reform of public accounts and finances arose from the need to bring the laws and rules governing public finances and budget management in line with the requirements arising from Italys membership of the monetary union the evolution of the economic system and the new institutional relationship between the state and decentralised bodies The new law is aimed at bodies making up the public administration The unitary government of public finances One of the main new features is the authority to harmonise the draft balance sheets and accounting systems of public administrations and set up a single databank in order to collect their accounting and management data to ensure that easily comparable information is available promptly and to facilitate the monitoring and control of public accounts The new programming cycle and the procedures for formulating the relevant instruments provide for a greater involvement of all levels of government in designing budget policies and more coordination between these policies and Community objectives Financial and 181 budget programming has a mediumterm focus with policies objectives and resources being programmed over three years Control of public finances and the quality of expenditure In order to make the tools for controlling public finances more effective the practice used hitherto of covering each new legislative initiative with three balances net balance to be funded from the budget cash balance and net debt of the public administrations has been put on an institutional footing making implementation of the cover required by the constitution consistent with the criteria and parameters adopted by the European Union The new law helps to reinforce the mechanisms and tools for the quantitative and qualitative control of expenditure Greater focus on measuring and evaluating results is achieved by providing the central state administrations with a programme of analysis and evaluation of expenditure that is also conducted by setting up analysis and evaluation units for that purpose Transparency The information content of the public financial programming documents has been improved by the addition of revenue and expenditure forecasts that are divided into subheadings the drafting of explanatory notes on the methods used to forecast trends the drafting of annexes on the effectiveness of publicfinance measures and on the annual monitoring of income expenditure and the publicsector borrowing requirement Notes to the Accounts The Notes to the Accounts are documents that are attached to the national budget that supplement and provide further details on the budget itself They are the tool by which each ministry illustrates in relation to the expenditure programmes the criteria for drawing up the forecasts the objectives to be reached and the indicators to measure them They are an integral part of the wider programming process that starts with the general formulation of the Governments objectives develops them in relation to the individual administrations checks that initial budget forecasts are compatible with public finance constraints and objectives and concludes after parliaments approval of the budget law with the annual directives issued by the ministries The Notes to the Accounts basically define and describe the objectives of the expenditure programmes and provide concise indicators to make it easier to ascertain whether the objectives have been reached Delegations of powers completion of the review of the structure of the national budget and the changeover to cashbased accounts The rules and the structure of the Italian state budget will change as a result of the implementation of two delegations of powers the first concerns completion of the reform of the structure of the budget the second concerns the changeover from accrual and cashbased reporting of income and expenditure to only cashbased reporting The delegation to complete the reform of the national budget which has to take place within two years of the law coming into effect will involve in particular a review of the number and structure of missions and programmes so as to ensure a better correlation between the voting units and the functions performed by the administrations The objective is to ensure a clear correspondence between the programme and the ministry and to assign each programme to a single centre of administrative responsibility The programmes must be identified 182 in such a way as to ensure their homogeneity with reference to the results to be achieved in terms of products and final services review of the basic income and expenditure units The review must ensure that income is named so as to enable the source of revenue to be identified correctly and more clearly Actions will be introduced for expenditure in the form of basic units for management and reporting instead of the current chapters the actions will be accompanied by an integrated plan of accounts the threeyear programming of resources and objectives with the setting of simple and measurable indicators establishment of criteria and methods for fixing expenditure ceilings and adoption of threeyear agreements between the Ministry of the Economy and Finance and the other ministries to agree resources objectives and deadlines for achieving them As part of the fight against fraud we should mention the work of the General Accounting Office in managing EU funding The General Inspectorate for Financial Dealings with the European Union Ispettorato generale per i rapporti finanziari con lUnione Europea IGRUE is one of the ten general departments of the General Accounting Office and helps to draw up implement and certify the budget of the European Union and conduct overall monitoring of the corresponding financial flows and controls delegated by the European Union 3 The concept of Public Internal Control in the administration 31 Managerial accountabilityresponsibility Managerial responsibility is governed in Italy by Legislative Decree No 165 of 2001 although the origins of the current arrangements can be found in Legislative Decree No 29 of 1993 One of the principles behind the 1993 reform is the clear separation between political and administrative spheres currently set out in Article 4 of Legislative Decree No 1652001 According to this principle government organs provide policy and administrative guidelines to define the objectives and the programmes to be implemented and check the compliance of the results of the administrative activity and management with the guidelines given This principle assigns senior managers the task of adopting administrative acts and measures including the administrations external commitments and of implementing financial technical and administrative management For this purpose senior managers are given independent powers over expenditure and the organisation of human material and control resources ultimately they are solely responsible for the work of administration and management and the corresponding results In other words while the policymaking bodies are responsible for deciding on the objectives to be pursued the basic organisational structure and overall staffing levels the managers have the concrete task of managing the departments This framework was further fleshed out by subsequent legislative measures primarily Law No 145 of 2002 that gave public managers a dual disciplinary and managerial responsibility The disciplinary responsibility is that common to all publicsector employees and concerns infringement of the general duties provided for in Article 54 of the Italian Constitution and set out in detail in the Code of Conduct for Employees of Public Administrations The Code of Conduct which was drawn up by the Public Function Department sets out principles of ethical conduct for publicsector employees diligence 183 fairness impartiality etc infringement of which may involve civil administrative criminal or accounting responsibility Managerial responsibility on the other hand relates specifically to publicsector managers and substantially relates to the results achieved by the managers in their administrative work and in management In particular there are two possibilities failure to reach objectives ie a senior management failure and failure to comply with the directives issued by policymaking bodies such noncompliance must be attributable to the behaviour of the manager An annual appraisal is conducted as prescribed by Article 5 of Legislative Decree No 286 of 1999 which is based on the information supplied by the review and strategic control body and is conducted on via the chain of command the individual manager of a single unit is evaluated by the head of the general management sector concerned the general manager is evaluated by the head of department and the head of department is evaluated by the minister If the appraisal is unfavourable the managerial appointment is not renewed or is terminated early In the most serious cases the manager may also be dismissed under the terms of the national employment contract 32 Internal Audit The Italian public administration has not developed a legal basis for internal audits in the strict sense of the term Nevertheless many of the tasks that are part of an internal audit above all financial and accounting tasks are performed by the offices of the Ministry of the Economy and Finance UCB and RTS with the aim of increasing the efficiency and efficacy of public expenditure No laws or regulations provide for internal audits and no apparently equivalent terms indicate the function of internal audit in the strict sense of the term This applies particularly to the central administrations of the state ministries the Prime Ministers Office etc Nevertheless forms of internal audit are found in various bodies owing to the organisational independence that they are given by the regulatory setup whereby they have been given their own responsibilities and activities under their articles of association or through their standing rules governing the organisation of offices responsibilities and activities pertaining to their functions These forms of internal audit have been developed in public bodies both in the first tier of government for example the Inland Revenue State Property Land Registry and Customs Agencies which have taken over ministerial responsibilities and in instrumental public bodies and regional and local administrations comuni and provinces Nevertheless Legislative Decree No 2861999 framework law governing internal controls does not provide a legal basis for the internal audit function Pending the introduction of forms of internal audit in the public administration we should mention the reform brought in by Legislative Decree No 1502009 concerning measures for increasing the productivity and efficiency of public administrations In particular an appraisal system has been introduced for both management and nonmanagement publicsector employees based on performance reviews this has been made possible by the adoption of what are called threeyear performance plans designed to boost the productivity of public officials This function is performed in each body or administration by an independent appraisal body individual or collective person that is coordinated by a central committee known as the Independent Commission for Appraisal Integrity and Transparency in the Public Administration Although the function of appraisal of public employees does not coincide with that of internal audit there are some points in common first of all the 184 independent nature of the body responsible the scheduling of the activity that is the object of the control and the planning of the control In view of this similarity in order to put internal audits on a sounder footing in the public administration the Independent Commission for Appraisal Integrity and Transparency in the Public Administration the organism at the central level is tasked with issuing directives in order to provide a minimum legal basis Without such a basis owing to the wide powers of discretion in drawing up articles of association and standing rules any provision for forms of internal audit would not only be ad hoc but would vary according to the nature of the body their size their activities etc For example sometimes the function is held to coincide only with internal inspections whereas in other instances it is fully developed in structures that ensure ordinary activity It is thus clear that the degree of independence of the internal auditor where this function exits varies according to the body how it is set up and its size In general this function is assigned to a manager who is assigned a unit or structure that does not have any distinguishing features as regards its position or dealings with the directorate general or administrative board of the body compared with all the other units or structures If on the other hand the function of the internal audit were developed as part of an independent evaluation setup greater independence from the body would obviously be assured The preceding remarks reflect the objective difficulty of describing in general terms the internal audits freedom to report and make recommendations and the relationship between the internal audit function and management As far as professional training is concerned the certification issued by the Internal Audit Association is not generally required for appointment to managerial positions Appointments to managerial positions are normally made on the basis of competitive examinations in general administration subjects that are not usually closely connected to the functions that will have to be performed It is however possible to make fixedterm managerial appointments that are proportional to the total number of managers and are based on the experience and professional qualifications of the appointee if fixedterm managerial appointments are made professional qualifications of this type including relevant certificates obtained will probably be taken into consideration On the subject of different types of audit checks on the regularity of administrative accounts may usually also serve the purpose of financial audits Conformity auditing is nevertheless more frequent Financial inspection on the other hand corresponds to administrative accounting checks except that the inspection is obviously nonroutine and makes greater use of sampling Compared with the internal audit function it focuses on compliance with the law and regulations and ascertains the administrative and accounting responsibilities of administrators and management 321 Internal Audit relations with External Audit As there is currently no legal basis for conducting an internal audit in the strict sense of the term the relationship between internal audits and external audits is not institutionalised in the Italian system At present it is possible to complain to or at least alert the bodies that perform the function of external audit They can also obtain any documentation relating to the body or administration that is the subject of the report 185 322 Audit Boards or Audit Committees Legislative decree No 1502009 which implemented Law No 15 of 4 March 2009 on improving the productivity of the public sector and the efficiency and transparency of public administrations set up two bodies to measure and appraise the organisational and individual performances of public administrations a central body known as CIVIT Independent Commission for the Appraisal Integrity and Transparency of Public Administrations and for each individual administration the OIVs Independent Performance Evaluation Bodies The law tasks CIVIT which is called upon to show independence of judgement and evaluation and work in complete autonomy with the task of directing coordinating and supervising the appraisal functions to ensure the transparency of the systems adopted and the visibility of the indicators of public administrations management performance This task which essentially aims to improve the efficiency of the public sector and the quality of services to citizens whilst recognising and rewarding the merits of individuals and of groups that operate inside the administrations goes hand in hand with that of ensuring total administrative transparency ie making the data relating to their working also accessible through the online provision of a careful selection of the data that is truly useful to enable the institutions and citizens to take an active part in controlling the way in which the public domain is managed This function is also particularly relevant because the law sees data transparency as a tool for ensuring the integrity of public administrations and thus preventing the serious problem of corruption The members of CIVIT are appointed by the cabinet Each administration also has an Independent Performance Evaluation Body OIV that performs a multitude of tasks such as monitoring the overall operation of the system of evaluation transparency and integrity of the internal controls and drawing up an annual report on its working promptly reporting any problems to the relevant internal government and administration organs ensuring that the measuring and evaluation processes are correct in order to uphold the principle of rewarding merit and professionalism applying correctly the guidelines the methods and the instruments provided by CIVIT promoting and certifying transparency and integrity checking the results and good practices arising from the promotion of equal opportunities In the Italian system there are also management control units provided for in Legislative decree No 2861999 Under Article 4 of this Legislative decree each administration sets up at individual department level units that are responsible for designing and implementing management controls These units map the processes products and aims of the administrative action of the department to which they belong measuring the results of the administrative action in terms of efficiency efficacy and cost and conducting periodical monitoring of the time resources costs and quality of the activities of the department The main aim is specified in Article 1 of Legislative decree No 2861999 namely checking the effectiveness efficiency and cost of the work of the administration in order to optimise also by prompt corrective measures the costbenefit ratio Within the general framework of the system set out in Legislative Decree No 1502009 the performance plan and the performance report provided for in Article 10 are of particular importance 186 In order to ensure the quality readability and reliability of the performance reporting documents public administrations must each year by 31 January draw up a threeyear programme report called the performance plan This plan must be consistent with the contents and cycle of financial and budgetary programming and must set out the guidelines and strategic and operational objectives defining the indicators for measuring and evaluating the performance of the administration the objectives assigned to managers and the relative indicators with reference to final and intermediate objectives and resources A report called the performance report must be adopted by 30 June it describes with reference to the previous year the organisational and individual results obtained compared with the individual programmed objectives and resources and points out any slippages The plan and the report are sent to CIVIT and to the Ministry of the Economy and Finance 33 Coordination of Public Internal Control The Italian system has four types of control that are described in our reply to point 1 BRIEF HISTORY OF PRESENT PUBLIC INTERNAL CONTROL SYSTEMS Different bodies are responsible for coordinating these types of control The Ministry of the Economy and Finance coordinates and harmonises the control of administrative and accounting regularity which has to guarantee the legitimacy validity and propriety of the administrative action This function is performed in particular by the State General Accounting Department and the branches of this department the UCB located in each central administration the RTS located throughout the country in each of the provincial capitals the central inspectorate of public finances a specialised body of inspectors The Offices for Departmental Control have the task of checking the effectiveness efficiency and good value of the administrative action in order to optimise the cost effectiveness These offices are set up in each department of the individual ministries The Offices for Departmental Control work directly with the head of the department and they are coordinated by the Independent Performance Evaluation Bodies see reply to point 322 AUDIT BOARDS OR AUDIT COMMITTEES As already illustrated in the reply to point 31 Managerial accountability responsibility there is already an evaluation system for evaluating managers via the chain of command the individual manager of a single office is evaluated by the head of the general management sector concerned the general manager is evaluated by the head of department and the head of department is evaluated by the minister Finally there is strategic control which evaluates the appropriateness of choices in terms of consistency between the results and the objectives see the reply to point 1 BRIEF HISTORY OF PRESENT PUBLIC INTERNAL CONTROL SYSTEMS and is conducted by the abovementioned OIVs These are structures that are directly answerable to the bodies issuing policy and administrative guidelines and they are coordinated by the CIVIT Independent Commission for the Appraisal Integrity and Transparency of Public Administrations See also the reply to point 322 Audit Boards or Audit Committees 187 4 Financial Inspection Financial inspections are outside the hierarchy and are conducted by the Minister of the Economy and Finance where public finances are involved The absence of any hierarchical relationship between the administration conducting the inspections and the offices or administrations inspected means that the basis for this type of inspection is laid down in law In particular the framework measure governing publicsector employees gives the Ministry of the Economy and Finance authority to monitor expenditure on staff and imposes the obligation to report irregularities to the State Audit Court When exercising these powers the public finance inspection services of the Ministry of the Economy and Finance act under the above framework law giving them a specific role in inspecting the administrative and accounting regularity of the administration This means that the inspections may cover all the aspects of the inspected administrations and not only the regularity of expenditure on staff In addition to reporting any irregularities detected to the State Audit Court the inspection also involves questioning the managers of the inspected offices or administrations to obtain further details on what has been observed or to ensure that suitable remedial measures are taken Inspections are generally scheduled on the basis of directives signed by the Ministry but this does not exclude the possibility of acting on individual petitions or notifications of alleged irregularities The Ministry directive is implemented by scheduling the inspections on the basis of the main and most frequent financial irregularities detected and of the objective of reducing waste and inefficiencies in public expenditure as set out in general programming documents see the Financial Economic Programming Document now called the Public Finance Decision In general the inspections relate to an administrations past management in particular the previous five years beyond which losses suffered by the exchequer can no longer be recovered under the laws governing this type of responsibility As to the relationship between the inspection and control functions we should note that inspections while designed to repress irregular or unlawful conduct have primarily an auxiliary collaborative function and serve to spread good administrative practices 5 Ongoing andor future reforms The reform of controls under way is based on the new law governing public accounts and finances Law No 1962009 This law requires the government to issue a series of implementing measures that are still being drawn up The provisions of this law concerning controls are as follows monitoring of public finances comparison of the results of different administrations achievement of publicfinance objectives defined in terms of financial balances that comply with EMU limits provision of a different basis for the public administration subject to the controls which should be defined in terms of substance rather than just formally following the adoption of Eurostat criteria More generally Law No 1962009 introduces new instruments for achieving the objectives of transparency and coordination and reinforces the role of Notes to the Accounts These are documents attached to the national budget by means of which the individual administrations illustrate in relation to the expenditure programmes the criteria for formulating forecasts the objectives to be achieved and the indicators for measuring them The most important innovations are the threeyear time scale and a greater focus on measuring the effects that the public policies aim to produce greater focus on output and outcome indicators 188 Legislative decree No 1502009 on the other hand aims to optimise the productivity of public work and the efficiency and transparency of the public administrations requiring them to adopt a system for measuring and evaluating performance with reference to the administration as a whole to the organisational units and to individual employees Measuring and appraising organisational and individual performance provided for in Legislative decree No 1502009 is designed to improve the quality of the services offered by the public administrations whilst measurement of the results of the internal objectives of expenditure programmes of the national budget provided for by Law No 1962009 will make the allocation of public resources better and more transparent Both laws establish a link between the two systems of measuring performance Another important reform arises from the approval of Law No 42 of 2009 Delegation of powers to the Government concerning Fiscal Federalism in application of Article 119 of the Constitution In 2001 the Italian parliament approved a constitutional law Law No 3 of 2001 that radically amended the part of the Italian constitution dealing with local government and relations with the state The objective was to create the bases and the essential conditions for a future transformation of Italy into a Federal Republic overturning the hierarchy in lawmaking Whereas before matters on which the regions could pass laws on a joint basis were listed and the state was responsible for all the rest Constitutional Law No 3 of 2001 lists the matters for which the state is solely responsible together with matters for which the state and regions are jointly responsible the regions are left with the general or residual responsibility what is called legislative federalism This reform has had various effects The main ones include a polycentric and no longer hierarchical organisation of the Italian Republic which now consists of comuni the provinces the metropolitan areas the regions and the state the possibility giving ordinary regions that so request having reached agreement with the state the special forms and conditions of autonomy what is called differentiated federalism the comuni are given priority in administrative action inclusion in the Constitution of the principle of administrative federalism introduction of the principles of vertical subsidiarity between the various government levels of the Republic and of horizontal subsidiarity between public bodies and citizens inclusion of the principles of fiscal federalism and the setting up of an equalisation fund for disadvantaged areas of the country abolition of prior state control of regional legislation Law No 42 of 2009 is an enabling law to implement the new Article 119 of the Constitution that was introduced after the 2001 reform The new Article 119 in fact confers taxraising and expenditure autonomy on comuni provinces metropolitan areas and regions obviously in accordance with the principles of solidarity and social cohesion The main objective is to replace at all levels of government the criterion of historical expenditure by that of standard expenditure Determining costs and standard requirements will constitute the indicator with which to compare and evaluate public action This will ensure the maximum degree of responsibility effectiveness and transparency of controls 189 Law No 422009 also contains provisions establishing the main principles for the coordination of public finances and the tax system and for organising the settingup of an equalisation fund for parts of the country that have a lower fiscal capacity per inhabitant Tax federalism will be implemented in a manner compatible with Italys commitments at the European level to the Stability and Growth Pact and in order to avoid overlapping functions with the transfer of central administration functions to local administrations which will of course also be accompanied by a transfer of staff Lastly we should mention the reform of controls following the delegation of powers to the government under Legislative decree No 123 of 30 June 2011 This decree provides for the reform and strengthening of the system of accounting controls and the programme of analysis and evaluation of expenditure It comprehensively reforms the provisions on controls of administrative and accounting regularity carried out by accounts departments and introduces instruments to improve them by way of procedural innovations especially by simplifying streamlining and revising the terms of ex ante and ex post controls It has comprehensively reformed the provisions on controls of administrative and accounting regularity carried out by accounts departments and introduced instruments to improve them by way of procedural innovations In particular it has comprehensively reformed ex ante and ex post control procedures simplified and streamlined them and revised the terms The decree is composed of five titles Title I Articles 1 4 General principles and guiding criteria Title II Articles 518 Controls on the administrative and accounting regularity of acts of the state administration Title III Articles 1922 Controls of the audit committees or boards in public institutions and entities Title IV Articles 23 24 Controls of the Public Finance Inspection Services Title V Articles 2528 Analysis and evaluation of expenditure Title I sets out the general principles common to all types of control Article 2 states that the controls on administrative and accounting regularity are aimed at acts that impact on the balances of the state other public administrations and public entities Controls on acts having financial impact is carried out by the bodies specifically set up for the purpose in the various sectors of the public administration and in the case of the state administrations by the relevant offices of the State General Accounting Department namely the UCBs and RTS Constitutional bodies and bodies of constitutional significance Constitutional Court Parliament the Presidency of the Council of Ministers the Council of State the Court of Auditors the Council of the Judiciary remain outside this scope Title II provides for controls on the administrative and accounting regularity of acts of state administrations excluding however ex ante controls on acts with financial impact adopted by state administrations organisations and entities with financial and accounting autonomy Title III covers the controls of audit committees or boards in public institutions and entities Relevant to the work and duties of such audit bodies in public entities is the impact on the entities and internal audit bodies covered by Legislative decree No 39 of 27 January 2009 sic 2010 on the statutory audit of the consolidated or annual accounts 190 This decree implements Directive 200643EC on statutory audits of annual accounts and consolidated accounts and repealing Directive 84253EEC Eighth Directive on statutory audits of accounting documents Directive 200643ECimplemented by Legislative decree No 39continues a series of acts expressly concerned with corporate entities required to keep income and expenditure and balancesheet accounts Many statutory audit techniques eg fixed asset cycles the valuation of securities and investments etc are specifically addressed to this type of accounting record We should add that the statutory audit regime is a unitary system and the reliability that it can confer on accounting records depends on the proper application of all the constituent methods In other words application of only some methods of the statutory audit does not constitute completion of the statutory audit all the audit methods routinely in use must be fully applicable to the entity in question in order to constitute the statutory audit of a public body For Legislative decree No 392011 sic to be applicable to a public entity there must be as well as income and expenditure and balancesheet accounts an express legal provision or statute laying down such a requirement for the entity In particular given that the term statutory audit was introduced by Directive 200643EC and introduced into national law by Legislative decree No 39 Italian law needs to provide for a specific requirement for statutory audits auditing of accounts certification of financial statements official audits or other forms of equivalent controls which is quite demanding in terms of substance and terminology In the absence of such provisions the components of the control body cannot be required to control obligations that are specifically related to the activity of statutory auditing and it is sufficient that they carry out the tasks required by Legislative decree No 123 of 2011 Title IV covers the controls of the Public Finance Inspection Services Subject to these controls is the administrativeaccounting management of all public administrations except the regions and the autonomous provinces of Trento and Bolzano In these cases the Inspection Services may however carry out checks concerning any deviation from publicfinance objectives Title V contains provisions on the analysis and evaluation of the expenditure of central state administrations by the State General Accounting Department 191 LATVIA Public Internal Control Major changes and updated information in 20112013 Chapter 1 Brief History of your Present Public Internal Control Systems Chapter 2 Internal Control Environment in State Administration In Chapter 2 there is fully updated information about budget planning budget execution accounting and preparation of financial reports Chapter 3 Concept of Internal Control System in State Administration Information of Chapter 3 has been fully updated definition of internal control system legal order detailed description of interconnected elements from which the internal control system is formed 32 Internal Audit It is described which tasks are performed by the Internal Audit Department of the Ministry of Finance The Ministry of Finance evaluates the activity of Internal Audit Units established in ministries and authorities For the evaluation of Internal Audit Units activity there is the objective evaluation criteria and rating scale described 321 Cooperation of Internal and External Audit The tasks of the Internal Audit Council are being updated Chapter 5 Current and Future Reforms The Chapter has been fully updated describing the reforms planned in the future such as development of management efficiency development of information systems management including development of IT audits certification and further education of internal auditors etc 1 A brief history of our present public internal control system The development of a system of internal controls in Latvia is closely associated with Latvias integration into the European Union During preaccession negotiations the Latvian authorities committed themselves to establishing an internal audit system covering all ministries and their subordinate bodies and laying down the responsibilities of the directors of those bodies with regard to setting up the system In its regular report of November 1998 on Latvias progress towards EU integration the European Commission pointed out the need to strengthen internal audit and control systems 192 The Cabinet of Ministers approved Regulation No 342 the internal audit regulations on 5 October 1999 These contain the following definition of an internal control An internal control system is an action plan adopted by the management of a body and all methods and procedures ensuring the effective management of that body The basic requirements for an internal control system however were not legally prescribed in any piece of legislation until the Cabinet of Ministers adopted a regulation on the basic requirements for establishing the internal control system on 23 August 2003 The Regulation set the basic requirements for an internal control system and the main principles for establishing and organising internal controls Nevertheless over time the need arose to improve the existing legal framework as the basic requirements for establishing the internal control system were considered too general and insufficient to ensure a shared understanding of what constitutes an internal control system within a public administration The Cabinet of Ministers adopted a new Regulation on the internal control system on 8 May 2012 The Regulation applies only to bodies under direct State administration bodies answerable to the Prime Minister and ministries and their subordinate bodies The body responsible for drawing up the Regulation on the internal control system and steering it through the approval process was the Ministry of Finance The new Regulation was presented as the product of a collaborative effort between various institutions the State Chancellery Ministry of Finance and Corruption Protection and Combating Bureau The Regulation is based on the internal control system model adopted by COSO Committee of the Sponsoring Organizations of the Treadway Commission 2 Public Internal Control Environment The procedures for drawing up approving and implementing the State Budget local authority budgets and the budgets of nonbudgetary authorities and the responsibility for drawing up approving and executing the budget in Latvia is laid down in the Law on budgetary and financial management LBFV The LBFV applies also to State and local authority agencies and public foundations Procedures for drawing up and executing local authority budgets in Latvia are also laid down in the Law on local authority budgets This Law sets the conditions for independent budgeting by city and municipal authorities Mediumterm budgetary planning has been done in Latvia since 2013 A law on the mediumterm budgetary framework and another on the Annual State Budget law are currently being drafted The Minister for Finance is responsible for drafting these laws The draft laws are approved by the Parliament in two readings Cabinet Regulation No 867 of 11 December 2012 laying down the procedure for determining the maximum total State Budget expenditure and the maximum total State Budget expenditure for each Ministry and other central government bodies for the medium term lays down the procedure for calculating funding for the medium term The maximum total expenditure is calculated in accordance with the Law on the medium term budgetary framework on the basis of macroeconomic development forecasts taking into account the fiscal conditions established in the country where these have been laid down in legislation on mediumterm budgetary planning or fiscal discipline and on the basis of decisions taken by the government in respect of forecasting expenditure for new policy initiatives Ministries and other central government institutions draw up budget requests for the medium term in accordance with the procedure laid down in Cabinet Regulation No 523 of 31 July 2012 on the basic principles for drawing up and submitting budget requests 193 The most important measures for ensuring control over State Budget resources while implementing the Law on the Budget are compilation and approval of a funding plan the budget implementers revenue and expenditure plans drawn up in accordance with the Law on the annual State Budget with draft plans being drawn up for each month to manage implementation of the budget in line with the grant from State Budget resources Cabinet Regulation No 1220 of 28 December 2010 on the procedures for granting and implementing appropriations Programme or institutional funding plans are drawn up in accordance with the Law on the annual State Budget For payments to be made from State Budget resources bodies draw up payment instructions and send them to the State Treasury electronically in order for it to carry out the relevant transfers Communication with the State Treasury takes place via the electronic eKase eTreasury tool When making a transfer via e Kase the payment is checked automatically against the awarded budgetary allocations in the funding plan accounts are opened at the State Treasury to receive State Budget resources and implement expenditure to receive appropriations and spend State Budget resources bodies financed from the State Budget open accounts for funds from the State Core Budget and State Special Budget exclusively with the State Treasury These same bodies also open deposited fund accounts exclusively with the State Treasury To receive and spend State Budget resources budgetary institutions except for budgetfinanced authorities and local authorities open current accounts exclusively with the State Treasury unless provided for otherwise in other legislation Nonbudgetary authorities open current accounts exclusively with the State Treasury revenue and expenditure estimates are made to enable the relevant body to plan funds within the approved budget analyse the implementation of revenue and expenditure across programme and subprogramme financial indicators and trace their correspondence to approved financing plans Cabinet Instruction No 2 of 20 January 2009 on the procedures of parafiscal bodies for drawing up and approving currentyear estimates for State Budget programmes sub programmes and measures accounting for State Budget finances which is organised by the State Treasury Article 291 of the LBFV Ministries other central government bodies and local authorities submit financial reports and financial information to the State Treasury on those limited liability companies in which the State and local governments hold shares This is done in accordance with the procedure and to the extent prescribed by the Cabinet of Ministers Article 304 of the LBFV The State Treasury is responsible for financial management in accordance with its remit and in compliance with the requirements of the LBFV Article 463 of the LBFV External audit Financial statements of all departments as well as financial statements from general public administrations prepared by the State Treasury are audited on an annual basis by the State Audit Office which also delivers an opinion in accordance with international standards of audit The State Audit Office is the highest independent collegial audit body the operation of which is governed only by the law The Law on the State Audit sets out the following responsibilities of the State Audit Office 194 Submitting to the Latvian Parliament an annual opinion regarding the Minister of Finance report on the execution of the national budget and financial condition of local budgets in the economic year Delivering annual opinions regarding the correctness of annual statements of ministries and other central public bodies Carrying out audits of legitimacy and performance in accordance with an audit plan approved by the State Audit Office Council Information regarding results of audits carried out by the State Audit Office is provided to the Latvian Parliament and the Cabinet of Ministers infringements which come to light during audits are reported to law enforcement bodies Pursuant to Sections 211 and 212 of the Law on the State Audit in the course of financial legitimacy and performance audits the State Audit Office controls revenue and expenditure of budget funds in public and local authorities and other derived public bodies and the use of funds of the European Union and other international organisations and bodies included in the national budget or local authority budgets The aim of the State Audit Office is to make sure that the use of funds specified in Paragraph 1 of this Section is legitimate correct economical and efficient and to provide recommendations for correcting revealed irregularities The State Audit Office also informs the Financial Audit Board of the results of all audits The State Audit Offices audit reports are available on the Audit Office website The fight against fraud andor irregularities A number of bodies have been established in Latvia to prevent and investigate fraud such as the Corruption Prevention and Combating Bureau Economic Crime Department of the State Police Financial Crime Department of the State Revenue Service and the Customs Criminal Board The Ministry of Finance has been designated as the contact institution for cooperation with OLAF It also functions as the antifraud coordination service AFCOS The new membership of AFCOS has been approved by Cabinet Order No 475 of 15 October 2013 on the membership of the Council for Coordinating the Protection of EU Financial Interests It is a collegiate consultative body whose aim is to facilitate the introduction and development of a coherent policy at national level with regard to the protection of the EUs financial interests The AFCOS Council examines irregular expenditure of EU funds during AFCOSs regular meetings The Head of the AFCOS Council is the State Secretary of the Ministry of Finance and among its members are senior officials of European Union fund managing authorities the above mentioned investigative bodies and the Ministry of Justice The AFCOS Council maintains direct contact and exchanges information with OLAF departments and national authorities The Ministry of Finance as the Managing Authority of European Union and Structural Funds and the Ministry of Agriculture as the Managing Authority of the agriculture and fisheries funds are responsible for daily operations relating to the administration of irregularities and drawing up regular reports 195 3 The concept of public internal control in our administration 31 Managerial accountabilityresponsibility Pursuant to Latvian law the head of a body organises and is responsible for the performance of its functions and for managing its administrative activities so as to ensure continuity effectiveness and legitimacy The head of a body is responsible for establishing monitoring and improving the internal control system Heads of bodies also have the following responsibilities a managing the financial human and other resources b determining the responsibilities of its officials and employees c appointing and dismissing its officials and hiring and dismissing its employees d ensuring that the bodys annual operational plan and budget request are prepared e laying down procedures for the ex ante and ex post control of administrative decisions The head of a body must be an official who is a civil servant or employee of the body and who is appointed or hired on the basis of professional criteria 32 Internal Audit The Ministry of Finance draws up its internal audit policy with the aim of obtaining assurance that the internal control system in ministries and bodies is functioning As part of coordinating internal audits in public administration institutions the Ministry of Finance submits a consensus opinion on the public internal control system to the Cabinet makes an assessment of the activities of internal audit units submitting its opinions to the heads of the relevant institutions and to ministers and supervises internal auditors certification The legal basis for internal audits is the Law on internal audits which lays down how the internal audit system is to be established how it is to operate and how it is to be coordinated the responsibilities of officials tasked with establishing internal audit units the tasks of the internal audit units the principles underpinning the independence of the internal audit units and the responsibilities of an internal auditor including ethical principles In Latvia an internal audit is an independent and objective activity performed by an internal auditor which results in the auditor issuing an opinion or advice aimed at improving the operation of the internal control system in a particular ministry or body The internal audit unit acts independently of the bodys other units in terms of planning its operations carrying out internal audits and reporting the results of its activities The internal auditor does not involve itself in performing the primary functions of a ministry or body nor in implementing programmes and projects wholly or partially financed by the European Union or in providing foreign financial aid designing specific projects or programmes or in establishing the internal control system The internal auditor may participate in the performance of these functions as a consultant An internal audit units rules of procedure are approved by the head of the relevant body The internal audit units rules of procedure lay down the status aims functions tasks essence of consultations scope of work structure and rights and responsibilities of the internal audit unit 196 The internal audit unit submits a report on internal audits to the head of the body Additionally the head of the body determines which officials are to be apprised of the contents of internal audit report The head of the internal audit unit ensures that the contents of internal audit reports are made known to the relevant officials The head of an internal audit unit is responsible for preparing a review of operation of the internal audit unit over the previous calendar year and submitting this review to the head of the body The review contains the following chapters the internal audit units plans systems audited in the reporting year an opinion of the internal control system employees of the internal audit unit and other significant information The review of a ministrys or bodys internal audit unit must also contain information on the units activity implementation and quality indicators Based on the information provided by internal audit units by 1 June of the relevant year the Ministry of Finance prepares a report on the functioning of the internal audit system in ministries and bodies and submits this and the opinion of the Internal Audit Council to the Cabinet of Ministers and State Audit Office in accordance with established procedure Internal audit units carry out internal system audits based on a risk assessment and internal audits of the quality management system Depending on the aim of a particular audit internal audit units carry out compliance audits financial audits performance audits IT audits and functional audits The procedure for monitoring internal audit recommendations is laid down in each individual bodys internal rules on internal audits The head of the internal audit unit is responsible for informing the head of the body of how the implementation of recommendations is progressing If a recommendation is not implemented in a timely manner the head of the body takes a decision with regard to further action 321 Internal Audit relations with External Audit The internal audit unit is responsible for monitoring the implementation of the State Audit Offices and external auditors recommendations at the body concerned The internal audit unit provides the State Audit Office with the internal audit units strategic plan annual plan and annual report When examining the system during system audits internal auditors avail themselves of the results of external audits carried out by the State Audit Office In line with international auditing standards the State Audit Office assesses whether it is possible to avail itself of the work done by internal auditors whenever it carries out an external audit In nearly all cases the State Audit Office can use the work done by internal auditors to gain an understanding of the domain to be audited and the potential risks it poses and to assess the internal control system Until now the State Audit Office has been able to use the work of internal auditors as part of its audit certainty The State Audit Office arranges meetings with internal audits once a year at which the shortcomings detected in the external audits conducted in the previous year external audit priorities for the coming year and possible areas of cooperation are discussed In 2013 the State Audit Office and internal auditors agreed on necessary action to be taken to further improve cooperation 322 Audit Boards or Audit Committees An Internal Audit Board operates in Latvia It is a consultative body whose aim is to improve the quality of internal audits and introduce and develop internal audit policy and methodology in public administration The responsibilities of the Internal Audit Board are 197 to evaluate internal audit units annual reports and other information regarding the operation of internal audit units and to prepare opinions to present an opinion on the Ministry of Finances annual draft report on the performance of internal audits in public administration to evaluate proposals submitted by ministries and bodies for refining and improving internal audit processes and to submit recommendations to the Minister for Finance to evaluate information submitted by internal audit units concerning instances where the independence or objectivity of internal audit were compromised the Board may participate in peer reviews of internal audit units carried out by the Ministry of Finance Audit Committees in public administration bodies in Latvia are established on a voluntary basis and are operating in certain bodies Audit Committees usually consist of senior administrative officials of the relevant bodies Ministers State Secretaries Deputy State Secretaries No mandatory requirements for establishing Audit Committees are considered necessary as the structure of public administration bodies does not allow Audit Committees to act completely independently of the bodys administrative and political management nor is it expedient to maintain separate organisations for this purpose outside those bodies 33 Coordination of Public Internal Control No formal units or institutions responsible for coordinating public internal controls have been established in Latvia Assessment of the internal control system is the responsibility of internal audit units Internal audit units give their opinion of the operation of the internal audit system in the annual report on the internal audit units operations The Ministry of Finance prepares a summary of the information provided and includes it in the annual report on internal audits in public administration The report is submitted to the Cabinet of Ministers 4 Financial Inspection According to Article 2 of the Law on the Corruption Prevention and Combating Bureau KNAB the KNAB is a public administration body under Cabinet supervision which performs the corruption prevention and combating functions provided for in that Law and verifies that funding regulations for political organisations political parties and their associations are being complied with The Bureau carries out investigative field work The role of the State Audit Office in the control of the use of funds Every year the State Audit Office carries out audits of the Ministry of Finance and State Revenue Service with regard to the revenue section of the Finance Ministers report on the execution of the State Budget and local authority budgets The aim of this audit is to obtain assurance that the revenue administration system as it stands ensures that the taxes collected are reflected properly in the annual report The audit comprises checks of the principal tax administration processes influencing the recording and verification of payments and taxable persons and the collection of State taxes and duties and other mandatory payments in Latvia Initiation of checks The State Audit Office is an independent body and takes decisions on its plans and unscheduled audits independently When carrying out a risk analysis and planning its 198 operations the Office takes all of the information it has available into account including publicly accessible information submissions by individuals etc The Office also sends the Finance Minister an information report about the audits it has carried out thereby ensuring the exchange of information between the State Audit Office as the supervisory authority and the Ministry of Finance The reports are also sent to the Ministry of Finance separately 5 Ongoing andor future reforms 1 From 2014 the duties of an internal audit manager may be performed only by a person who has obtained a professional internal auditors certificate 2 Since 2012 the Ministry of Finance has been informing the Cabinet of its views on the functioning of the public internal control system 3 The methodology for assessing the operations of internal audit units has been improved in line with the Quality Assessment Handbook produced by Institute of Internal Auditors 4 The following activities to enhance management effectiveness are planned improve policy development planning by linking it to budgetary planning and the analysis of performance indicators introduce a labour resource accounting system throughout the civil service increase the share of effectiveness audits and in so doing determine how possible it is to reduce resource consumption in order to achieve the goals set 5 From 2014 local authorities are also to submit a statement to the Minister for Finance confirming both the establishment of a comprehensive and effective internal control system which ensures that annual reports are compiled without fraud and significant irregularities caused by errors and the choice and application of a suitable accounting policy 6 Accounting for tax in line with the accrual principle is scheduled to be introduced by 2016 199 LITHUANIA Public internal control 49 49 Contributed by the Ministry of Finance of Lithuania Summary of the major changes 20112013 The main changes in Section 2 of the Compendium Public Internal Control Environment are related to the further development of the programme budget based on the strategic planning principles accounting and financial reporting system corruption prevention public administration and civil service The strategic planning and programme budgeting systems are described in more detail highlighting the functions of the Seimas Parliament Government Ministry of Finance of the Republic of Lithuania State budget appropriation managers and municipalities The information about the preparation of the sets of annual consolidated financial reports of the Republic of Lithuania for 2010 in 2011 for 2011 in 2012 for 2012 in 2013 and the first national set of financial reports for 2012 in 2013 as the result of successful public sector accounting and financial reporting system reform is presented The information about the preparation of the National AntiCorruption Programme and its implementation plan of the Republic of Lithuania for 20112014 and changes in the functions of state and municipal as well as nongovernmental institutions caused by implementation of the aforementioned documents approved is presented highlighting the responsibility of the Head of a public legal entity for corruption prevention The information about the main legal acts regulating public administration and civil service is presented highlighting the principles of ethics upon which activities of civil servants in the Republic of Lithuania are based The main changes in Section 31 of the Compendium Managerial AccountabilityResponsibility are related to the further improvement of the procedures for planning documents implementation monitoring of activity results and financial control performance public procurement execution in the public sector of the Republic of Lithuania The implementation of strategic and annual activity plans development and preparation of program estimates monitoring of programme implementation results are described in more detail highlighting the functions of the Government Ministries and public legal entities The public procurement procedures are described in more detail highlighting the functions of the Central Purchasing Organization Public Procurement Office and purchasing organizations The procedures for preparation submission and analysis of the Reports on the State of Financial Control and the functions of the Ministry of Finance of the Republic of Lithuania and public legal entities are described in more detail 200 1 Brief history of the development of public internal control The beginning of the Lithuanian public internal financial control PIFC reform is the year 2000 in parallel with other ongoing public administration and public expenditure management reforms supporting the PIFC system when the following main legal instruments for internal audit and financial control were adopted in the Republic of Lithuania Law on the Budget Structure on 11 July 2000 Law on Local SelfGovernment on 7 July 1994 amended on 12 October 2000 Law on Public Administration on 17 June 1999 Government Resolution No 127 on Internal Audit of State Enterprises and Establishments of 7 February 2000 amended by Resolution No 1098 of 13 September 2001 Government Resolution No 273 on the Composition of the Standing Inter Departmental Commission for Coordinating the Development of the Internal Audit System in the Public Sector and on the Commissions Regulations of 9 March 2001 Government Resolution No 1116 on Internal Audit Standards of 19 September 2001 Government Resolution No 379 on the Approval of the Procedure for Control and Assessment of Programme Implementation by Appropriation Managers of the State Budget of 5 April 2001 Minister of Finance Order No 26 on the Internal Audit Manual for Public Enterprises and Institutions of 31 January 2001 amended by Order No 22 of 23 January 2002 The coordination of PIFC was especially enhanced when the Standing InterDepartmental Commission for Coordinating the Development of the Internal Audit System in the Public Sector was established under Government Resolution No 273 of 9 March 2001 The Ministry of Finance is in charge of the overall methodological guidance on internal audit and financial control issues and on 1 October 2001 the Financial Control Methodology Department was established as a Central Harmonising Unit the CHU Thus the Ministry of Finance following the appropriate obligations delegated by the government and the Seimas parliament of the Republic of Lithuania became the main driver of the reform in the field of internal audit and financial control The CHU responsible for implementing the requirements for the Accession Negotiations of Chapter 28 Financial Control prepared the policy paper document which triggered the further establishment and full development of a comprehensive and effective PIFC system in the Lithuanian public administration area Taking into consideration the recommendations and practical support from the European Commission twinning partners and the recommendations provided under SIGMA Peer Review of 2002 as well as further ongoing monitoring activities by SIGMA also following the internationally accepted principles COSO IIA the existing internal audit legislation was consolidated into a single primary document the Republic of Lithuania Law on Internal Control and Internal Audit hereinafter referred to as the PIFC Law at the end of 2002 Progress was made and the accession negotiation Chapter 28 was closed in December 2002 Then secondary and tertiary legislation in the field of PIFC internal audit charters internal audit and financial control manuals code of professional conduct guidelines etc followed Internal audit units hereinafter referred to as IAUs were established in all the line ministries and other public institutions a few years later on also in municipalities The 201 majority of internal audit posts and positions were occupied in the public sector Internal auditors were regularly trained under a newly prepared four modules continuous training programme for internal auditors in the training centre of the Ministry of Finance In addition a number of twinning projects Phare SPP II etc comprised training components on internal audit and internal control not only for internal auditors accountants but also for the heads of the public institutions These contributions considerably enhanced the administrative capacities of IAUs in the public sector The year 2001 was especially important in the external audit area The National Audit Office of Lithuania prepared the Strategic Development Plan for 200106 According to the appropriate regulations and in line with international standards the National Audit Office NAO was reorganised into a supreme audit institution 2 Public internal control environment This paragraph presents an analysis of the highlevel state institutions such as the Seimas parliament government and ministries of the Republic of Lithuania Key principles and rules of internal control are also applied to the lowerlevel institutions and those of local selfgovernment municipalities still due to different government and activity structures as well as organs regulated by individual legal acts these can only be analysed with the knowledge of the legal acts regulating their activities The Republic of Lithuania has developed a public internal control system embedded in the PIFC Law which defines the basic objectives principles responsibilities and accountability of the functioning of internal control including financial control and internal audit At state level the implementation of the state budget usage of state funds management usage of state assets and disposal of it implementation of the State Social Insurance Fund Mandatory Health Insurance Fund usage of the state budget funds allocated to municipalities and implementation of municipal budgets as well as within the scope of state audit management usage of municipal assets and disposal of it usage of the European Union assistance received in the Republic of Lithuania and implementation of the programmes where the Republic of Lithuania participates are audited by the NAO which is accountable to the Seimas parliament The NAO performs financial legitimacy and performance audits Internal audits of public legal entities that are in compliance with the criteria established in appropriate legal acts are performed by IAUs which are subordinate and accountable to the head of a public legal entity Other legal entities are audited by a centralised internal audit unit of a superior institution IAUs of public legal entities report on their activities directly to the Ministry of Finance on an annual basis Heads of public legal entities monitor and report on the functioning of the financial control system Public legal entities submit a report on the state of financial control to the public legal entity they are subordinated to or within whose sphere of regulation they are and the highlevel state institutions submit this report to the Ministry of Finance The programme budget in accordance with the strategic planning principles is prepared in the Republic of Lithuania Implementing the government programme each year the government approves the government activity priorities and the plan for preparation of draft financial indicators of the state budget and municipal budgets of the next year The government also approves threeyear preliminary key indicators of the national budget and general principles of determination of maximum appropriations Having regard to the terms determined in the plan for preparation of draft financial indicators of the state budget and municipal budgets and in accordance with the strategic planning methodology approved by the government state budget appropriation 202 managers prepare draft strategic activity plans and draft programmes which are based on calculations of estimates The Ministry of Finance determines maximum amounts of state budget appropriations available for three years for the planned appropriation managers prepares state capital investment preliminary limits for each field for three years and informs appropriate institutions about that State budget appropriation managers according to the determined maximum amounts of state budget appropriations revise the strategic activity plans and prepare draft programme estimates and standard calculation templates approved by the Minister of Finance They inform budgetary institutions and other institutions subordinate to them about the projected key indicators of their activity maximum amounts of appropriations other indicators for three years which are necessary for calculations of appropriations in draft programme estimates State budget appropriation managers inform municipalities about the projected amount of appropriations for performance of state functions delegated to them and for financing of a students basket State budget appropriation managers present prepared draft programme estimates and calculations to the Ministry of Finance The Ministry of Finance prepares the draft state budget of a corresponding budget year in accordance with the government programme or other planning documents approved by the Seimas parliament and government requirements of legal acts macroeconomic forecasts of the economic growth European Union assistance strategic documents threeyear preliminary key indicators of the national budget revised strategic activity plans of the state budget appropriation managers programmes draft programme estimates and calculations and together with state capital investment preliminary allocation by appropriation managers and investment projects for a corresponding year other documents submits to the government and the Seimas parliament Seimas parliament of the Republic of Lithuania approves the planned indicators budget revenue and appropriations of the consolidated state budget and municipal budgets for three budget years and also the plan for state budget revenue and appropriations for the budget year The Council of the municipality approves the plan for the municipal budget revenue and appropriations for the budget year The appropriations of the State budget and municipal budgets are used for financing the programmes approved by appropriation managers carrying out the functions of the state and municipalities The Ministry of Finance prepares the Set of the State Budget Implementation Reports and presents it to the government of the Republic of Lithuania The Set of the State Budget Implementation Reports is based on the accounting data of the state budget revenue received in the state budget Sets of the Budget Implementation Reports presented by appropriation managers The government presents the Set of the State Budget Implementation Reports to the Seimas parliament for approval The administrations of municipalities prepare the Sets of the Municipal Budgets Implementation Reports which are based on the accounting data of municipal budgets revenue received in municipal budgets used appropriations of municipal budgets Sets of the Budget Implementation Reports presented by appropriation managers The Council of the municipality approves the Set of the Municipal Budget Implementation Reports The Ministry of Finance prepares a consolidated Set of the Municipal Budget Implementation Reports and presents it to the government The audit on the implementation of the State budget is performed by the NAO The audit on the implementation of municipal budgets is performed by the NAO under the scope of the state audit and the controllers of municipalities IAUs evaluate the implementation of the programmes of appropriation managers and budgetary institutions subordinate to them 203 Public sector accounting and financial reporting system reform in the Republic of Lithuania was launched in 2005 The main goal of the reform was to move from cash basis to accrualbasis accounting The structure preparation and presentation requirements for financial and budget implementation reports to public legal entities were established in 2007 The public sector accounting and financial reporting standards common chart of accounts accounting guides for separate groups of public legal entities and consolidation guide were prepared analysis of public sector accounting information systems used was performed and alternative decisions concerning the optimisation of public sector information technologies and software were taken according to the action plan for the implementation of the reform by the end of 2008 Public legal entities began to use in practise the accrual accounting principle and to prepare financial reports according to the requirements for public sector accounting and financial reporting standards and the common chart of accounts from 2010 The reform was performed progressively The first set of annual consolidated financial reports of the Republic of Lithuania for 2010 was prepared in 2011 The sets of annual consolidated financial reports of the Republic of Lithuania for 2011 and for 2012 were prepared in 2012 and in 2013 accordingly The sets of consolidated financial reports of individual municipalities State Social Insurance Fund and Mandatory Health Insurance Fund were prepared in parallel The first national set of financial reports for 2012 was prepared on 30 July 2013 It includes the sets of consolidated financial reports of all municipalities State Social Insurance Fund Mandatory Health Insurance Fund and the State and is presented as the set of one public legal entity Introduction of the new accounting principles and standards should create more favourable conditions for better information flows improving internal controls National AntiCorruption Programmes of the Republic of Lithuania for 20112014 and the plan for its implementation were approved by the Seimas parliament in 2011 The draft programme and its implementation plan for the new period are prepared by the government with involvement of the Special Investigation Service State municipal and other institutions present proposals concerning the aforementioned programme and its implementation plan for the new period to the Special Investigation Service The prevention of corruption is carried out by the government the Chief Official Ethics Commission the Special Investigation Service other state and municipal as well as non governmental institutions Government ensures the implementation of corruption prevention measures in ministries and institutions subordinate to them and foresees the funds for this The Interdepartmental Commission for Coordination of Fight against Corruption formed by the government coordinates the implementation of the National AntiCorruption Programme of the Republic of Lithuania and controls the implementation of this programme plan The Chief Official Ethics Commission analyses the problems of civil servants ethics participates in drawing up and codification of legal norms determining the requirements for professional ethics implements corruption prevention measures delegated to it The Special Investigation Service performs anticorruption evaluation of legal acts and draft legal acts regulating energetics health protection pharmaceutics environment protection law enforcement planning of territories and state supervision of construction communication public procurement and their implementation control analysis of corruption risk in state and municipal institutions acting in the fields of administrative services administration of public services State budget municipal budgets and the European Union assistance The Special Investigation Service and other institutions of criminal intelligence in accordance with the Law on Criminal Intelligence of the Republic of Lithuania carries out the activities of collecting recording evaluating and using of available information about the criminal activities possibly developed ongoing or committed about the persons who develop make or have made such activities about active actions of such persons in neutralizing criminal intelligence about other events and persons related with national security The head of a public legal entity is responsible for corruption prevention in state municipal and nongovernmental institutions In the event of detecting infringements 204 during the internal audit to be investigated by law enforcement institutions the head of the IAU should transfer all internal audit documents to the competent law enforcement institutions When the statutory audit detects infringements to be investigated by appropriate public administration entities or law enforcement institutions state audit documents should be transferred by an appropriate decision of the Head of the NAO and his deputies In accordance with the Republic of Lithuania Law on Public Administration the administrative powers are provided to state and municipal institutions and bodies funded by the state or municipal budgets and state monetary funds Legal relationship arising from public administration activities of a civil servant in a state or municipal institution or body acquisition change or loss of the status of a civil servant compound civil service The main principles of civil service legal framework of civil service management responsibility status salary social and other guarantees of the head of a state or municipal institution or body and other public servants performing public administration activities and duties in civil service are set in the Republic of Lithuania Law on Civil Service The activities of civil servants in the Republic of Lithuania are based on principles of ethics respect for the individual and the state justice selflessness decency fairness accountability transparency exemplarity set up in the Code of Conduct of Civil Servants approved by the government 3 The concept of public internal control The public internal control system was built and developed in accordance with INTOSAI principles The following provisions are consolidated in the PIFC Law Internal control is the entire set of controls established by the head of a public legal entity who owns uses state and municipal assets and disposes of them hereinafter public legal entity in order to provide reasonable assurance that the transactions of the public legal entity are legal economic efficient effective and transparent strategic and other plans are implemented assets are safeguarded financial and other information and reporting are reliable and exhaustive contractual and other liabilities to third parties are satisfied and that all identified risks are managed Financial control is a constituent part of the internal control system of a public legal entity which is used to ensure the legality of the economic activities of a public legal entity and compliance with the principles of sound financial management economy effectiveness efficiency and transparency In the Republic of Lithuania the head of the public legal entity is responsible for creation improvement and monitoring of functioning of financial control in the public legal entity and approval of the rules for financial control of the public legal entity hereinafter the rules for financial control in accordance with the Minimum Financial Control Requirements approved by the Ministry of Finance The rules for financial control including references to other internal documents should contain the financial control procedures implemented from adoption of a decision to perform a certain transaction to its implementation and inclusion of data of accounting or other documents justifying transactions into accounting registers Correct and timely drawing up and submission of financial and other reports is another essential objective of financial control The rules for financial control specify financial control procedures that are established in view of the nature of activities and peculiarities performance risks organisational structure accounting and information systems the state of protection of assets in a public legal entity 205 The head of a public legal entity supervises the functioning of financial control continuously analyses its efficiency in the public legal entity The head of a public legal entity ensures functional and organisational independence of internal auditors The IAU systematically and comprehensively evaluates risk management and internal control in the public legal entity and provides the head of the public legal entity with recommendations on the improvement of activity and internal control system including financial control as a constituent part of it of the public legal entity The IAU monitors implementation of the recommendations provided The NAO promotes positive and effective impact of state audit on the state financial management and control system and public administration oriented to results and society needs The NAO cooperates with IAUs 31 Managerial accountabilityresponsibility The PIFC Law establishes the responsibility of the heads of public legal entities for the creation of the efficient internal control system its functioning and improvement appointment of the staff responsible for performance of financial controls In accordance with this law internal control covers all five COSOinterrelated components control environment risk evaluation control procedures information and communication monitoring In creating its internal control system the head of a public legal entity ensures that its activities comply with legal acts work regulations the rules on internal work procedure procedures strategic plans contracts of the public legal entity and ensures the reliability of performance and financial information effectiveness of performance and the protection of assets and liabilities In accordance with the law the top administrative manager of the public legal entity called the Chancellor is responsible for the functioning of internal control and its monitoring He or she is a career civil servant not at civil servant of political personal confidence ie not a politically appointed manager He or she appoints the staff to be responsible for implementing the financial control procedures in the public legal entity Although the assignment of internal control functions falls within the competence of the head of the public legal entity eg the Chancellor the delegation of decisionmaking powers falls within the competence of top managers eg ministers of the public legal entity Ministers as members of the government are responsible for the implementation of the government programme for its annual priorities as well as for the planned results in the area assigned to them The Chancellor is responsible for organisation and coordination of drawing up and implementing the strategic activity plans of the ministry for the coordination and control of the activities of administrative units of the ministry He or she ensures that in implementing strategic activity plans of the ministry financial material intellectual and information resources are managed and used to the optimum extent On the ministers order the Chancellor coordinates and controls the activities of bodies subordinated to the ministry Before the head of a public legal entity takes decisions ex ante control takes place through either acceptance or rejection of decisions related to the use of state and municipal assets and liabilities to third parties The ex ante control function is separated from decision initiation and implementation The ex ante financial control is performed by the chief accountant accountant or the head of an accounting structural unit The chief accountant responsible for ex ante financial control of a transaction signs or refuses to sign appropriate accounting or other documents allowing carrying out the transaction The chief accountant by signing accounting and other documents of the transaction certifies that the transaction is legal accounting and other documents relating to its performance are prepared adequately and that the appropriations approved are sufficient for carrying out the transaction 206 In performing ex ante financial control the chief accountant has the right without a separate instruction to be given by the head of the public legal entity to receive from heads of structural units senior officials and employees of the public legal entity the written and oral clarifications on the preparation of accounting and other documents necessary for the performance of the transaction and copies of those documents In accordance with the current legal acts the chief accountant is directly subordinate to the head of the public legal entity top administrative manager The Seimas parliament approves the state budget of the Republic of Lithuania Public legal entities in the Republic of Lithuania plan their performance forming strategic activity plans and annual activity plans In strategic activity plans public legal entities describe their mission set strategic changes and strategic objectives describe programmes which they perform results to be achieved planned appropriations and human resources in annual activity plans goals and objectives of the programmes of the strategic activity plan Ministers agree in writing with the Prime Minister to approve the strategic activity plan of the management fields assigned to them strategic activity plans of institutions under the Ministries the heads of which are appropriation managers Strategic activity plans of state institutions are approved by the Ministers of the appropriate management field Other appropriation managers approve strategic activity plans of the institutions they manage The Ministers also approve annual activity plans of the ministries institutions under the ministries other subordinate budgetary institutions Ministers can assign the heads of the aforementioned institutions to approve annual activity plans of budgetary institutions subordinate to them The annual activity plans of the state institution harmonised with the minister of the appropriate management field are approved by the head of the state institution Each state budget appropriation manager each budgetary institution subordinate to it each budgetary institution subordinate to institutions of the ministers management field which implement programmes of the appropriate appropriation manager and other public legal entities after the approval of the state budget of the corresponding year develop programme estimates and fill in standard program estimate templates Programme estimates are signed by the heads of public legal entities State budget appropriation managers approve their strategic activity plan programme estimates of their own institution budgetary institutions subordinate to them and other public legal entities The Ministry of Finance according to the programme estimates submitted to it by appropriation managers prepare and submit to the government the draft Resolution on the Allocation of the Approved State Budget Appropriations by Programmes which determines the amounts of appropriations for each programme of the state budget appropriation manager For evaluation of the programme implementation results and appropriations used the aforementioned public legal entities determine evaluation criteria and prepare standard templates of their descriptions as well as standard templates of the budget estimate reports Top managers of a public legal entity in delegating powers of implementation may not delegate their responsibility for the implementation of these functions and expenditure related to the implementation thereof The government and the ministries of the Republic of Lithuania perform the permanent monitoring of planning document implementation results within their competence The monitoring data is submitted to the Centralised Monitoring Information System which 207 presents information for preparation of activity reports initiation of programmes evaluations and state budget expenditure reviews Internal control ensures that the activities of a public legal entity are carried out in accordance with the procedure prescribed by laws other legal acts meeting strategic or other activity plans with programmes and procedures aimed at protection of the state and municipal assets as well as liabilities to third parties against fraud misappropriation embezzlement illegal management or other illegal acts and that the public legal entity follows the principles of sound financial management in its activities In order to save funds and assets present performance data in true and fair financial and other reports greater attention was given to the legality of transactions performed and the correctness and integrity of accounting records The Law on Public Procurement sets strict requirements for the arrangement and carrying out of public procurement and establishes the responsibility of top managers of a contracting authority as well as detailed public procurement procedures Public procurement procedures are carried out by the Central Purchasing Organisation which purchases goods and services for purchasing organizations performs public procurement procedures concludes preliminary agreements Purchasing organisations must purchase goods and services from the Central Purchasing Organization or through it when the items in the catalogue of the Central Purchasing Organization satisfy the needs of the purchasing organization and such organizations cannot purchase the items in more effective way using the funds rationally The policy of public procurement is implemented and arrangement of public procurement procedures is supervised by the Public Procurement Office which is a budgetary institution accountable to the government The Public Procurement Office manages the Central Public Procurement Information System which is designed to provide electronic instruments for provision and management of public procurement notifications and reports performance of public procurement procedures and publishing information about public procurement on the Internet Each year heads of the public legal entities based on the template approved by the Ministry of Finance prepare reports on the state of financial control an annual statement in public legal entities including public legal entities subordinate to them or assigned to their management area These reports are submitted following the procedure established by the government The principle for submission of these reports is based on the principle of accounting to the higherlevel public legal entities the lowerlevel public legal entities summarise the data on public legal entities and report on their activities performed The reports comprise essential aspects of financial control This ensures accountability of the public sector for the state of financial control The head of the public legal entity signs the report on the state of financial control of the public legal entity The Ministry of Finance analyses l reports on the state of financial control submitted by the Office of the President Office of the Seimas parliament public legal entities accountable to the Seimas parliament Prime Ministers Office government institutions other public legal entities established by the government ministries and other public legal entities and prepares the summary of these reports The following issues of the submitted reports on the state of financial control are analysed accounting performance risk management implementation of the rules on financial control evaluation of financial control management of the assets performance of the internal audit function According to the data received the requirement for the improvement of the existing legal acts and other documents is examined 208 32 Internal audit The legal basis The Law on Internal Control and Internal Audit the PIFC Law approved in 2002 The document defines the basic legal framework goals and procedures for the functioning of internal control including financial control and internal audit in a public legal entity as well as responsibilities of its heads according to internationally accepted principles COSO IIA etc The Standard Charter of the Internal Audit Unit approved by the government resolution in 2003 The activities of the IAU shall be governed by the Internal Audit Charter approved by the head of the public legal entity which is developed following the template text for the Internal Audit Charter approved by the government The Rules of the Professional Ethics for Internal Auditors the Code of Ethics approved by Minister of Finance of the Republic of Lithuania Order in 2003 The document defines the principles and norms of professional conduct of internal auditors of a public legal entity which they shall follow when exercising their rights carrying out responsibilities and functions The Standard Internal Audit Methodology approved by Minister of Finance of the Republic of Lithuania Order in 2003 The document aims at assisting the IAU in drafting the internal audit methodology having regard to the characteristics of activities performed by the public legal entity The Internal Audit Guidelines approved by the Standing InterDepartmental Commission for Coordinating the Development of the Internal Audit System in the Public Sector in 2003 The guidelines serve as an additional and comprehensive reference tool to provide the internal auditors of the public legal entities with principles concepts and recommendations which are to support them in conducting their activities and in preparing the specific manuals on internal audit The nature of functional independence of the internal auditor visàvis the top manager to which the internal auditor is attached can be clarified as follows 321 Freedom of audit reporting and recommending to top management or lower levels The basic aspects and status of the functional independence of the internal audit in the Republic of Lithuania are embodied in the existing PIFC Law secondary and tertiary legislation Functional independence of the internal auditor refers to being free from interference in determining the scope of internal audit performance of audit work and communicating results Also the IAU may not be involved in the performance of any managerial function of the public legal entity The IAU reports directly to the head of a public legal entity which means that the IAU is organisationally free from undue influence and control of the senior management Furthermore in cases of disagreements and conflicts the head of the IAU has the right to discuss the situation with the Ministry of Finance the CHU The CHU assesses how the aforementioned aspects are implemented and function during quality assessment reviews of the internal audit units consultations and other sources of information Also the Ministry of Finance the CHU monitors the appointment and dismissal of the head of the IAU the representative of the CHU participates as a member of the Commission for selection of candidates to the position of the head of the IAU The head of a public legal entity dismissing the head of the IAU shall inform the Ministry of Finance about the dismissal indicating the reasons in all cases except when the head of the IAU resigned on hisher own initiative or request the PIFC Law Representatives of the CHU 209 participate as members of the Commission for evaluation of career development of the heads of IAUs and their internal auditors The IAU also provides the manager of the public legal entity and the Ministry of Finance with the annual report on its activities during the year which shall cover various performance aspects including the details of any major audit findings where action is urgently required but has not been taken including those identified in the previous years reports 322 The use of audit charters to be agreed upon between management and the internal audit function The PIFC Law states that the activities of the IAU are governed by the Internal Audit Charter approved by the head of a public legal entity which is developed following the Standard Internal Audit Charter approved by the government The goals tasks functions rights and other organisational aspects of the IAU are defined in the aforementioned document Also the internal auditor shall sign hisher job description that usually makes reference to the Internal Audit Unit Charter after heshe is employed as a civil servant The internal auditor may not be involved in the performance of any managerial function in the organisation the PIFC Law The independence of the head of the IAU is a key issue in providing an effective service to the management Sometimes it happens that internal auditors are involved in the daytoday operations of the organisation eg internal auditor participating in the activities of various commissions as a member not in the observers capacity developing an audit trail within the organisation creating anticorruption programmes etc The CHU follows such situations and communicates them to the heads of the public institutions in writing or during quality assessment reviews of the IAUs in order to preserve the functional independence of the internal auditor The head of the IAU also has a possibility to inform the CHU on such cases andor present them in the annual report on the activities of the IAU The internal auditor is bound by the Rules of Professional Ethics and must refuse to carry out the internal audit by notifying the head of the IAU and the head of the public legal entity about such cases where performance of the internal audit in the public legal entity may give rise to a conflict of public and private interests the PIFC Law 323 Training Until 2009 the Training Centre of the Ministry of Finance has continued organising training for internal auditors and other PIFC actors The major part of the training programmes was created in 200001 However the outdated training system had to be reformed the training programmes had to be revised and updated in accordance with the most recent EU standards The Ministry of Finance the CHU as coordinator of internal auditor training has implemented in cooperation with the Training Centre the project Strengthening the Administrative Capacities of Civil Servants in the Area of Financial Control and Internal Audit under the EU Transition Facility Programme Since 2010 a new programme for certification procedures has been introduced to public internal auditors The training programme consisted of six level training modules each of which took 4060 academic hours from 2011 six level training modules each of which took 2540 academic hours The training package and training arrangements were professionally organised concentrating on understanding of concepts and regulations governing internal audit internal audit of public legal entities internal audit by sector and internal audit focus on administrative capacities strategic planning EU assistance audits and psychological aspects The modules were given by the university professors and professional internalexternal auditors Each module ended with an appropriate module examination After the successful completion of the required training programme internal auditors from the public sector are awarded with a certificate The PIFC Law encourages internal auditors to continuously upgrade their knowledge skills and other 210 professional qualities and capacities At present the certification for public sector internal auditors is voluntary The certificate demonstrates the quality of the internal auditor From 2010 till now 183 public internal auditors have been certified accounting for about 43 percent of all internal auditors working in the public sector There are also other types of public sector training frequently provided by the local and foreign experts and the Ministry of Finance in a particular field of internal audit eg public procurement audits information systems audits etc in one or twoday seminars Heads of IAUs are organisationally free from undue influence and control of the senior management by virtue of reporting directly to the head of the public legal entity the PIFC Law According to the existing legal framework every public legal entity assumes the responsibility for the implementation of particular budgetary programmes compilation and execution within the limits of approved appropriations expenditure estimates and effective use of appropriations approved The main function of the internal audit is to provide recommendations to the head of a public legal entity with the goal of improving the activities management and internal control of the public legal entity In implementing this function the internal auditor shall assess the implementation of strategic and other action plans programmes of a public legal entity and the economic efficient and effective use of the state and municipal assets The internal auditor following the objective of the internal audit may perform financial operational performance and compliance audits as well as information systems audits and potential combinations of these audits The consultancy assignment is defined in the PIFC Law the internal audit provides an independent objective assessment examination evaluation and consulting designed to improve the performance of a public legal entity Consulting activities are basically oriented towards the internal audit work already performed by the internal auditor and are based on the findings and recommendations provided The PIFC Law states that the head of a public legal entity shall ensure that heads of the administrative divisions of the public legal entity heads of the audited public legal entities subordinate to him heads of the audited public legal entities assigned to his management field make decisions on the implementation of the internal audit recommendations provided in the audit report In case of disagreements with the provided recommendations the head of the institutiondivision audited shall give to the heads of the public legal entity and the head of the IAU a written explanation of the reasons for their disagreement The head of the public legal entity shall take the final decision on the implementation of the recommendations Also the head of the public legal entity ensures that the recommendations presented by the IAU are implemented within a certain timeframe The standard internal audit methodology approved by the Minister of Finance stipulates that in cases where a level of risk assumed by the head of the audited public legal entity regarding the errors and deficiencies detected during the internal audit may have an adverse impact on the activities of the auditee the IAU shall notify the head of the public legal entity especially so if the head of the auditee does not take into consideration the recommendations given by the internal auditor and does not eliminate the deficiencies The head of the IAU has also the right to approach the CHU on concerns which heshe believes are not being adequately addressed If indications of fraud andor irregularities are identified during the course of the internal audit the head of the IAU shall submit without delay all such cases to law enforcement institutions following the procedure established by laws and other regulatory enactments 211 324 Internal audit relations with external audit The cooperation between the National Audit Office the NAO and internal auditors is based on the existing legislation IAUs shall submit annual internal audit plans and annual reports on the IAUs activities to the NAO the PIFC Law in order to avoid duplication of appropriate functions or works the activities of the IAU shall be coordinated and information exchanged with other auditors performing audit activities in a public legal entity the PIFC Law the NAO collaborates with other audit institutions enterprises and IAUs the Law on National Audit Office an external auditor can use the results of an internal auditors work in reducing the extent of its audit procedures Requirements on National Audit Given their common interest in a wellfunctioning PIFC and improvement of the public sector management the NAO and internal auditors support each other in the following ways sharing professional audit experiences increasing scope for use by both internal and external auditors of each others work improving audit methodologies developing audit quality assurance Close cooperation between the NAO and the CHU takes place in terms of developing the internal audit training format As the CHU coordinates the training process of internal auditors and other PIFC actors the representatives of the NAO are often invited to give lectures and share their practical experience with specific training issues ie information systems audits public procurement audits etc The representatives of the NAO the CHU and public sector internal audit are sometimes invited to participate in joint meetings organised by the Audit Committee of the Seimas parliament in order to raise urgent questions and give their opinions from the perspective of internal and external auditors The updated Cooperation Agreement between the National Audit Office NAO the Ministry of Finance the Association of Municipality Controllers the Association of Internal Auditors and the Chamber of Auditors of the Republic of Lithuania was signed on 30 December 2010 Pursuant to the provisions established in the updated Agreement the Committee and newly established working groups started their activities dealing with issues related to the amendment andor development of the existing methodologies internal control issues audit quality assurance matters sharing audit experiences etc 325 Audit boards or audit committees In 2001 at the beginning of the internal audit development process in Lithuania the Standing Interdepartmental Commission for Coordinating the Development of the Internal Audit System in the Public Sector SIC was established under a government resolution The main task of the SIC was to monitor and coordinate the development of the internal audit system in the public sector It also performed other functions such as assessing commenting issuing opinions and recommendations to state institutions on the establishment of IAUs internal audit methodologies and procedures individual internal audit reports and recommendations and the annual reports of the Ministry of Finance on the state of internal audit units in the public legal entities The SIC has been 212 functioning for eight years and in 2009 following the amendments to the government law finished its proceedings Alternatives when needed will be considered in the future The Parliamentary Audit Committee deals broadly with the issues related to the National Audit Office However it also considers the annual report on the functioning of the internal audit system in the public sector prepared by the Ministry of Finance the CHU This audit committee debates draft laws prepares conclusions thereon and examines issues of accounting financial statements external and internal audits 33 Coordination of public internal control To support the harmonised PIFC system in the Republic of Lithuania the functions of the Central Harmonisation Unit the CHU were assigned to the Financial Control Methodology Department now called the Internal Audit and Financial Control Methodology Department of the Ministry of Finance which was established on 1 October 2001 The department is accountable to the Chancellor and appropriate ViceMinister of the Ministry of Finance and has the following structure Internal Audit and Financial Control Methodology and Monitoring Division combining as of 2009 two separate divisions the Financial Control Management Methodology Division and the Internal Audit Methodology and Monitoring Division hereinafter called Division Internal Audit Analysis Division and performs the following main functions development of legislation and methodological guidance on financial control and internal audit quality assurance reviews of internal audit units activities onthespot checks analysis of functioning of the internal audit and financial control systems analysis of annual reports reporting on an annual basis to the government and the Seimas parliament on the functioning of the internal audit system in the public sector coordination of the training in the field of internal audit and financial control implementation of special tasks regarding coordination of EU assistance audits programming period 200406 carries out functions of an audit authority of the EEA and Norwegian Financial Mechanisms period for 20092014 preparation of the annual general Lithuanian and Swiss cooperation programme management and control system internal audit plan and summary of audit report findings and recommendations of the projects under this programme The division performs the quality assurance reviews and onthespot checks of internal audit units activities according to the established requirements as it is stipulated in the PIFC Law and other legal acts regulating internal audit and analyses the IAUs functions in the public sector The quality assurance reviews are performed in accordance with annual IAU review schedules drawn up by the head of the division or as the need arises The division examines the activities of the IAU under the quality assurance reviews as well as the organisation of the IAU activities the development and implementation of the IAU plans the procedures and documentation of the internal audit its followup activities human resources management and other issues related to the functioning and quality of the IAU After completing the review of the IAU performance a review report is issued The review report is addressed to the head of the public legal entity which may comment on the findings and recommendations andor take appropriate decisions concerning the further developments of the IAU The review report is also made available 213 to the head of the reviewed IAU who is responsible for the implementation of the recommendations provided Each year by 1 July the CHU in the Ministry of Finance prepares and sends to the government and the Audit Committee of the Seimas parliament the annual report on the functioning of the internal audit system in the public sector the PIFC Law This annual report is prepared on the basis of information collected from the internal audit units each year by 1 March the head of the IAU shall prepare and submit the annual report on the activities of the unit including the information on the functioning of the internal control system in the public legal entity to the Ministry of Finance The annual report on the functioning of the internal audit system also covers the main issues related to the activities of the CHU and information collected during the quality assurance reviews of IAUs The annual report informs line ministries and other authorities about the CHUs plans and recommendations for any new actions towards further improvements Later on the annual report on the functioning of the internal audit system is analysed by the government and the Audit Committee of the Seimas parliament where appropriate decisions on further developments of the internal audit system within the public sector may be taken Also the head of a public legal entity annually reports to the Ministry of Finance on the state of financial control in the public legal entity including public legal entities subordinate to them or assigned to their management area The Ministry of Finance issued a template form for the information collected The annual reports are concise and focus on financial control systems weaknesses so that the heads of the public legal entities could assess themselves the state of the main financial control components and use them to their benefit The annual reports are used for benchmarking progress over the years as well 4 Financial inspection There is no financial inspection service in the Republic of Lithuania However there is the Financial Crime Investigation Service FCIS which is the law enforcement institution accountable to the Ministry of the Interior In order to protect the state financial interests the FCIS relies on detection and investigation of financial crimes and other legal violations against the financial system instead of implementing the follow up financial inspections In pursuing its tasks in accordance with the relevant laws the FCIS discloses and investigates the activities relating to deceptive and negligent management of accounting by taxpayers submission of knowingly false data about taxes state levies and other payments to the responsible institutions and agencies the evasion of taxes state levies state social insurance and other payments as well as discloses and investigates activities relating to the legitimisation of the money or property derived from criminal activity other violations of law related to the financial system The FCIS carries out intelligence activities inquiries pretrial investigations into the economic and financial activities as well as controls and cooperates with law enforcement and other institutions and agencies of the Republic of Lithuania other countries and the international organisations on issues within its competence and performs other functions laid down by law The FCIS is the main institution responsible for the cooperation of antimoney laundering activities and has the status of the Financial Intelligence Unit FIU of Lithuania It also acts as a partner to the European AntiFraud Office OLAF and performs the role of an AntiFraud Coordination Service AFCOS in Lithuania 214 5 Ongoing andor future reforms Reforms are ongoing or planned in respect of the following issues developing the good practice documentsguidelines and other legal documents as necessary for the elaboration of issues like internal control assessment quality of the internal audit and internal audit function in the municipalities continuing of training and certification process for the internal auditors of the public sector The certification process of the internal auditors will be further elaborated The established groups for supervision examination experts and other working groups will expand their activities quality assurance reviews of the internal audit units in the public sector With reference to the developed methodology and annual plans the number of onthe spot checks will be increased to enhance the quality of the IAUs performance 215 LUXEMBOURG Public internal control Major changes since 2012 refer to chapter 5 1 Brief history of the public internal control systems in force The first Chamber of Auditors of the Grand Duchy of Luxembourg was established by the Royal GrandDucal Decree of 4 January 1840 The Chamber had jurisdiction to audit the revenue and expenditure not only of the State but also of communes as well as of foundations and establishments placed under state control The Chamber could submit to the Government proposals to reduce spending Moreover it had administrative and judicial jurisdiction as regards accounts and accountants and had the power to exercise disciplinary control over accountants The Chambers jurisdiction to audit the accounts of communes and public establishments was not maintained for long Pursuant to the Law of 23 September 1847 regulating the accounts of communes and public establishments the control thereof has been assigned to the Minister of Home Affairs Subsequently the organisation and attributions of the Chamber of Auditors were further modified especially by the Law of 19 February 1931 concerning the organisation of the Chamber of Auditors and of the General Revenues and by the Law of 27 July 1936 concerning the accounts of the State Henceforth the Chamber conducted the audit of all state financial operations and for this purpose held the power to deny budgetary discharge The Chamber also performed the ex ante control of state expenditure verifying based on documentary evidence the legality and regularity of expenditure after commitment but before payment By the amended law of 7 March 1969 the General Inspectorate of Finance Inspection Générale des Finances was established In 1999 the reform of the entire public finance control and management system led to the Law of 8 June 1999 establishing the Court of Auditors and to the Law of 8 June 1999 on the state budget accounts and treasury as well as to the revision of Article 105 of the Constitution The objectives of the Law establishing the Court of Auditors the successor to the Chamber of Auditors were as follows to invest the Court with the full missions and means necessary for conducting an independent neutral and efficient audit of public finance to operate a clear separation between on the one hand internal financial control to be organised and ensured by the Government and on the other hand external financial control to be carried out by the Court of Auditors 216 to entrust the Court of Auditors with the ex post verification of the legality and regularity of revenue and expenditure as well as with the assessment of the sound financial management of public funds to expand the activity scope of the Court of Auditors beyond the control of the financial management of state bodies services and administrations to those legal entities of public and private law that are beneficiaries of public funds to reinforce the Court of Auditors function of providing advice and assistance to the Parliament on issues related to its audit of state financial operations to guarantee that the Court of Auditors as the control body is independent from the executive as the controlled body The reform was accompanied by the establishment of a Directorate for Financial Control Direction du contrôle financier responsible for financial control within ministerial departments The Treasury service set up in 1936 was reformed and replaced by the current State Treasury Trésorerie de lEtat The General Bank of the State whose services had been ensured by the State Savings Bank Banque et Caisse dEpargne de lEtat became integrated into the State Treasury 2 Public Internal Control environment 21 Financial control by the Chamber of Deputies In financial matters the control of the Government by the Chamber of Deputies consists of the annual vote on the budget and taxes the right to close each year the accounts of the State and the supervision to a certain extent of the administration of public assets In fact the Constitution confers upon the legislature the right to grant or deny the Government the authorisation to collect revenues and make expenditures This authorisation is normally expressed in the annual vote on the budget The budget is established in the form of a law according to the rules on governmental initiative set out by the legislative procedure The Chambers right to close the accounts of the State is the corollary of its right to vote on the budget Each year the Government submits to the Chamber the general account of the State presenting the revenues collected and expenditures made during the last completed budgetary year The general account is accompanied by a general report of the Court of Auditors Like the budget it is passed by the Chamber of Deputies in the form of a law Besides the annual control of the current financial management of the State the Constitution reserves to the legislature a series of decisions surpassing the scope of the regular administration of public assets No tax may be imposed except pursuant to a law The budget law contains the authorisation to collect ordinary taxes Extraordinary taxes require authorisation by a special law The Government may not contract loans make any important financial commitment of the State alienate any real estate of the State acquire any important real estate property for the benefit of the State or carry out for the benefit of the State a large infrastructure or building project without having been authorised by a special law However a general law determines the threshold below which the Chambers special authorisation is not required No commitment may burden the State budget further than one fiscal year except by a special law The Court of Auditors exercises a consultative function at the request of the Chamber of Deputies Upon the latters demand it issues an opinion on the provisions of the budget law and on proposals or bills of law regarding the accounts of the State and of legal entities of public law It can be consulted by the Chamber on proposals or bills of law with a significant financial impact on the public treasury Finally the Chamber may at 217 any moment commission the Court to draw up special reports on specific fields of financial management based on its audits for several budgetary years 22 Budgetary accounting Expenditure operations are complex processes chiefly because of the diverging objectives pursued by the different participants Thus it is necessary on the one hand to strictly observe the rules of public accounting and the limitations defined by the budget law and on the hand to spend as efficiently as possible All expenditure operations aim or should aim at reconciling these two objectives In order to achieve this aim expenditure operations have been broken down into four distinct phases commitment liquidation or confirmation of service performed payment authorisation and payment The commitment is the act by which a public body ascertains or creates a financial obligation that will result in a liability Since all expenditure is initiated by commitment it is important for the correct application of financial legislation to define and implement a system for the registration monitoring and ex ante control of all commitment operations It should also be noted that budgetary accounting which is concerned with registering revenue collection and expenditure payment operations is carried out according to the principle of annuality under the accrual method Under the principle of annuality the revenue and expenditure during one year is recorded according to when the acquired entitlements and the debts resulting from commitments were earned or incurred during that year irrespective of their subsequent date of recovery or effective payment Finally it is worth noting that the commitment of capital expenditure is subject to multiannual indicative planning Multiannual planning only serves for orientation purposes as it does not establish a multiannual ceiling for capital expenditure and especially for investment expenditure but simply provides at any moment comprehensive and detailed information on the progress of projects whose implementation covers several years 3 The concept of Public Internal Control 31 Managerial responsibility and accountability Ministerial responsibility Ministerial responsibility is inseparable from the absence of responsibility of the Grand Duke For an act of the Grand Duke to take effect it must be countersigned by a member of the Government who assumes full responsibility for it The Constitution provides in a general manner for the responsibility of ministers This responsibility is general with regard to acts having a direct or indirect relationship to ministerial functions It can be legal ie criminal or civil as well as political Ministers are responsible for acts of which they themselves are the authors either individually or collectively Responsibility for any measure taken in the Council of State is incumbent upon all the members of Government involved in adopting the respective 218 measure However a minister who has a dissenting vote recorded in the minutes of the Council session is released from responsibility The Government as a whole and each individual minister are politically responsible for their acts before the Chamber of Deputies When the Chamber disapproves of the actions of one or several ministers or of the entire Government it expresses its disagreement either by casting a negative vote on an item proposed on the agenda by the Government or by rejecting a bill of law submitted by the ministers By refusing to vote on the annual budget the Chamber can make it practically impossible for the Government to administer public affairs The political responsibility of ministers may be subject to sanction consisting of the obligation to cease their functions when the Chamber no longer has confidence in them motion of censure It is customary for ministers to resign when they receive the first hostile vote from the Chamber On no account can a verbal or written order of the Grand Duke release a minister from responsibility Indeed ministerial responsibility would become illusory and deprived of all sanction if the Grand Duke could cover it by asserting his own inviolability In accordance with the Constitution only the Chamber is entitled to indict ministers This constitutional provision forms an exception to the right of pursuit against public officials Indictments against ministers are reserved to the Chamber in order to prevent any distortion in the development of public affairs by means of misplaced or vexatious legal actions pursued by the citizens Indictments admitted against ministers for acts committed in the exercise of their functions are brought before the Supreme Court of Justice sitting in plenary session To avoid the criminal responsibility of ministers becoming purely theoretical the Constitution establishes an exception to the Grand Dukes right of pardon stipulating that a convicted minister may only be pardoned upon a request from the Chamber Appointment of public officials to management positions The stability of employment constitutes a fundamental principle of public positions and contributes to ensuring the continuity independence and neutrality of public service It provides an essential guarantee against arbitrary dismissals of a political or other nature The civil service regulations enshrine this stability by stipulating that public officials within state administrations and services are appointed to positions held on a definitive and permanent basis Consequently public officials cannot be removed from office except in extraordinary situations such as following disciplinary sanction or in the case of an ailment that prevents them from exercising their functions In its declaration of 12 August 1999 the Government solemnly reiterated the traditional principle of appointing public officials for life An exception was made for officials occupying management positions within the administration In this respect the government declaration sets out that Managerial staff within the administration shall be rendered more responsible when the hierarchical authority has the possibility to prematurely cease their functions and reintegrate them into previous or equivalent positions in accordance with the provisions of the civil service regulations Notwithstanding the principle of appointment for life of all public officials as enshrined in the regulations the Government considered it useful and necessary in this particular case to establish a mechanism that helps to give a further sense of responsibility to the managerial staff within the administration by limiting their appointment to a renewable period of seven years 219 Public administration The Government exercises its administrative functions through ministerial departments and their related public services Among other things it supervises to a certain degree the administration of communes This role is specifically entrusted to the Ministry of Home Affairs The organisation functioning and control of public administration are carried out by the bodies of the executive ie the Grand Duke and the members of the Government Nevertheless the legislature has the exclusive competence to establish the administrations with the exception of the formation and establishment of the Government which are reserved to the Grand Duke The Government exercises its supervisory and administrative role by means of general and special provisions Each government member is in charge of one or several ministerial departments which do not constitute legal entities distinct from the State Ministerial departments are distributed among ministers by the Grand Duke when the Government is formed The members of the Government exercise each with regard to the departments under their responsibility the attributions assigned to the Government by the Constitution laws and regulations The actual management of a department is a matter for the relevant member of Government He or she is assisted according to the requirements of the service by one or more advisers who may be delegated the task of signing documents regarding decisions relating to detail The drafting of documents of a certain importance especially the preparation of preliminary draft legislative acts and the drafting of legal opinions or reports on issues of general policy is assigned to government advisers and to officials of the central administration assistance services The written reports of the ministries regarding their activity during the last completed budgetary year are made available to the Chamber of Deputies at the latest by 1 March Some public services are detached from ministerial departments and form special administrations headed by chief administrative officers endowed with certain decisionmaking powers Examples of such services are the Direct Tax Administration Domain Registration and Administration Customs and Excise Duty Administration Bridges and Roads Administration Work and Mining Inspectorate and Employment Administration These administrations are set up for technical and practical reasons They remain directly dependent upon and closely monitored by the relevant minister They are not decentralised services like the public establishments In fact whereas decentralised services enjoy some autonomy and constitute legal entities distinct from the State the administrations come exclusively under the legal entity of the State and represent a case of deconcentration rather than decentralisation The same applies for the military and for police corps By their very nature public enforcement organisations come under the control of the executive However the Constitution explicitly reserves to the legislature the right to regulate the organisation and attributions thereof Internal budgetary control within government administration The Minister for the Budget has the right of inspection with regard to the financial management of other ministerial departments in order to ensure that their financial commitments are established with due caution 220 The General Inspectorate of Finance is present at all the essential stages of the States financial life it plays an active role in the preparation and clarification of the draft budget it participates in financial economic and social programming activities it issues an opinion on the proposals and bills of law likely to have an impact on state finance It carries out on behalf of the Minister for the Budget the ex ante control of the economic efficiency of budgetary execution measures verifying their conformity with the general policy of the Government As such it intervenes before the commitment of expenditure As a control body it monitors both the execution of the proposals and bills of law approved by it and of multiannual programmes decided by the Government and it also controls the execution of the state budget by following revenue movements and expenditure operations The State Treasury which is considered to be the budget banker comprises the Payment and Recovery Financial Administration and Accounting divisions The latter establishes the budgetary accounts and the general accounts Commitments made by authorising officers are registered and entered in the budgetary accounts so that the State has available during the budgetary year complete and updated information regarding each stage of budgetary execution The Financial Control Directorate which comes under the Ministry of Finance is independent from the General Inspectorate of Finance The Directorate is responsible for the coordination and supervision of financial controllers who in turn are responsible for controlling the commitment and the payment authorisation of all expenditure as well as the liquidation and recovery of all relevant nonfiscal revenue of the departments placed under their control By verifying the regularity and legality of the acts of the authorising officers under their control controllers carry out an ex ante control with regard to budgetary authorisations without having the right to assess the appropriateness or economic efficiency of financial decisions External control by the Court of Auditors In defining budgetary and fiscal matters as matters to be decided by law the Constitution implies that the ultimate power of decision belongs to the Chamber of Deputies The Chamber is also ascribed the power to control the general account of the State In order for the Chamber to be able to effectively exercise this control it has a right of information regarding all the financial operations of the State To this end the Constitution establishes the Court of Auditors as a permanent control instrument which enables the Chamber to monitor and control the financial management of the executive Acting as the eye of the Chamber the Court of Auditors is independent from the executive but depends on the Chamber of Deputies as regards the appointment of its members and the exercise of its functions The Grand Duke appoints the president the vicepresident and the three counsellors of the Court of Auditors from a list of three qualified candidates submitted by the Chamber of Deputies for each vacant position The members of the Court of Auditors may not exercise any other elective or nonelective public function nor can they participate directly or indirectly in any type of enterprise supply or affair that places them in a conflict of interests with the State They may not intervene in any affair they had previously become acquainted with in the context of functions exercised prior to their activity within the Court Among other things they may not be present at deliberations concerning themselves and their relatives by blood or marriage up to the third degree inclusive The Court of Auditors may be consulted by the Chamber with regard to proposals and bills of laws with a significant financial impact on the public treasury At the request of the Chamber of Deputies it may also issue an opinion on the provisions of the budget law and on proposals and bills of law regarding the accounts of the State and of legal entities of public law 221 In particular the Court examines the legality and regularity of revenue and expenditure as well as the sound financial management of public funds Its control covers the accounts in other words it intervenes after the liquidation of expenditure and payment The Courts control is immediate and permanent in the sense that it refers any irregularity to the Chamber without having to wait for submission of the accounts The audits conducted by the Court of Auditors are not limited to state bodies administrations and services they may also cover legal entities of public law ie communes and public establishments as well as entities of private law that are beneficiaries of public funds The general account of the State The general account of the State comprises the entire budgetary revenue and expenditure operated during the last completed budgetary year It is drawn up by the State Treasury and submitted for approval to the Minister for the Budget In this case too the Chambers right to information is satisfied by the comments issued by the Court of Auditors Each year at the latest by 31 May the bill of law approving the general account of the State for the last completed budgetary year is submitted to the Chamber of Deputies and referred to the Court of Auditors The latter presents its comments at the latest by 30 September so that the general account can be discussed in the Chamber before the end of the budgetary year immediately following the year concerned by the account 32 Internal audit General Inspectorate of Finance Inspection générale des Finances IGF The Organic Law establishing the General Inspectorate of Finance does not specifically set out an internal audit function but provides for it indirectly Thus when an ex post control is necessary the Government as a rule mandates the IGF In this respect it is worth noting that when the IGF was established in 1969 the concept of internal audit was not widely recognised not even in the private sector Nevertheless since the lawmaker stipulated that the IGF monitors state expenditure and that it may carry out any mission deemed appropriate by the Government it is perfectly possible to infer that the internal audit function is set out indirectly in the framework law concerning the IGF Currently audits are performed at the explicit request of the Government usually following information on potential issues within a state administration or service This type of operation is better designated as an inspection than an audit In the field of the European Union Structural Funds however the General Inspectorate of Finance carries out audit missions on a regular basis Compared to the traditional audits performed by the General Inspectorate of Finance which concern isolated cases such missions are carried out according to an annual programme and observe EU requirements in accordance with international audit rules To this end the European Commission provides audit guidelines and advice to the Member States The main tasks within the responsibility of the General Inspectorate of Finance as the audit authority for the Structural Funds are set out below 222 Drafting a report and a preliminary opinion on the conformity of fund management and control systems based on a descriptive analysis thereof This mission must be carried out before any expenditure can be declared for EU co financing Drawing up a detailed audit strategy and audit plan covering the entire period 20072013 Performing audits regarding the actual functioning of fund management systems at the beginning of the period Performing controls of cofinanced projects at least 10 of the projects for which expenditure statements are submitted Following up in detail the findings of previous audits and controls Drafting an annual control report and issuing an annual opinion on the functioning of the systems Besides its responsibilities with regard to the Structural Funds the General Inspectorate of Finance has served since 2008 as the audit authority for the general EU programme Solidarity and Management of Migration Flows for the period 20072013 In the framework of the EAGF and EAFRD the IGF is the national competent authority whose mission is to ensure the verification and constant monitoring of the eligibility criteria of the GrandDucal payment agency The IGF is also responsible for appointing the certifying body an external auditor and monitoring its audit activities financial and conformity audits Since all these activities cannot possibly be performed by IGF officials onthespot control activities system audits and audits of operations are assigned on principle to external audit enterprises which are fully accountable for the activities they perform Directorate for Financial Control Direction du Contrôle Financier DCF The mission of financial control is defined in Article 24 of the Law of 8 June 1999 on the state budget accounts and treasury the Law and mainly consists of verifying the conformity of expenditure with the applicable laws regulations conventions and governmental and ministerial decisions The State Treasury is normally responsible for the payment of all state expenditure The ex ante control that blocks commitments and payment authorisations established by the Law has helped to shorten payment times for invoices issued to the State Upon the financial controllers second refusal to approve a commitment or a payment authorisation the authorising minister may issue an overriding decision to unblock the situation provided that the necessary credit is available Such a decision is referred for information purposes to the Court of Auditors and the Chamber of Deputies The DCF comprises 33 controllers divided into 6 groups led by coordinators Controllers are placed within the different ministerial departments in order to facilitate the dialogue between controllers and authorising officers Controllers are required to change department every three to four years in order to on the one hand widen their field of competence and on the other hand avoid too great a routine between the two parties According to Article 87 of the Law the financial controller is independent as he or she shall not receive any instruction regarding a given payment authorisation or commitment Selfadministered state services schools cultural institutes etc are subject to biannual ex post controls on a random and casebycase basis Deductions about 600 of extraordinary items are checked ex post annually 223 The DCF is responsible for carrying out the firstlevel control of EU funds under INTERREG and ESPON etc It also conducts the secondlevel control certification for all other EU funds control of conformity with European legislation The General Inspectorate of Finance IGF serves as the audit authority for those funds According to the European directives EU Member States have the obligation to ensure there is a managing authority the respective ministry and a financial authority the Ministry of Finance that are responsible for the monitoring of European projects Controls at the two levels are therefore carried out by the DCF and IGF although they are not set out by law The DCF and IGF are confronted not only with the continuous overlapping of their controls but also with the fact that the European legislation increasingly demands plausibility controls which are difficult for the two entities to perform 4 Financial inspection In short the General Inspectorate of Finance has the following compulsory missions to participate in programming activities to issue an opinion on all projects and proposals likely to have an impact on state finances to examine the budgetary proposals of ministerial departments to monitor the movement of state revenue and to control state expenditure at the request of the Ministry of the Budget and especially to issue an opinion on unrestricted credit overrun As regards the optional missions of the Inspectorate they follow from Articles 4 and 5 of the Organic Law establishing it to present to the Government suggestions likely to generate savings improve the organisation of state services and ensure the reasonable operation thereof to examine any other issue deemed necessary by the Council of State or by a member of the Government When it comes to projects with financial impact the General Inspectorate of Finance is no longer limited as set out by law to issuing an opinion on the projects On the contrary at the request of the Government the Inspectorate has become an increasingly active participant in the preparatory work for such projects as well as in the fundamental studies serving as a basis for defining government policy on significant financial issues Finally the biggest increase in scope of the missions of the General Inspectorate of Finance has probably been in drawing up the annual budget where its role is not confined to examining the budgetary proposals of ministerial departments as set out by law but extends to the entire cycle of administrative work involved in establishing the draft budget 5 Ongoing and future reforms On the subject of internal audits the new Luxembourg Government which took office in December 2013 made the following statement in its government programme The Government will significantly increase financial information internal audit and the evaluation of expenditure in particular through the publication of a sixmonthly report for the parliamentary committees which supervise the budget and a regular financial report aimed at the general public the introduction of internal audits in ministries 224 coordinated by a central body at the Ministry of Finance and lastly periodic and systematic evaluations of the costeffectiveness of expenditure and adherence to policy priorities so that ministries can assess the effectiveness and efficiency of their programmes The following ideas are therefore still being studied in Luxembourg and the relevant preparations are progressing rapidly as part of the recently launched budgetary reform Reduction of ex ante controls by the Directorate for Financial Control eg systematic controls only above a certain threshold to be defined Internal audits Detailed process analysis and critical controls Drafting of a multiannual internal audit plan Choice between Establishment of an internal audit cell within each ministry or at least within ministries conducting programmes of a certain scale The cells would be coordinated by a unit attached to the Ministry of Finance IGF or DCF Establishment of an internal audit cell attached to the Ministry of Finance IGF or DCF Programme assessment Definition of a framework establishing rules for assessment Drafting of a multiannual assessment plan Definition of performance objectives for new policy programmes to complement the financial sheets accompanying each bill of law or measure with financial implications Implementation of the multitier objectives set out in the framework of the administrative reform Spending review Introduction of a spending review conducted in collaboration with the ministries concerned Such examination of items need not be carried out annually but only for example during the preparation of government programmes or for the investigation of measures to reduce spending in the event of a manifest crisis 6 Bibliographical references The descriptions given above are extracted from the following works Brochure 10 ans Cour des Comptes GrandDuché de Luxembourg 10 Years of the Court of Auditors of the Grand Duchy of Luxembourg Connaissances sur lorganisation le fonctionnement et les structures de lEtat luxembourgeois Pierre Majerus Marcel Majerus JeanMathias Goerens Emmanuel Servais Marc Besch Max Agnès Edition 2009 Information on the Organisation Functioning and Structures of the State of Luxembourg Pierre Majerus Marcel Majerus JeanMathias Goerens Emmanuel Servais Marc Besch Max Agnès 2009 edition 225 Exposé des motifs du projet de loi déterminant les nominations de certains fonctionnaires occupant des fonctions dirigeantes Explanatory memorandum of the Bill of law concerning the appointment of certain public officials on management positions Exposé des motifs du projet de loi sur le budget la comptabilité et la trésorerie de lEtat Explanatory memorandum of the Bill of law concerning the state budget accounts and treasury ProcèsVerbal de la réunion du 191009 de la Commission du Contrôle de lexécution budgétaire de la Chambre des Députés Minutes of the meeting of 191009 of the Committee for control of budgetary execution at the Chamber of Deputies 226 MALTA Public internal control 50 Summary of the major changes 20112013 1 Strengthening of managerial accountability by recruiting knowledgeable employees and providing training to existing employees according to the skills gaps identified through various studies 2 Introduction of additional monitoring and control measures to enhance the internal control system Students successfully completing Higher Diploma in Public Accounting Finance HDPAF were allocated to Ministries high risk areas in order to strengthen the second level controls 3 Maltas intensive preparation in order to implement IPSAScompliant accrual accounts and to increase the reliability and veracity of recordkeeping 4 Establishment of a Ministry headed by the Deputy Prime Minister responsible for the implementation of the Electoral Manifesto which is then cascaded down over a period of 5 years This is then translated into yearly budgets and the performance of top Management and Ministers is assessed every four months to ensure the effective implementation of the Manifesto 5 Enhanced communication channels to reach all levels of employees in order to ensure that the right information is recipients at the right time and place 6 Ongoing review and updates legislations guidance notes manual of procedures and policies to meet current objectives 1 Brief history of the development of public internal control Public internal control systems in Malta are the primary responsibility of the heads of government ministries and departments Top management in ministriesdepartments is to ensure that proper internal controls are in place in line with good internal control practices as well as in consonance with directives that may be issued by the Office of the Prime Minister OPM by the Ministry responsible for Finance headed by a permanent secretary or other relevant departments The key players in the PIC in Malta are 1 the Internal Audit and Investigations Department 2 the National Audit Office 3 the Ministry of Finance Treasury Department Budget Affairs Department and Financial Policy and Management Department 4 The Management and Efficiency Unit 50 Contributed by the Office of the Prime Minister the Internal Audit and Investigations Department 227 These key players ensure the proper functioning of the PIC system supervise regulate and record all government financial transactions keep the money pertaining to the government and all the funds advanced by the EU to finance devise programmesprojects administer procurement procedures provide statutory audit of both local and EU funds Maltas public financial control structures started to change in the early 1990s as part of a chain of reform measures in the public sector initiated by the government some years earlier A process of reform was launched in 1989 with the publication of a Public Service Reform Commission report The adoption and subsequent implementation of many of the Public Service Reform Commissions recommendations including those in the area of financial management has since resulted in significant improvements in the public service A new public financial management act is also envisaged to embody provisions that address the efficient and effective management of government resources the proper harnessing and control of the public debt and the rules on accrual accounting that will be introduced in government financial planning and accounting frameworks Another specific and important aspect of public service reform worth mentioning is that relating to the recruitment policy adopted in recent years The new policy has led to a steady intake of graduates and professionals within the managerial and financial levels in government and its agencies This has raised considerably the professional level of the public servants working in any particular sector One of the most significant thrusts of the reform of PIC in Malta was directed at the public audit function both the external and the internal audit In external audit following legislation enacted in 1997 the National Audit Office was established as a completely autonomous body independent from government that reports directly to parliament The Auditor General has extensive powers that enable the National Audit Office to function effectively The Office is also empowered by law to perform formal inquiries which can be compared to judicial ones Prior to the legislative changes in 1997 the National Audit Office was an audit department that was an integral part of government The Internal Audit and Investigations Department IAID which was set up in 2000 is an independent body operating under the responsibility of the Cabinet Office It reports to the Internal Audit and Investigations Board that is chaired by the Secretary to Cabinet of Ministers The role of the IAID is to provide assurance on the implementation of the governments procedures and controls through internal audits and financial investigations 2 Public internal control environment The national budget is so far cash based With regards to Government Financial reporting this is mainly cash based however the Accounting Methodology and Control Unit within the Treasury Department periodically receives accrualsbased templates from the various Ministries and Departments as accrualsbased information is required by the National Statistics Office for the publication of the Government deficit and debt figures reported to Eurostat 228 The central concepts of PIC are those of managerial accountability and functionally independent internal audit PIC is preventive in nature and aims to ensure that adequate systems are in place to thwart as much as possible the occurrence of public funds mismanagement and fraud and corruption The National Audit Office the state external auditor and the Internal Audit and Investigations Department the state internal auditors are the main bodies responsible for assessment of PIC The Ministry of Finance and the Treasury Department are responsible for the control of PIC The Management Efficiency Unit which is the governments inhouse management consultancy organisation with the primary function of facilitating the improvement of government services and falls under the Office of the Prime Minister may also introduce new government processes that would improve PIC as part of its functions There is no legal definition of PIC However the National Audit Office Malta Audit Manual defines internal control as all the policies and procedures conceived and put in place by an entitys management to ensure the economical efficient and effective achievement of the entitys objectives the adherence of external rules laws regulations etc and to management policies the safeguarding of assets and information the prevention and detection of fraud and error and the quality of accounting records and the timely production of reliable financial and management information The NAO and IAID provide recommendations whenever shortcomings in PICs in government operations are detected The Ministry of Finance and the Treasury Department issue guidelines and directives through circulars on financial management and accounting matters The National Audit Office NAO and the Internal Audit and Investigations Department IAID meet on a regular basis to identify good practices Bodies in charge of PIC will continue recommending improvements to PICs whenever PIC weaknesses are detected As outlined below the introduction of IPSAS International Public Sector Accounting Standards will revolutionise government reporting in Malta and the onset of these standards will have a major positive impact on the PIC function 3 Concept of public internal control 31 Managerial accountabilityresponsibility Managerial accountabilityresponsibility is understood as the need to make public officials responsible not only for making financial decisions but also to respond periodically to questions concerning their activities and to be held responsible and answerable for exercising the authority given to them The following section explains how the top officials assume their responsibility for establishing an adequate internal control system across the public administration in Malta in line with good internal control practices as well as in consonance with directives that may be issued Reference is being made to the five interrelated components of the Committee of Sponsoring Organisations COSO framework which is the basis for the International Organisation of Supreme Audit Institutions INTOSAI guidelines for internal control in the public sector 229 Implementation of the control environment The Public Service Management Code PSMC brings together in concise form all standing regulations circulars and policies in the public service Its provisions are aimed to uphold the core values of the public service as announced in the Public Administration Act PAA The Principal Permanent Secretary has assigned to the PSMC the legal status of a directive in terms of the PAA by virtue of Directive No 1 issued under the Act This directive confirms that the provisions of the PSMC are binding on public officers and makes the PSMC enforceable in terms of Article 152 of the PAA which states that Public Officers shall comply with all applicable directives issued by the Principal Permanent Secretary and officers who fail to comply shall be liable to proceedings under the disciplinary regulations A comprehensive code of ethics exists as a schedule to the PAA covering public officers With regards to public entities there is a corporate governance framework and a separate code of ethics Top officials at each and every level are accountable for the observance of the code of ethics and have the responsibility to ensure that such codes are being followed accordingly by all the employees within their remit and to report any violations and malpractice The Principal Permanent Secretary may also issue directives and guidelines aimed at upholding and ensuring compliance with the code of ethics and with the concurrence of the minister responsible for the particular board or commission he may also issue such guidelines with respect to boards and commissions Top managers are also accountable for ensuring that clear job descriptions drafted in conjunction with the Directorate for Corporate Services are maintained and updated when necessary All public organisations follow this procedure and make certain that each and every individual is aware of hisher duties and responsibilities This is essential so that relevant tasks are carried out and hence operations run efficiently The heads of every unit also have the responsibility to formally review and evaluate the performance of all the staff falling within their remit at least annually against preset objectives In the event of any specific performance issues adequate action is taken Risk management Having identified risk management as being a weak area within all government organisations several documentation including the Risk Management Guideline and the Policy and Procedures Manual have been introduced to serve as a coherent set of guiding principles Although not compulsory permanent secretaries are encouraged to assume the responsibility of ensuring that such process is given due importance and ultimately integrate it into their ministry in line with the established policy Control activities Control activities occur throughout the organisation at all levels and in all functions in the form of supervisory checks and second signatures separation of duties and delegated limited powers of authorisation It is the duty of each head of unit to ascertain that such controls are observed and maintained to guarantee adequate control and that the predetermined objectives are achieved With the change in Government in 2013 a Ministry responsible for European Affairs and the Implementation of the Electoral Manifesto was set up This Ministry is headed by the Deputy Prime Minister who is aided by a Parliamentary Secretary The promises in the electoral manifesto have been split over the five year legislature and each year these initiatives are included in the Budget for the forthcoming year Ministers and Permanent Secretaries are responsible to implement the electoral manifesto within the established timeframe Performance is measured every four months by the Principal Permanent 230 Secretary together with the Ministry of Finance the respective Ministers and Permanent Secretaries accordingly Furthermore heads of unit carry out an annual performance management procedure with the officers under hisher remit in order to measure their effectiveness productivity and training needs This procedure is repeated with each public officer Moreover permanent secretaries directors general and directors are requested to carry out the performance reviews of Category A officers whose appointment is regulated by a performance agreement in order to assess the overall performance against targets and objectives sets Information and communication Reports on progress against objectives are carried out annually through the performance agreement The Government uses various communication channels such as the intranet the issues of directives and circulars on various areas of interest a daily newsletter for all Government employees and Press releases All of the Public Administration makes use of the services offered by MITA which is the Governments IT Agency MITA makes use of an Information System Security which is ISO compliant Various fora and committees meet on a regular basis to discuss horizontal issues and identify best practices to be adopted One forum brings together the Principle Permanent Secretary and the Permanent Secretaries and another forum is set up for the Directors in charge of Corporate Services and Financial Management Monitoring Top managers have the responsibility to comply with and respond adequately to the recommendations on internal controls provided by the internal auditors in order to ensure that objectives are achieved Furthermore top management works hand in hand with the Risk Management Assurance Unit which forms part of the Internal Audit and Investigations Department IAID to provide the necessary training and facilitation on internal controls to all their staff The Centre for Development Research and Training CDRT is the Governments training coordinator and provider Various training courses are offered on a regular basis to ensure that employees are updated on various areas of interest The CDRT in tandem with the University of Malta is also offering three courses namely Diploma in Public Administration Diploma in Public Management and Higher Diploma in Public Finance and Accounting The first graduates of the Higher Diploma will be assigned to various Government Departments in the very near future to be able to carry out monitoring work and ensure the implementation of Internal Controls They will report to the Permanent Secretary within the Ministry of Finance This will reinforce second level controls to ensure quality at all times While all employees are responsible for the quality of their internal controls the Internal Audit and Investigations Department IAID assists management in their oversight and operating responsibilities through independent audits and consultations designed to evaluate and promote the systems of internal control Managerial accountability is not only exercised by top administrative managers While they have a significant impact on an organisations system of internal control every employee of the organisation has a responsibility and a role in ensuring that the system is effective in achieving the organisations mission Hence it is the responsibility of every permanent secretary directorgeneral chairman chief executive officer andor head of 231 department to ensure that an effective internal control system is in place in order to safeguard accountability transparency and delivery These positions are filled by administrative managers as opposed to political appointees Delegation of responsibility and of authority is moderately practiced within Maltese government organisations Formally the following procedures are in place to ensure that decisionmaking powers are clearly laid out The Public Service Agreement PSA is signed by every ministry This agreement aims to chart out in a more direct manner the outputs expected from each ministry and identifies the people responsible for the achievement of such objectives The Performance Agreement for headship positions originates from the Public Service Agreement and is cascaded down to at least assistant director level This agreement outlines the objectives and goals of top management and their decisionmaking powers For officers in positions a performance contract identifies the functions and objectives of the position For all officers in the general service grades with the exclusion of officers in the managerial class who are not on a performance agreement a system of performance management procedure PMP has been introduced to measure their effectiveness productivity and training needs Job descriptions are also used to outline the roles and responsibilities of each officer The cabinet prime minister and ministers is responsible for the policy development and has the general direction and control of the public administration The cabinet is responsible to parliament and is responsible for any business of the government of Malta including the administration of any department of government The ministers when charged with the responsibility for any department exercise general direction and control over that department and also the department would be under the supervision of a permanent secretary The Principal Permanent Secretary is responsible for the implementation of the public policy and may with the concurrence of the prime minister delegate any of his functions under this article to one or more permanent secretaries or heads of department The Principal Permanent Secretary shall provide leadership to the public service uphold and promote the public administration values and the code of ethics and monitor the compliance of public employees therewith take measures to improve the performance of the public service assume overall responsibility for human resource management and development within the public service take measures to ensure coordination between departments agencies government entities and local councils and to ensure that agencies and government entities are complying with the key policy objectives and management priorities of the government provide leadership and direction to permanent secretaries set performance targets for permanent secretaries and monitor their performance following consultation with the relative minister advise the prime minister on matters relating to the public service and the wider public sector including the appointment and termination of appointment of permanent secretaries and heads of department and perform any other function that may be assigned to him by or under any law 232 A permanent secretary may give directions to and set targets for a head of department on any matter in fulfilment of his duties and he shall monitor and assess the head of departments performance in relation to such directions and target Ministries are divided in a number of departments one of which being Corporate Services which would also include the financial function Therefore the Director of Corporate Services would be responsible for assisting and advising top managers on financial aspects Corporate objectives are extracted from the Electoral Manifesto and are the basis for the Public Service Agreement PSA These are cascaded down to each and every ministrydepartmententity In order to ensure the smooth running of the organisation directorsheads of each level have the responsibility to identify ministrydepartmental and entityrelated objectives and ensure they are aligned in accordance with the aims set by the PSA Headship positions in each ministry including permanent secretaries directorgenerals directors and assistant directors together with other important professional officers enter into a performance agreement exercise whereby the performance of each objective is assessed on an annual basis in order to establish the current status of delivery The corporate objectives are then translated into budget plans which are then allocated to the various centres in order to reflect the ministerialdepartmentalentity aims and objectives On a monthly basis line ministries and departments submit revised estimates of revenue and expenditure to the Budget Affairs Division Such statements assist top managers in identifying budgetary risks and thus facilitating the initiation of timely corrective action as may be necessary Moreover the regular updates form an integral part of that ministrys ongoing financial assessment process enabling the monitoring of the budgetary position at an aggregate servicewide level This procedure enables line ministries and departments to adjust their budget plans accordingly The main objectives of the internal control system in Malta are based on the same principles of the COSO framework and can be categorised as follows effectiveness and efficiency of operations reliability of financial reporting compliance with applicable laws and regulations The internal control strategies that have been designed focus on transparency both in terms of clear lines of responsibility and in terms of harmonised methodology and standards Clear reporting lines are laid down in the Constitution and the Public Administration Act reflecting particularly the positions and responsibilities of top public officials Furthermore job descriptions are used to outline reporting lines for all officers As part of the reporting system a statement on internal control is in the process of being adopted across the public administration in Malta in order to ensure further accountability and responsibility This shall include a declaration that the internal control system supporting the achievement of the ministrydepartmententitys policies aims and objectives has been put in place and that public funds and all organisations assets are being safeguarded Moreover it will also comprise an affirmation that a risk management system designed to identify and prioritise the risks to the achievement of the ministrydepartmententitys policies aims and objectives has been implemented 233 Headship positions will be expected to sign this statement on internal control at the end of each year for the organisation they manage as part of the annual report Moreover government departments ministries and entities are currently required to submit an annual report detailing the activities carried out as well as an action plan outlining what activities are to be undertaken 32 Internal audit The Internal Audit and Investigations Department IAID was set up in year 2000 It is a self contained independent unit within the Office of the Prime Minister The department is organised in a central manner and caters for all government departments and entities falling under the supervision of permanent secretaries for the purpose of assisting them in the effective discharge of their duties In 2003 the responsibilities and powers of the IAID were entrenched in the Internal Audit and Financial Investigations Act Chapter 461 of the Laws of Malta One of the reasons for enacting the Internal Audit and Financial Investigations Act was to provide the directorate with strict functional independence from ministries other departments and divisions The law made it outright clear that the IAID is answerable to the Internal Audit and Investigations Board headed by the Secretary to Cabinet IAID auditors abide with the Code of Ethics for Accountants of the Malta Accountancy Board which is applicable to all local accountants and auditors Additionally Section 24 of the Internal Audit and Investigations Manual refers to standards of professional conduct the manual stipulates that the listed principles adopted from the Code of Ethics of the Institute of Internal Auditors have to be followed by the internal auditors within the IAID The principles to be upheld are integrity objectivity confidentiality and competency The IAID is free to report on reviews undertaken In fact Article 14 of the Internal Audit and Financial Investigations Act stipulates that once an internal audit is concluded the director IAID should transmit the resulting audit report to the permanent secretary under whose supervision the auditee falls The director IAID may also transmit a copy of the report to the auditee Within one month of receipt of such report the permanent secretary shall give such instructions to the auditee as may be necessary to remedy any shortcomings and shall inform the director accordingly As per Section 813 of the IAID Manual the objectives of individual audit reports are to provide independent assurance on the areas examined and to initiate management action and also to highlight specifically the cause of weaknesses and related action thereto The charter of the IAID specifies that the primary objective of internal audit is to assist permanent secretaries in the effective discharge of their duties internal audit provides permanent secretaries with analyses recommendations counsel and information concerning activities reviewed andor investigated The charter encompasses also the following areas independence authority of the IAID role and scope of IAID responsibilities reporting and relationship with the National Audit Office Article 17 of the Internal Audit and Financial Investigations Act provides that where the director or the board consider that there would be a conflict of interest if the director himself were to conduct an internal audit or a financial investigation the board may appoint a senior public officer from amongst the officers of the directorate to conduct that investigation as a replacement It is the duty of every officer of the directorate who has any form of conflict of interest in any internal audit or financial investigation he is assigned to work upon whether such conflict is direct or indirect to immediately disclose to the director his interest and refrain completely from involvement in that particular case 234 Any officer of the IAID who knowingly acts in contravention of this requirement will be guilty of an offence and is liable to a fine and disciplinary proceedings as provided for in the Public Service Commission Disciplinary Procedures Regulations IAID auditors have to undertake a minimum number of hours of training CPE activities every year to maintain and improve their professional competence and skills in accordance with the Continued Professional Education CPE Regulations of the Malta Institute of Accountants MIA which comply with IFACs International Education Standard IES 7 Continuing Professional Development The IAID endeavours to facilitate on a continuous basis the participation of its officers in CPE activities Not only does the IAID finance the costs involved with regards to participation in certain training taking place both locally and abroad course fees flight expenses where applicable etc but it also organises CPE activities for its officers on a regular basis The IAID reports to the Internal Audit and Investigations Board IAIB whose chairman is the Secretary to the Cabinet The internal audit reports are sent to the respective permanent secretaries within the various ministries Audits which are performed by the Internal Audit Services fall under Legal Notice 434 of 2004 entitled Types of Internal Audits Regulations 2004 which specifies the following different types of audits to be carried out by the IAID financial audits compliance audits operational audits performancevalue for money audits comprehensive audits information technologyinformation systems audits management audits programme audits European Union joint audits European Unionrelated audits and followup audits Article 15 of the Internal Audit and Financial Investigations Act Chapter 461 of the Laws of Malta states that the director IAID shall after an internal audit and if deemed necessary conduct followup reviews In fact it is the policy of the IAID to follow up all significant issues and recommendations arising from the IAIDs audit reports Chapter 9 of the Internal Audit and Investigations Manual Furthermore Article 16 of the Internal Audit and Financial Investigations Act requires any entity that has reason to suspect any irregularity andor suspected case of fraud of public funds to refer the matter to the director IAID and is authorised to provide the director IAID all information in his possession relating thereto Article 18 of the Internal Audit and Financial Investigations Act gives the authority to the director IAID to inform the Attorney General when suspicions of irregularities andor suspected cases of fraud can be firmly established with respect to the responsibilities of the auditee under review Such an irregularity would constitute a criminal offence Article 3 of the Internal Audit and Financial Investigations Act distinguishes between internal audits and financial investigations and stipulates that these are two separate and distinct functions 321 Internal audits relations with external audit The National Audit Office Malta as the Supreme Audit Institution SAI is headed by the Auditor General and is responsible for the external audit of central and local government on behalf of parliament The Office which is an autonomous body and independent from the executive branch of government was established in 1997 The mandatory and primary objective of the Office in terms of the Constitution and the Auditor General and National Audit Office Act 1997 is to provide independent information assurance and advice to parliament on the way the Treasury government departments and certain non central government entities including local government account for and use taxpayers money Another objective in terms of the Act is to establish whether public moneys have been expended economically efficiently and effectively In evaluating the effectiveness of internal control the NAO can use the work of the IAID which forms part of the internal control structure and is well placed to provide the NAO with guidance as to the effectiveness of the systems that are in place The NAO has the responsibility for 235 the overall conclusion drawn based on the examination of the systems in place the quality of the internal audit unit and the attitudes towards internal control and risk management of the entity under review To allow the work of the internal audit to be effectively assessed the NAO has to understand the purpose role procedures and methods of the internal audits work as well as consider the quality of staff and the independence and objectivity that they bring to their work Investigations or other special audits can be undertaken as may be decided upon by the Auditor General himself or as may be requested by the Minister of Finance or by the Public Accounts Committee The directorgeneral IAID liaises with the Auditor General and provides him with the IAIDs annual audit plan upon its approval by the Internal Audit and Investigations Board 322 Audit board and audit committees Article 6 of the Internal Audit and Financial Investigations Act appoints the Internal Audit and Investigations Board as the independent and objective body that monitors the public internal financial control function in Malta and to oversee the work of the IAID Furthermore the Board aims to safeguard the continued independence of the director IAID and officers of the IAID Other functions include the endorsement of plans budgets and schedules as proposed by the director for the proper administration of the directorate and the setting of policies procedures and methods for the proper functioning of public internal audit and for the carrying out of financial investigations The board is appointed by the prime minister and is composed of the Secretary to Cabinet as chairperson the director the Permanent Secretary in the Ministry of Finance a person of a recognised standing in the accounting andor auditing profession who is not a public officer and one other member The board is required to meet at least quarterly The decisions of the board are taken by a majority of votes and the chairperson has both an original and a casting vote in case of an equality of votes The Corporate Governance Framework for Public Sector Entities issued by the Office of Prime Minister in November 2008 established corporate governance best practices including the settingup of audit committees within public entities 33 Coordination of public internal control The Risk Management and Assurance Unit RMAU has been set up purposely to assist the entrenchment of public internal control as the basis for monitoring and controlling public finances This unit is acting as the central harmonisation unit within the public sector with respect to the coordination of internal control being a decentralised system The RMAU is a subunit forming part of the Internal Audit and Investigations Department and reports directly to the directorgeneral IAID who in turn reports to the Secretary to the Cabinet The objective of the RMAU is to assist ministries departments and entities to reengineer their internal control environment and enable them to upgrade public sector control systems in line with international standards and EU best practice through the issue of relevant policies and procedures facilitation and training With this in mind the RMAU has prepared and finalised a risk management survey through the use of a questionnaire The results of the survey have made it easier for the unit to risk assess all the government ministries divisions departments and directorates and identify the public service risk areas Results derived have been incorporated into the IAIDs audit plan which in turn aims to ensure the correct prioritisation of its work plan for the future The RMAU has continued to promote the reform of risk management in public administration as follows the enactment of a corporate governance framework together with codes of ethics introduced a system of accountability targeted towards public 236 entities The public service structure was already catered for substantially and was further reinforced by specific provisions in the PAA A requirement for an annual statement of internal control stipulated in a guideline issued by the Principal Permanent Secretary encouraged permanent secretaries to sign for the adequacy of their internal control structure A requirement for risk registers stipulated in a guideline issued by the Principal Permanent Secretary encouraging continuous assessment of internal controls by government ministries divisions departments and directorates Apart from facilitating the overall risk assessment of all public sector organisations through training seminars onsite reviews and research the RMAU is following up the implementation of risk registers within the public service and the updating thereof The RMAU is also following up work with the main key players of internal control and will in the near future coordinate with the new graduated officers in enhancing the internal control structure 4 Financial inspection Administrative financial investigations fall under the remit of the Internal Audit and Investigations Department which falls directly under the responsibility of the Secretary to the Cabinet The Financial Investigations Unit has the remit to conduct financial investigations in government departments and in any other public or private entity which in any way is a beneficiary debtor or manager of public funds including EU funds for the purpose of protecting such funds against irregularities and fraud or otherwise to assess such public or private entities liability to contribute to such funds This unit is also the designated interlocutor for the Europeans AntiFraud Office OLAF and is the Anti Fraud Coordinating Service AFCOS for Malta This implies that this unit can conduct joint investigations with OLAF with respect to EU funds availed of by Malta The unit reports irregularities to OLAF on a quarterly basis with respect to Preaccession Funds Transition Facility Funds Structural Funds Cohesion Fund and Agricultural Funds The unit also provides substantial contributions including feedback to various subunits within OLAF all in charge of protecting the EU financial interests under different facets An antifraud and corruption strategy has also been drafted to complement this units ex post function As part of its investigation the Financial Investigations Unit carries out indepth examination of all circumstances relative to irregularities and cases of suspected fraud including the corruption of public officers and in that regard the acquiring of records andor information and the carrying out of related assessments analyses and recommendations Investigations relate to inquiries aimed at uncovering the hidden facts and establishing the truth They imply a systematic trackdown of information and include probing A financial Investigation may be carried out in terms of the provisions of the Internal Audit and Financial Investigations Act The Act stipulates that if an entity has reason to suspect an irregularity andor a suspected case of fraud of public funds it shall refer the matter forthwith to the director internal audit and investigations department The entity would have to supply all information in its possession relating to the matter in line with the same Act The Risk Management Assurance Unit provides for the ex ante controls through the establishment of a risk management programme for the public administration The Risk Management Assurance Unit acts as the central harmonisation unit for public internal 237 control and facilitates the implementation of an integrative risk management process within the public administration with the aim of formalising risks into risk registers The Internal Audit EU Audit Financial Investigations and the Risk Management Assurance Unit fall within the same department and are coordinated by the director general The department falls under the direction of the Internal Audit Board The board is responsible for overseeing the departments operations and to serve as an independent and objective body to monitor the public internal financial control function in Malta and to set policies procedures and methods for the proper functioning of the department 5 Ongoing and future reforms The public administration is in the process of submitting proposals to the EU Commission for the Strategy and Action Plan 20142020 Better Governance This document which will be presented in March 2014 will highlight the direction and implementation of systems that will strengthen the internal controls This exercise is being carried out in tandem with a Human Resources and Skills Development Strategic policy framework with the main purpose of increasing efficiency and effectiveness within the Public Administration Modifying the Financial Management Act A Committee was set up by the Ministry of Finance the Economy and Investment to modify the Financial Management Act This law is being modified and updated to include management tools relating to public internal financial control risk management and public performance mechanisms The introduction of such tools should help to further strengthen the accountability and transparency within the public administration The introduction of accrual accounting within the government ministries Over the past years the Government has implemented measures for the smooth transition from cash accounting to accrual accounting within its operations In 2013 the Government embarked on an IPSAS project which will lead to the implementation of IPSAScompliant accrual accounts for all Government Ministries and Departments The Chartered Institute of Public Finance and Accountancy CIPFA were engaged in May 2013 to undertake a scoping study on the transition to full accrual accounting Following a series of workshops and interviews from the Public Sector CIPFA issued its report Transition to Accrual Accounting Scoping Study in November 2013 In parallel with the introduction of IPSAScompliant accrual accounts Government is also committed to change the current Departmental Accounting System DAS with a new Corporate Finance Management Solution CFMS The Implementation of this system will form a core part of the programme of other changes required to introduce the full accrual based approach The introduction of risk registers The Risk Management Assurance Unit within the Internal Audit and Investigations Department has been assigned the responsibility to develop promote and oversee implementation of policies on risk management and internal control through the adoption of risk registers In this manner objectives set by the government would become clearer and more visible any threats to these objectives would be identified and addressed in a manner that mitigates these same risks Such a process would also improve transparency accountability and probity whilst reasonable assurance would be achieved as to the effectiveness of the internal controls in place The principal tool used for recording and managing risks within a public organisation is the risk register Registers 238 are developed and deployed at corporate public organisational and sectional levels The risk register is an important document in risk management because it identifies risks rated according to their importance This information will then enable appropriate responses to be developed implemented and monitored The provision of continuous training and facilitation The CDRT will be offering new training courses both shortterm and longterm in order to address the skills gaps which were identified through an analysis carried out by the Public Administration Human Resources Office in the past years Another course in Higher Diploma in Public Accounting and Finance has commenced and which will yield a number of graduates in the future that will be placed within the Government Department to continue strengthening the second line of defence Training aimed at facilitating internal control and risk management within the public administration will be carried out on a continuous basis The Internal Audit and Investigations Department will continue training by lecturing various credits organised by the CDRT mainly on the role of the IAID within Government the risk of irregularities and fraud the components of the COSO framework and other important matters Updating of IAID legislation and respective Manuals of Procedures The Act regulating the work of the IAID will be revised in the near future in order to meet current objectives The roles within the IAID will be split up in the coming months and a Director for each of its functions namely Internal Audit and Risk Management EU Funds Audits and Financial investigations will be appointed The setting up of a coordinating committee The Internal Audit and Investigations Board will set up a coordinating committee in order to coordinate the activities of and to facilitate the exchange of information between different entities charged with the protection and safeguarding of public funds 239 THE NETHERLANDS Public internal control 51 1 Brief history of the development of internal control in public finance 11 Point of departure 111 Dutch public sector basically decentralised policymaking rather centralised The Dutch public sector is basically decentralised based on historical tradition The regional governments provinces and the local governments municipalities conduct their own household including an independent financial management The external control is applied by their own democratic councils Supervision by central government is limited and indirect Nevertheless policymaking is rather centralised The central government determines the social and political objectives the instruments and the budget but the policy implementation execution is largely decentralised to regional and local governments and external agencies 51 Contributed by the Ministry of Finance Major changes in 20112013 1 The Budget presentation in the budget documents the budget laws and the annual reports has been changed to encounter problems with regard to performancebased program budgeting This is the so called Accountable budgeting project The core of the project was a curtailing policy information with less political relevance about performance indicators and policy texts explaining policy objectives This policy information could however be useful in multiyear evaluations or spending reviews of the policy performance b more input information about financial instruments and organizational support expenses for especially staff and hiring external expertise and labor force There is a strong parliamentary demand for more input information in the budget documents 2 The ministries no longer have their own Internal Audit Department IAD Since 2014 for efficiency reasons all IADs have been merged into one shared service center for internal audit the Central Government Audit Service CGAS The CGAS is an organizational unit within the Ministry of Finance but is working for and directly reporting to the individual ministers concerned So although the audit function is centralized regarding its organizational structure it is de concentrated regarding its way of functioning 240 112 Dutch political system coalition government In the Dutch political system parliament is normally constituted of about a dozen political parties After elections some parties will in principle for a four year period form a coalition government based on a majority in parliament more than 75 deputies The new administration is based on a coalition agreement It is an enumeration of the agreed policy programmes the fiscal constraints budgetary framework and tax burden conditions the midterm objective mto for the general government deficit based on the EUs budgetary stability programme for the Netherlands at present an structural EMU balance not exceeding a deficit of 05 to a surplus of 05 GDP and the EMU debt standard not exceeding 60 GDP the tax burden In the first or constituent meeting of the Council of Ministers decision will be taken on the fiscal rules the rules necessary to respect the fiscal constraints In fact the start of a new administration is the beginning of a new four year financial management and control cycle FMCcycle 12 Developments since the mid1980s There are four outlines in the development of the Dutch PIC system 121 Enhancement budget right of parliament The Ministry of Finance MoF has played the leading role in close cooperation with the Supreme Audit Institution SAI and the Committee for the Budget of parliament Second Chamber A better and faster information provision to parliament about the annual budgets the annual budget adjustments and the financial reports financial accounts needed to be found For that purpose some important changes were carried out in central government in the period 198595 Introduction of a new budget and accounting system not only cash based but also commitment based Automation and digitalising of the financial accounting systems Enhancement of the financial function the financial economic affairs departments FEAD of the ministries transformed from a pure accounting function to a broad financial control function managers became wholly responsible for policy implementation and for financial management the FEAD for respecting the planning and control cycle budget control policy advising including advising about effectiveness efficiency and the economy the three Es Enhancement of the audit function every ministry was given their own internal audit department this IA department became responsible for the annual statement of assurance with regard to the regularity of the financial management In the meantime since 2014 all the IA departments have been merged into one a central government internal audit service CGAS 122 Public administrative reforms PAR since the beginning of the1990s The MoF has played the leading role Creation of at the moment more than 40 internal agencies for policy implementation and operational support management Internal agencies are relatively independent in implementing the policy and the operational support 241 management activities They are steered and controlled on output and quality they are using an accrual accounting system instead of the combined commitmentcash system To finance the activities they are not merely dependent on the budget mechanism but they may use an internal borrowing facility for investments at the Ministry of Finance Treasury Internal agencies are operating under the political rule of full accountability for the minister concerned the same as goes for ordinary ministerial departments Creation of at the moment some hundreds lawbased external agencies External agencies are operating under the political rule of limited accountability for the minister concerned the minister is only responsible for the control system and the legal framework within which the external agency is operating and not for the daily operations of the agency 123 Public expenditure management PEM since the mid1990s The MoF has played the leading role Enhancement of budget control since 1994 fiscal policy based on structural economic forecasts and the application of budget rules based on frames for expenditures and revenues The applied budget standards are based on the EU standards for the budget balance EMU deficit and the EMU debt Introduction of a PPB system planning programming and budgeting since 2000 the ministerial budgets are constructed and presented mainly as an output budget and to a limited extent as an inputbudget Presentation of the annual budget laws and presentation of the annual financial reports are more focused on the results of the policy implementation performance output accountability A policy agenda was introduced in the budget laws and a policy report in the annual financial reports However parliament is more and more interested in input information about staff So there is political pressure for more input information in the budget laws and financial reports 124 Public operational management reforms POMR since 2007 The Ministry of the Interior is playing the leading role There is development towards a more horizontal integration of processes through the creation of shared service centers SSCs with regard to operational support management of the ministries for staff management office housing office ICT and internal audit merging of IA departments in a central government internal audit service CGAS policy implementation of the ministries eg with regard to granting subsidies supervision and inspection on policy implementation of external agencies policy advising merging of planning offices 125 Budget presentation reforms since 2010 In 201113 a new presentation of budget documents was introduced This so called Accountable Budgeting reform targeted some of the more persistent problems encountered with regard to performancebased program budgeting in the Netherlands These problems included limited usefulness of budgets and annual reports for financial analysis and unclear results accountability especially with regard to policy outcomes 242 The changes introduced were intended to enable more detailed parliamentary oversight of spending as well as to enhance internal control by the Ministry of Finance and line ministries To achieve this more detailed financial information was presented following a uniform classification of financial policy instruments and categories of organisational expenses In addition the use of policy information performance indicators and policy texts explaining policy objectives was curtailed and had to meet stricter conditions concerning the precise role and responsibility of government As a result about 50 of all performance indicators disappeared from the budget documents The experience from 2002 demonstrated that performance information in the old budgets had become more aimed at legitimizing funding and compliance than in providing useful insights for oversight or to learn and improve that use of performance information for the latter purposes does not necessarily happen in a cyclical annual way and is more likely to occur following multiyear ex post evaluation For this reason the lessons from evaluation gained a more prominent place in budget documents For an overall view of the Dutch FMC system including aspects of the PIC system we refer to the diagram attached to this contribution 2 Public internal control environment 21 Budget and accounting system For the central government by the ministries a combined financial commitment and cash based system is applied by the approximately 40 internal agencies as units of the ministries an accrual accounting system is applied by the external agencies an accrual accounting system is applied by stateowned enterprises an accrual accounting system is applied For the decentralised governments by regional and local governments an accrual accounting system is applied 22 Budget presentation and presentation of the annual financial reports to parliament Since the year 2000 the budgets of the ministries are in principle outputbased In the general part of the budget presentation the ministers focus on their main policy objectives policy agenda In the explanatory part the ministers present their budget items Every budget item is structured through one single general objective The financial policy instruments eg subsidies loans guarantees staff investment programmes are linked to the operational objectives So the budgets are linked to the policy instruments 23 Mandate system taking decisions and actions on behalf of the minister The minister is the top manager Within a ministry we distinguish three levels of control 243 the top managementstrategic level minister state secretary secretarygeneral SG and directorsgeneral DGs who are responsible for the strategic planning the middle managementtactical level the heads of the directorates directors who are responsible for the development of the policy programmes and the operational support management the executive managementoperational level activity and transactions the heads of the departments units and internal agencies who are responsible for policy implementation and operational support management activities The minister or the state secretary takes the strategic decisions after consulting the top management level one Decisions that are not taken by the minister or state secretary have been mandated to the SG and submandated to the DGs they have been authorised to act on behalf of the minister A further submandate has been done to level two directors and sometimes to level three head of departments etc depending on the nature of the activities The minister however remains totally accountable to parliament for all decisions taken either by him or on his behalf 24 External audit by the Supreme Audit Institution SAI Court of Audit 241 Line ministries and external agencies The Dutch Court of Audit audits at the ministries the regularity of the policy programmes and the operational support management especially the financial regularity of the financial transactions financial and compliance audits the performance of the policy programmes and the operational support management the effectiveness the efficiency and the economy the three Es Officially independent from the Central Government Audit Service CGAS the SAI conducts its audits at the ministries In practice the CGAS conducts the financial and compliance audits and for efficiency reasons the SAI makes use of these audit results External audit includes reporting the SAI provides the minister the external agency and the parliament with information resulting from the audits Regarding the external agencies the SAIs audit is limited to the public or legal tasks of the agencies to the public money involved and to the functioning of the legal framework 242 Local and regional governments The SAI is not authorised to audit the public household of localregional governments With regard to the implementation of national policy by the local and regional governments the SAI can only conduct audits by means of data documents and other data carriers present at the ministry involved The SAI has no entry to the offices and accounting systems etc of local and regional governments There is only one exception to this noentry rule the SAI is authorised to audit local and regional governments in the case of the spending of European subsidiessubventions Based on a historically long decentralised tradition local and regional governments are responsible for organising and regulating their own external audit Normally these audits are conducted by a local SAI or a public accountancy firm 244 25 Fight against fraud andor irregularities 251 Fraud There is no special organisational unit within the financial management and control system for the fight against fraud no financial police There is a general organisational structure Government Investigation ServiceRijksrecherche within the Ministry of Justice Whenever there is a case of fraud this GIS will be called in The CGAS and the SAI will stipulate the fraud in their audit findings 252 Irregularities In the case of irregularities the CGAS andor the SAI will stipulate these in their audit findings These could have negative influence on their statements of assurance In the case of irregularities deliberately committed by officials disciplinary sanctions will be applied by the management In most cases irregularities are committed by mistake then the management has to take steps to prevent the same mistakes being made in the future 3 The concept of public internal control in the Dutch administration 31 Characteristics elements of managerial accountability responsibility In the Dutch political system ministers are individually responsible and accountable to parliament There is no collective responsibility of government Government promotes the unity of government policy by harmonising the ministerial policy decisions in the Cabinet A decision of government is finally always a decision for which the minister concerned is responsible to parliament The control and accountability relations in the Dutch FMC financial management and control system are relations between a minister and parliament external control and accountability and between a minister and his ministerial officialsmanagers internal control and accountability There is no accountability relation between parliament and ministerial officials 311 Political control versus ministerial accountability external and ministerial control versus managerial accountability internal Within the FMC system external and internal control are distinguished as well as ex ante control and ex post control The external control is the political control by parliament of the political managersministers parliament monitors the ministers or government ex ante through enacting the budget laws and ex post through accepting the annual financial reportstatements Parliament annually explicitly discharges the ministers All other control is internal control managerial control control within the central government by the ministers and the departmental management management control and internal financial control by the financial controllers first line control Management control is implemented by the minister political control and by the subordinated top managers SGs DGs managerial control Internal financial control first line control is the control by the head of the FEAD Financial Economic Affairs Departments He supports the first line management The head of the FEAD is organisationally independent of the line management He has the authority to inform and advise the SG and the minister directly 245 Additionally there is seen from the perspective of a ministry external financial control by the MoF and on his behalf by the DirectorateGeneral for the Budget DG Budget This external control is mainly the setting of government broad budgetary and financial frameworks and of financial regulations FMC system Ex ante controlsupervision verification of budget and financial management Ex post controlsupervisionaudit of budget and financial management External control politicalparliamentary control Political control Control of ministersgovernment by parliament through a enacting annually the budget laws b setting the general budgetary and financial framework through enacting the Organic Budget LawPFIClaw Comptabiliteitswet Control of ministersgovernment by parliament through a annually voting the financial ministerial reports b discussing the audit reports of the SAICoA External audit Independent audit by the SAICoA for parliament a auditing annually the financial reports and the financial management of the ministries b conducting periodically efficiency audits Internal control ministerial and managerial control Internal management control a Political control by the minister of the managerial board SGDGs strategic level b Managerial control by the managers of the staff members operational level c Complemented with self control by the operational staff members and with testing by colleagues Sometimes risk based internal verification by a verification department through order of the manager for example in case of large scale granting subsidies First line internal financial control Setting budgetary and financial frameworks internal regulation and advising within a line ministry by FEAD Complemented with limited preventive control by FEAD for special casessituations operations activities mandatory financial second opinion External financial control Setting government broad budgetary and financial frameworks and regulations by the MoFDG Budget Complemented with limited preventive control by the MoFDG Budget for special casessituations operationsactivities mandatory financial third opinion Internal audit Audit by the internal auditor CGAS Financial compliance and operational audits Independent of the managerpolicy performer but subordinated to the minister 246 312 Policy development and policy implementation including policy adjustments The FMCPIC system is in principle applied both to policy development and policy implementation by the ministries but in practise the focus is on policy implementation Policy implementation takes place by 1 ministerial implementing departments 2 internal agencies 3 external agencies and 4 local and regional governments The PIC system is totally applied to the organisational structures of 1 and 2 because the minister concerned is totally accountable to parliament The control of the minister with regard to 3 and 4 is limited because heshe has a limited accountability to parliament The external agencies and local and regional governments have their own PIC system regulated through special legal frameworks The managers charged with policy implementation 1 and 2 are responsible for the system of AO and IC administrative organisation the Organisation of the Internal Information Provision and Internal Control In the system applied in general they take into account the five INTOSAI guidelines a control environment b risk assessment c control activities d information and communication and e monitoring The managers can request the Central Government Audit Service CGAS for an operational audit on their AO and IC system 313 Politically appointed managers Managerial accountability is exercised by top administrative managers SGs DGs etc Only the ministers and state secretaries are politically appointed So during a political change the administrative top managers stay in function Nevertheless in case of vacancies in the administrative top management government will take the political background of the candidates into account 314 Delegation of responsibility and authority See chapter 2 for the Dutch mandate system taking decisions and actions on behalf of the minister The mandate system is much decentralised Regular decisions on policy implementation are within the existing frameworks taken rather low in an organisation In case of exceptional decisions or actionstransactions for which the minister has given no clear policy lines it is up to the middle or top management political feeling to assess whether the minister should be involved in the decision 315 Support from the FEAD financial officers See Second line internal control in the table above 316 Determining objectives The strategic social and political objectives and operational objectives in general the policy programmes are set by the government There is more management freedom for establishing more detailed operational objectives for policy implementation in general more freedom for external agencies less for internal agencies and the lowest for ministerial implementing departments the more ministerial accountability the less management freedom 317 Objectives and scope of internal control The control objectives are respecting budgetary and financial frameworks EMU balance EMU debt respecting the three Es effectiveness efficiency and economy 247 respecting financial regularity The operational support management activities and especially those with financial consequences are the scope of the internal control at the level of policy implementation by ministerial implementing departments and internal agencies These can be divided into regular financial operations o entering into financial obligations appropriationscommitments by contracting or subsidising o paying expenditures paymentsdisbursements o imposing leviestaxestariffs imposing claims o collecting tax and nontax revenues special financial operations for example payment of advances balancing of debts payment in kind remission of debt securing valuables cash credit cards bank cards bank warranties etc balance sheet operations treasury activities managing financial assets and managing financial liabilities 318 Reporting system The CGAS gives for every annual financial report a statement of assurance in a report of findings Annually there are 23 budget laws so also 23 annual reports including the financial statements and 23 statements of assurance The statements of assurance are the result of the financial and compliance audits and are submitted to the ministers concerned and to the SAI The content of the financial and compliance audits comprises auditing whether the financial management is regular orderly verifiable and efficient auditing whether the financial information in the annual reports is congruent with the financial records auditing of the realisation of policy information in the annual reports The SAI makes use of the statements of assurance of the CGAS The SAI issues annually a statement of approval regarding the financial statements included in the central governments annual financial report The SAIs statement also relates to the central governments trial balance This statement is submitted to parliament and to government 32 Internal audit 321 Internal audit function implemented by the Central Government Audit Service CGAS 3211 Audits to be implemented including statements of assurance The GCGAS has two main task fields 1 The lawbased task financial and compliance audits auditing of the financial regularity of the financial management the financial information and the realisation of policy information in the annual reports resulting in the annual statement of assurance This is the main element of ex post audit 2 The consultative task operational audits advising the manager on his demand about the operational management systemsprocedures A statement 248 of assurance can be the result Operational audits are not an element of ex post audit The CGASs financial and operational audit is applied upon three organisational levels within a ministry the strategic level management control level the operational level and the activity and transaction level as lowest level 3212 Reporting The GCGAS reports the results of the annual financial and compliance audits to the minister concerned So the internal audit includes the reporting of the results The annual financial and compliance audit reports of the CGAS are sent to the SAI so the SAI can make use of the results of this audit matter of efficiency of the audit process This obligation has been legally regulated in the Government Accounts Act Comptabiliteitswet However the SAI is constitutionally independent It has the authority to decide itself to do any supplementary financial or policy audit 3213 Organisation There are 10 ministries They no longer have their own Internal Audit Department IAD Since 2014 for efficiency reasons all IADs have been merged into one shared service center for internal audit the Central Government Audit Service CGAS The CGAS is an organizational unit within the Ministry of Finance but is working for and directly reporting to the individual ministers concerned So although the audit function is centralized regarding its organizational structure it is de concentrated regarding its way of functioning 3214 Regulation The tasks of the CGAS have been regulated in the Government Accounts Act 2001 3215 Audit charters The CGAS has shortly formalized an audit charter The most important elements of a charter like independence scope responsibilities authority and standards of the internal audit are also regulated in bylaws Elements as mission objectivity and authorities are laid down in the professional rules of conduct The acceptance of duties outside the scope of the financial compliance and operational 52 audits is legally not permitted Operational audits are after consultation conducted on request of the management Acceptance of the request depends of the audit capacity available and these audits are planned in the annual audit schedule 3216 Audit training Public internal auditors are obliged to undergo continuing professional education PE Therefore they have to score every year a minimum of PE marks They have the opportunity to follow selfchosen training and courses given by certified educational institutions 3217 Followup procedure to internal audit reports Conceptfindings of the auditor are discussed with the managers The final conclusions and recommendations are discussed in the audit committee Subsequently the minister will take the decision to act on the recommendations In case of irregularities the CGAS andor the SAI will stipulate these in their audit findings This could have a negative influence on their statements of assurance In case 52 In Dutch we use the English term operational audit for what in English is called performance audit 249 of irregularities deliberately committed by officials disciplinary sanctions will be applied by the management In most cases irregularities will be committed by mistake then the management has to take steps to prevent the same mistakes being made in the future In case of suspicion of fraud the Government Investigation Service will be called in The CGAS and the SAI will stipulate the fraud in their audit findings In the Netherlands we have no special financial inspection financial police 322 Internal audits relation with external audit Coordination between internal and external audit The annual financial and compliance audit reports of the CGAS are sent to the SAI so the SAI can make use of the results of this audit This obligation has been legally regulated in the Government Accounts Act 2001 Since the SAI is constitutionally independent it has the authority to decide on any supplementary financial compliance or operational audit Furthermore the SAI participates as listener in the monthly reunions of the internal audit directors of the ministries in the socalled IODAD consultation Apart from that there is regular consultation between the president of the SAI and the Minister of Finance charged with audit policy about matters of audit policy eg about audit standards or the presentation of financial information in the annual financial reports 323 Audit boards or audit committees 3231 Audit board We do not have a regulated permanent audit board From time to time the government installs a temporary committee for giving advice on the internal audit function within government ministries Usually the SAI some representatives of the board of the CGAS some representatives of the DG Budget53 and some external experts participate in such a temporary committee 3232 Audit committees In each ministry an audit committee advises the minister andor the SG on recommendations of the GIAD and SAI operational management affairs and risk management and sometimes about the programming of the annual audit plan of the GCGAS It is a functional not hierarchical body composed of the members of the top management DGs SG and two external members with special expertise in FMC affairs or broad public management expertise The head of the FEAD Financial Economic Affairs Departments and a representative of the board of the CGAS are advising members of the audit committee The function of the audit committee has been regulated in a bylaw There is the intention to regulate the legal base for these committees in the Government Account Act Basic budget law 53 Using the concept of DG Budget as an official in this document there is of course understood the Dutch DG Budget 250 33 Coordination of public internal control In the Dutch central government we distinguish between 1 policy control the CHU 54 is partly the Ministry of Finance partly the Ministry of Justice 2 budget control the CHU is the Ministry of Finance 3 control of operational management financial control the CHU is the Ministry of Finance internal audit the CHU is the Ministry of Finance nonfinancial control staff housing ICT procurement of equipment facilities the CHU is the Ministry of the Interior 331 Methods of coordination of internal control Frame setting through regulation laws and bylaws by DG Budget Regular meetings between DG Budget and the directors of the FEADs of the ministries in the socalled IOFEZ council for policy matters of budget and financial control For more technical matters there is an interministerial working group of deputy directors of the FEAD Regular meetings between DG Budget the CGAS and the SAI for audit policy matters For more technical audit matters there is an internal working group within the CGAS Information provision and transfer of knowledge from the CHU through manuals conferences trainings etc 332 Central coordination or harmonisation unit DG Budget DG Budget and more specific the Budget Affairs Department BAD is the central harmonisation unit for public internal financial control and for internal audit through frame setting for budget control and financial control on the one hand and for internal audit on the other hand The frame setting is formalised in regulations law and by laws Before issuing regulations by the Minister of Finance there are institutionalised consultations between DG Budget the FEADs of the lineministries and the CGAS Within the set frames the ministries ministerspolicy managers are relatively autonomous with regard to budget and financial management DG Budget supervises in particular whether the frames are respected So delegated preventive ex ante financial control with respect to financial transactions by DG Budget can be very limited and is in general only applied to guarantees warranties As technical tool of budget control the ministries are obliged to use the central budget accounting system of DG Budget DG Budget does not assess the setup and functioning of the financial accounting systems of the ministries Such assessments are conducted by the CGAS and the SAI The CGAS reports to the minister concerned the SAI to the minister concerned and to parliament DG Budget supervisesmonitors the information output of the budget and financial accounting systems of the lineministries during the year by means of periodical and occasional information provided by the FEADs DG Budget has the authority to demand all the financial information necessary for their supervision The FEADs are legally 54 Central Harmonisation Unit 251 obliged to supply that information These authorities and obligations have been laid down in the Government Accounts Act 2001 55 With regard to internal audit the ministers are legally obliged to submit the results of the financial and compliance audits inclusively the statement of assurance to DG Budget This obligation has been laid down in the Government Accounts Act 2001 DG BudgetBAD does not assess the setup and the functioning of the internal audit systems of the ministries nor does it monitor the results of the internal audit The SAI reviews periodically the functioning of the CGAS and reports to the minister concerned and to parliament 333 Decentralised coordination of budget and financial control within a line ministry the FINANCIAL ECONOMIC AFFAIRS DEPARTMENT FEAD The main tasks of the FEAD within a ministry are coordinating the annual budget process and the multiannual financial estimates monitoring the budget implementation organising the budget accounting accounting of the financial estimates and the financial accounting advising independently from the policy managers the minister on all issues with financial consequences coordinating the multiannual policy evaluations organising the payment process the assignments of the cashiers managersadministrators of the bank accounts and securing the valuables cash credit cards bank cards bank warranties etc 4 Financial Inspection There is no special organisational unit within the FMC system for the fight against fraud no financial police There is a general organisational structure Government Investigation ServiceGIS within the Ministry of Justice Whenever there is a case of fraud this GIS will be called in The CGAS and the SAI will stipulate the fraud in their audit findingsThese could have negative influence on their statements of assurance 5 Ongoing andor future reforms Horizontal integration of processes through the creation of SSCs 56 The present government focuses on a more compact central government The policy is to promote more horizontal integration of processes through creating shared service centers and other organisational forms of cooperation between ministries especially in the field of policy implementation of the ministries eg with regard to granting subsidies supervision and inspection of policy implementation of external agencies and policy advising merging of planning offices 55 In the Netherlands the Government Accounts Act 2001 is a fusion of the Organic Budget Law the PIFC or FMC Law the Internal Audit Law and the External Audit or SAI Law 56 See chapter 1 Developments point 4 Public operational management reforms POMR 252 Internal agencies and ministerial performance departments Operational control level 1 Policy performanceexecution 2 Operational support management A financial management operations a regular financial operations b special financial operations c balance sheet operations B material management operations C human resource management operations Dutch Parliament Dutch MinistersGovernment Ministry of Finance Policy ministries FEAD2 External agencies Operational control level Policy performance execution or Supervision activities Operational support management Local regional government Operational control level Policy performance execution Operational support management Supreme Audit Institution SAI Court of Audit Strategic planningpolicy programmes Objectives and prior conditions 1 Setting policy programmes 2 Retaining sustainable political support of parliament 3 Respecting fiscal frameworks EMUbalanceEMUdebt 4 Respecting the 3 Es effectiveness efficiency economy 5 Respecting financial regularity DG BudgetCBO1 central coordination and surveillance within government of budget control financial control internal audit central promotion of policy control policy accountability 2nd line preventive ex ante surveillance limited 1 CBO Central Budget Office The CHU for FMCS PIFC and IA is the Budget Affairs DirectorateBAD in Dutch Begrotings zakenBZ Strategic control level DG level Control of policy development and of operational support management Tactical control level Directorate level Development of policy programmes and operational support management Central Government Audit Service CGAS internal ex post audit external ex post audit Financial Economic Affairs Directorate coordination Surveillance and advising within the line ministry about budget control financial control policy control 1st line preventive ex ante surveillance limited 2in Dutch FEZ 16 Audit committee 10 External audit by SAI 14 External parliamentary control 1 Information by SAI 15 External ministerial accountability 2 Limited accountability by LRG 6 External ministerial supervision 5 Limited accountability by EA 6 External ministerial supervision 5 Internal managerial accountability 4 Internal ministerial and managerial control 3 9 Information by FEAD 8 Framesettingregulation control by DG Budget 7 External audit by SAI 14 Information by CGAS 13 Internal audit 11 Society Citizens firms organizations Tax payers Voters Policy subjects 9 7 IOFEZ Financial Governance System of Central Government in The Netherlands Information by CGAS 12 253 POLAND Public internal control 57 Summary of the major changes in 20112013 Since the last edition of 2012 PIC Compendium Poland hasnt introduced any crucial organizational and legislative changes in the public finance sector The updating of the Polish input to the Compendium present only functional aspects of development of public internal control In Poland implementation of public internal control system started in 2002 but the transformation into a new approach called management control system was initiated by The Act of 27 August 2009 on Public Finance which came into force in 2010 After 3 years of functioning formal management control system Poland is still facing new challenges in the process of improving implemented solutions One of the main challenge is transition to planning processes in the public finance sector which will coordinate both the strategic planning longterm and annual planning on the level of entities Another important matter for improvement of public entities functioning is integration of various managerial tools and systems that already exist in the organizations in order to assure a coherent and consistent management control system Poland is also in the process of introducing the performancebased budgeting PBB system which currently will be working in parallel to the traditional budgetary system The dual system was introduced for the first time in the state budget for 2013 Completion of the entire process is scheduled for 2015 Compendium presents the milestones planned for the next years in implementing PBB in public finance sector entities Significant progress has been made in setting and organizing strategies in Poland The government has articulated strategies for the countrys long development and has consolidated over 400 sectorbased strategies into integrated strategies 1 Brief history of present public internal control systems The public internal control system was introduced in Poland in accordance with the amendment to the Act of 26 November 1998 on Public Finance passed on 27 July 2001 which came into effect on 1 January 2002 as the result of the preaccession negotiation process The act was based on the Principles for introduction of the PIFC system in the Polish public administration strategy paper approved by the Committee for European Integration in December 2001 The objective of the Public Internal Financial Control system was to ensure appropriateness and efficiency of collection and disbursement of public means Organisational activities 57 Contribution from the Ministry of Finance 254 In March 2002 in the Ministry of Finance the Polish central harmonisation unit called the Financial Control and Internal Audit Coordination Department was set up On 26 November 2002 the general internal auditor was employed through competition in accordance with the provisions on civil service In public financial sector entities enumerated in Article 35d 1 of the abovementioned act units or posts for internal audit were created At the request of the heads of public financial sector entities the Minister of Finance allocated and transferred financial means from the state reserve in the amount of PLN 40 million for the year 2002 destined for support of building of financial control and internal audit system mainly for financing personnel costs In the state budget for the fiscal year 2003 the special purpose reserve at the amount of PLN 3 million was foreseen which was destined for strengthening of auditing personnel in institutions managing financial means coming from the EU assistance funds On 29 October 2002 on the basis of the decision of the Minister of Finance the examination board was appointed for carrying out exams for candidates for internal auditors The key role in the implementation and coordination of the system was entrusted to the Minister of Finance who fulfilled the tasks with the assistance of the General Internal Auditor and Financial Control and Internal Audit Coordination Department situated in the Ministry of Finance The Minister of Finance in line with Article 35o 2 of the abovementioned act determined and propagated financial control standards and internal audit standards collected and analysed information including plans and reports from internal audit cooperated with foreign institutions and performed an assessment of internal audit and financial control in public financial sector entities To ensure a high quality internal audit staff the Minister of Finance appointed for the fouryear term the examination board The members of the examination board were recruited from among the employees of the Ministry of Finance relevant academics and scientists and the representative of private internal audit associations The board carried out the examination in order to verify theoretical and practical competence of candidates for internal auditor The examination covered issues related to audit methodology audit standards public administration public finance microeconomics and risk assessment Between 2003 and 2006 over 2 000 internal auditors passed the exam and obtained the national certificates Since 2002 the Act on Public Finance concerning public internal financial control was updated three times 2005 2006 and 2009 The current act came into force in January 2010 In accordance with the amendment to the Act on Public Finance which came into force in 2006 the General Internal Auditor post the examination board and the national certification process were abolished Types of qualifications and certificates entitling internal auditors to work in public finance sector entities were broadened in the act and enumerated as follows 1 certificates Certified Internal Auditor CIA Certified Government Auditing Professional CGAP Certified Information Systems Auditor CISA Association of Chartered Certified Accountants ACCA Certified Fraud Examiner CFE Certification in Control SelfAssessment CCSA Certified Financial Services Auditor CFSA or Chartered Financial Analyst CFA or 2 completed an audit traineeship and passed an audit examination before the examination board appointed by the President of the Supreme Audit Office or 255 3 qualification examination for fiscal control inspector or 4 qualifications of a certified comptroller or 5 national internal auditor certificate The current list of requirements for internal auditors and types of entitlements which enable someone to work as an internal auditor is presented in paragraph 32 Also since 2006 the International Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors have been directly adopted as The Internal Audit Standards in the Public Finance Sector Entities Due to the reorganisation within the Ministry of Finance since 2008 the Financial Control and Internal Audit Coordination Department has been renamed the Department of Public Finance Sector Audit see paragraph 33 2 Public internal control environment 21 Budgetary system Poland is in the process of further development of the performancebased budgeting PBB system which currently is working in parallel to the traditional system The dual system was introduced for the first time in the state budget for 2013 see paragraph 5 Completion of the entire process is scheduled for 2015 The constitution of the Republic of Poland the new Act of 27 August 2009 on Public Finance and the standing orders of the parliament regulate the fundamental aspects of the parliamentary budget process The Minister of Finance submits to the council of ministers the assumptions of the draft budget for the subsequent year taking into consideration the assumptions adopted in the MultiYear Financial Plan of the State and the guidelines for actions included in the convergence programme adopted by the council of ministers The council of ministers passes the budget bill and submits it together with the reasons behind it to the Sejm lower chamber of the Polish parliament by 30 September of the year preceding the relevant budget year The Sejm adopts the state budget for a fiscal year by means of a budget budgetary statute The right to introduce legislation concerning a budget an interim budget amendments to the budget a statute on the contracting of public debt as well as a statute granting financial guarantees by the state belongs exclusively to the council of ministers The council of ministers within the fivemonth period following the end of the fiscal year presents to the Sejm a report on the implementation of the budget together with information on the condition of the state debt The Sejm considers the report presented to it and after seeking the opinion of the Supreme Audit Office passes a resolution on whether to grant or refuse to grant approval of the financial accounts submitted by the council of ministers 22 External control and audit of public administration External control and audit of public administration in Poland is performed by the Supreme Audit Office NIK the supreme audit institution The NIKs organisation and functioning are set out in the Constitution of the Republic of Poland and the Act of 23 December 1994 on the Supreme Audit Office The basic task of the NIK is to audit the activity of government administration bodies the National Bank of Poland NBP state legal persons and other state organisational entities The NIK can also audit the activities of local government bodies as regards their legality sound management efficacy and integrity The NIK may also audit the activity of other organisational units and economic 256 entities entrepreneurs to the extent in which they use state or public property or resources or fulfil financial obligations to the state The NIK undertakes audits ordered by the Sejm or its bodies at the request of the president the prime minister or on its own initiative The supreme audit institution submits to the Sejm the analysis of the state budget execution and monetary policy guidelines 23 Body responsible for independent audit and control of the EU funds The body responsible for independent audit and control of the EU funds is the General Inspector for Treasury Control who is the Audit Authority for Structural Funds and the Certification Unit for the Common Agriculture Policy Heshe is also the Government Plenipotentiary for Combating Fraud against the Republic of Poland or the European Union see paragraph 4 3 The concept of public internal control in Poland 31 Managerial accountabilityresponsibility 311 Management control in the public finance sector The Ministry of Finance continues the establishment of an efficient system of managerial accountability within the public administration The Department of the Public Finance Sector Audit of the Ministry of Finance supports managerial accountability financial management and control and functionally independent internal audit The Act of 26 of November 1998 on Public Finance introduced to law a term financial control After a few years of the use of this term in the legislation the financial control was questionable and mistakenly associated only with the financial sphere The Act of 27 August 2009 on Public Finance introduced the management control definition which replaced financial control and in principle is equal to internal control in the meaning assumed by the COSO model In accordance with the provisions of the Act of 27 August 2009 on Public Finance management control comprises a general set of activities undertaken in order to ensure the implementation of objectives and tasks in an effective economical and timely manner compliant with the provisions of law The key references for management control are objectives and their achievement as the basic criterion for assessment of effectiveness of the solutions adopted in the entity It has to be emphasised that in public finance sector entities many elements of management control functioned and function such as structure of entity delegation of entitlements internal procedures external and internal communication etc Therefore the purpose of introducing management control is rather to put in order and systematize in accordance with international best practices the structures and principles existing already in the entities than to reorganise them entirely The objective of management control is to ensure in particular compliance with the provisions of law and internal procedures efficiency and effectiveness of operation credibility of reports protection of resources observance and promotion of rules of ethical conduct efficiency and effectiveness of information flow risk management The persons responsible for ensuring an adequate efficient and effective management control are 257 the minister in government administration branches 58 hereinafter a branch heshe is in charge of a commune foreman a mayor a chairman of the management board of the local government unit socalled secondary level of management control and the head of the entity socalled primary level of management control In comparison with previous provisions of law the Act of 27 September 2009 on Public Finance broadens the extent of control taking into account not only a single entity but also a group of entities supervised by the minister which heshe is in charge of a branch or by the executive organ of the local government It relates to the opinion that complete decentralisation of management within the public administration is pointless and not consistent with its essence it includes common objectives and principles which should be followed by public administration entities According to above mentioned Act the transformation of management system in public entities was initiated but the process is still in improvement It has to be emphasized that after 3 years since management control has been introduced in law awareness among heads of the public sector entities on changes in the approach to the management of the entity increased The vast majority of managers positively assess the applicable law on management control and declare that thanks to this process the management of the entity has been improved The challenge is still to ensure consistency and functionality of the implemented solutions One of the key task is to improve the process of planning activities of public finance sector entities through coordination of this process with both the strategic long term and annual planning Another crucial issue is to ensure coordination of various managerial tools and systems that already exist in the organizations in order to set up a coherent and consistent management control system Some of managers treat a management control as the next solution that must be implemented instead of coordinate these tools or systems The effective management control system should merge all the management solutions functioning in the entity 312 Annual activity plan and statement on the condition of management control By the end of November each year the minister in charge of the branch draws up an annual activity plan for the following year for the government administration branch which heshe is in charge of The annual activity plan includes in particular a specification of objectives within individual budget tasks together with an indication of subtasks for achieving the objectives and measures specifying the extent of objective implementation and the planned values thereof By the end of April each year the minister in charge of the branch draws up a report on the execution of the annual activity plan and submits a statement on the condition of management control for the preceding year covering government administration branches which heshe is in charge of The minister in charge of the branch may oblige the head of the entity in the branch to draw up an annual activity plan for the following year for this entity and also prepare a report on the execution of the action plan and submit a statement on the condition of management control for the preceding year covering the entity heshe is in charge of 58 Government administration branches in the Polish language działy administracji rządowej The English translation for the term has been adopted from the translation of the constitution available at the website of the Sejm httpwwwsejmgovplprawokonstangielskikon1htm Some 35 branches have been defined and described within the provisions of the Act of 4 September 1997 on Government Administration Branches The branches are substantial fields of activity of central government administration 258 The annual activity plan the report on the execution of the annual activity plan and the statement on the condition of management control shall be published in the Public Information Bulletin which is available on the each ministry and entity website In order to ensure effective management control in public finance sector entities the Minister of Finance specified in the form of a communication published in the Official Journal of the Minister of Finance The Management Control Standards for the Public Finance Sector Entities consistent with international internal control standards specified in the form of a communication published in the Official Journal of the Minister of Finance The Detailed Guidelines on Selfassessment of the Management Control in the Public Finance Sector Entities specified in the form of a communication published in the Official Journal of the Minister of Finance The Detailed Guidelines on Planning and Risk Management for the Public Finance Sector The minister in charge of the branch may specify detailed guidelines on management control for the government administration branch heshe is in charge of 32 Internal audit 321 Law and regulatory basis The basic issues concerning internal audit in the public finance sector are regulated in the Act of 27 August 2009 on Public Finance and proper regulations to the act The Internal Audit Standards in the Public Finance Sector Entities the International Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors are in force as well as in the guidelines included in The Internal Audit Manual The Charter of Internal Audit in Public Finance Sector Entities The Code of Ethics for Internal Auditors in Public Finance Sector Entities 322 The aim of the internal audit and its place in the entitys structure its independence and reporting In accordance with the provisions of the Act of 27 August 2009 on Public Finance internal audit is an independent and objective operation the aim of which is to support the minister in charge of the branch or the head of the entity in order to implement objectives and tasks by systematic assessment of management control and consulting activities The assessment refers to the adequacy efficiency effectiveness of management control in the government administration branch or in the entity The head of the entity in the office of government administration the director general ensures conditions required for carrying out the internal audit procedure in an independent objective and effective manner and inter alia organisational separateness of the internal audit function and continuity of the internal audit procedure in the said entity The heads of public finance sector entities are responsible for the implementation and functioning of internal management and control mechanisms procedures and internal regulations such as an internal audit charter A head of the internal audit unit reports directly to the head of the public finance sector entity and in the government administration offices within the remit specified in a separate statute to the director general Any termination of the employment contract or any amendments to the payment and work conditions of the head of the internal audit unit require an approval of the competent audit committee 259 323 Requirements for internal auditors In accordance with the provisions of the Act of 27 August 2009 on Public Finance an internal auditor should meet the requirements listed below 1 have the citizenship of a Member State of the European Union or any other state of which citizens are entitled to work in the territory of the Republic of Poland under international agreements or the provisions of the community law 2 possess full capacity to effect legal transactions and fully enjoy public rights 3 have not been sentenced for an intentional offence or an intentional fiscal offence 4 have higher education 5 have the following qualifications to carry out internal audit a one of the certificates Certified Internal Auditor CIA Certified Government Auditing Professional CGAP Certified Information Systems Auditor CISA Association of Chartered Certified Accountants ACCA Certified Fraud Examiner CFE Certification in Control Self Assessment CCSA Certified Financial Services Auditor CFSA or Chartered Financial Analyst CFA or b between 2003 and 2006 have passed an exam for an internal auditor before the examination board appointed by the Minister of Finance or c qualifications of a certified comptroller or d a twoyear track record in internal audit and hold a graduation diploma of a postgraduate course in internal audit issued by the organisational unit authorised under separate statutes to confer the degree of doctor of economics or law on the day on which the said diploma was issued 324 Training measures for internal auditors The Ministry of Finance is undertaking steps to ensure proper training for auditors During the training on performance budgeting organised by the Ministry of Finance in 200809 323 internal auditors and 180 heads of public finance sector entities were trained The Department of the Public Finance Sector Audit also organises regular monthly meetings for internal auditors of public finance sector entities for about 100 participants each time During the meetings key matters for internal audit and management control and good practice examples are presented and discussed 325 Types and mode of internal audit assignments Internal audit performed in the public finance sector entities covers both declarations of assurance and consultancy assignments The methodology of declarations of assurance is described in detail in the provisions of the Regulation of the Minister of Finance of 1 February 2010 on carrying out and documenting internal audit as well as in the Internal Audit Standards for the Public Finance Sector Entities Both are published by the Minister of Finance The internal audit methodology implemented by auditors enables them to perform various types of assurance assignments including financial audit compliance audit and performance audit The CHU encourages managers and auditors to plan more performance audits The methodology of consultancy assignments is also described in the abovementioned regulation and standards Within 14 days after having received the audit report the manager of the audited unit shall inform the management of the public finance sector entity and the internal auditor which recommendations are considered well founded and appropriate when and how they will be implemented and who is responsible for implementing them If the manager of the audited unit refuses to take action the head of the public finance sector entity is obliged to set out when and how the recommendations considered valid will be 260 implemented and who is responsible for implementing them The internal auditor shall monitor the execution of engagement results After the time limit for the implementation of recommendations heshe shall ask the manager of the audited unit about measures used to implement the recommendations and to what extent recommendations were implemented There is no unified formal procedure in the public finance sector entities as to how to inform the managers of the unit if indications of fraud andor irregularities are identified during the course of an audit In each case internal audit standards require the auditor to report fraud risk to management of the entity 326 The internal audit and the treasury control separation of duties The internal audit function in the public finance sector entities is in general independent from the Treasury Control centralised government financial inspection described in paragraph 4 There is only one important exception from that principle In accordance with the provision of Articles 293 and 294 of the Act of 27 August 2009 on Public Finance the General Inspector for Treasury Control may commission internal audit engagement on EU funds in both central government entities and local government entities Hisher service may also assess the internal audit procedures and audit engagements in the field of EU funds in the abovementioned type of entities Notwithstanding that external audit performed by the Treasury Control in the programmes cofinanced from the European Union resources see paragraph 4 should be compliant with the International Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors The Treasury Control shall control purposefulness and manner of use of public funds in the public finance sector entities where internal audit is performed see paragraph 4 This means that the same activities of the units may be audited and controlled in parallel The difference between both activities lies in the methodology used by auditors and inspectors internal auditors are focused on assessment of the management control system of the unit The Treasury Control may inspect every organisation both public and private where public funds are used 327 Internal audit relations with external audit The duty of cooperation between internal audit and the Supreme Audit Office NIK is determined in the Act of 23 December 1994 on the Supreme Audit Office The Internal Audit Standards in the Public Finance Sector Entities also determine the duty of cooperation between internal and external functions This is also regulated in The Charter of Internal Audit in Public Finance Sector Entities which states that the internal auditor cooperates in performance of hisher tasks with external auditors including in particular the NIK The coordination of cooperation between the NIK and the Internal Audit Unit is usually effected by the Head of the Internal Audit Unit ie the Chief Audit Executive The reports of the internal auditor are available to the NIK The NIKs auditors and the Head of the Internal Audit Unit should inform each other of any serious suspicion of bad management or fraud The Head of the Internal Audit Unit should ensure avoiding duplication of the NIK and Internal Audit Unit activities The Head of Internal Audit Unit also assesses coordination of the NIK and the Internal Audit Unit in terms of costs and effectiveness 261 328 Audit committees Currently there are 17 audit committees in the public finance sector in Poland which corresponds to the number of ministries All the committees were established in 2010 The committees were established for the reasons described below Until 2010 the concept of internal control has been implemented at the primary level of the public finance sector Internal auditors assessed the internal control system only within their entity The information given by the auditors was dispersed and useful only for the managers at the abovementioned primary level The Act of 27 August 2009 on Public Finance implemented in 2010 developed a new concept of management control and accountability at the higher secondary level of the management the minister in charge of the government administration branch Audit committees should strengthen the internal audit function in its task of assessment of the management control throughout the entire branch The audit committee may inform and give advice to the minister about risks connected with implementation of hisher objectives throughout the entire branch The aim of the audit committee is to provide consulting services with a view to ensuring adequate efficient and effective management control and providing an efficient internal audit to the minister in charge of the branch It should be emphasised that the scope of the audit committee guidance covers the functioning of the management control and internal audit in all units supervised by the relevant minister One joint audit committee may be established for the branches managed by one minister For example the Minister of Finance established one joint committee for three branches the Budget the Public Finance and the Financial Institutions The minister in charge of the branch shall appoint the audit committee with hisher internal regulation Currently there is no legal obligation to establish audit committees for local government The goals and tasks of the audit committees scope of activity number of members and requirements for members have been described within Articles 288290 of the Act of 27 August 2009 on Public Finance and in the Regulation of The Minister of Finance of 29 December 2009 on Audit Committee The members of the audit committee The audit committee shall comprise the minimum of three members including 1 a person in the rank of the secretary or undersecretary of state designated by the minister as the chairman of the committee 2 at least two independent members people not employed in the ministry or in organisations of the branch In the opinion of the Ministry of Finance the optimal size of the audit committee is composed of five to nine persons including the chairman This size of audit committee gives all the members a chance to actively participate in the deliberations and effectively perform the tasks of the committee In practice by the end of 2012 the audit committees ranged from 3 to 7 members The Ministry of Finance recommends that independent members shall make up at least half of the audit committee It is also recommended to maintain a constant size of the audit committee Independent audit committee members should jointly have knowledge skills and experience to perform their tasks competently and effectively The Minister of Finance defined within the provisions of the Regulation of 29 December 2009 on Audit Committee qualifications of the independent members the requirements the rules of procedure the audit committee should meet the method of determining the remuneration of the independent members The organisation and the mode of operation of the audit committee shall be specified by 262 the rules of procedure internal regulation granted by the minister on request of the chairman of the committee Tasks of the audit committee Annual report of the audit committee Tasks of the audit committee shall include the following in particular indicating material risks indicating material weaknesses in the management control of the branch and proposing measures to improve them setting priorities for annual and strategic internal audit plans reviewing material results of internal audit activity and monitoring the implementation thereof reviewing statements on the execution of the internal audit plan and on the assessment of the management control monitoring the effectiveness of the internal audit including reviewing results of internal and external assessments of the internal audit activity giving permission for dissolution of the employment contracts and any change in salary and employment conditions of the chief internal audit executives 59 in organisations within the branch By the end of February each year the audit committee shall submit a report on the implementation of tasks in the preceding year to the minister in charge of the branch and the Minister of Finance The report on the implementation of tasks shall be published in the Public Information Bulletin on the website of the relevant ministry The first reports were submitted to the Minister of Finance in 2011 33 Coordination of public internal control The Minister of Finance is the person responsible for the coordination of the management control and internal audit system In performing these tasks heshe is assisted by the Department of the Public Finance Sector Audit which serves as a central harmonisation unit CHU The CHU is supporting managerial accountability financial management and control and functionally independent internal audit According to the Act of 27 August 2009 on Public Finance in the scope of coordinating internal audit procedures in public finance sector entities the Minister of Finance fulfils the tasks specified below commissioning the internal audit procedure excluding the units referred to in Article 139 2 of the said act 60 and regional and local government units assessing the internal audit excluding the units referred to in Article 139 2 of the said act and regional and local government units disseminating the standards referred to in Article 273 1 of the said act The Internal Audit Standards in the Public Finance Sector Entities issuing guidelines cooperating with domestic and foreign organisations cooperating with audit committees 59 As defined in the International Standards for the Professional Practice of Internal Auditing 60 The abovementioned institutions are offices auxiliary to the supreme institutions of the state inter alia The Chancellery of the President of the Republic The Chancelleries of both chambers of parliament the Constitutional Court the Ombudsman Office the NIK The Supreme Court 263 In accordance with the Act of 27 August 2009 on Public Finance the Minister of Finance defines by regulation the detailed methods and modes of carrying out and reporting on the progress and results of the internal audit Internal audit in Poland follows internationally recognised standards and is carried out on the basis of an annual internal audit plan prepared by the end of each year for the subsequent year although additional internal audits may be carried out outside of the scope of the audit plan in justified cases By the end of January each year the internal audit unit shall also prepare a statement on the execution of the annual audit plan for the preceding year Both the plan and statement on the execution have the status of public documents The reports of the internal auditors are also available to the NIK 4 The financial inspection 41 The Treasury Control The Treasury Control TC is an inspection service subordinated to the Minister of Finance The legal basis for the performance of the service is the Act of 28 September 1991 on the Treasury Control including later amendments The essential elements of control procedure performed by the TC including powers of the controllers are comprised in the relevant provisions of the Act of 29 August 1997 Tax Regulation as well The organisational units of the service are 16 TC offices and the Ministry of Finance that comprises three out of its 39 departments subordinated to the General Inspector of Treasury Control The higherrank authority over the directors of TC offices is the General Inspector for Treasury Control who usually is also the Undersecretary of State within the Ministry of Finance The Minister of Finance is the supreme TC authority As was stated in paragraph 23 The General Inspector for Treasury Control is the Government Plenipotentiary for Combating Frauds against the Republic of Poland or the European Union Hisher tasks are inter alia coordination of activities of relevant central government bodies and establishing current and correct exchange of information about irregularities among relevant central government bodies 42 Main goals and tasks of the Treasury Control The goals of the TC are to protect the interests and property rights of the state treasury to ensure effective execution of tax obligations and other dues which constitute the revenue of the state budget or state earmarked funds to examine the compliance of the management of assets of other state legal persons with the law to prevent and reveal the offences specified in Articles 228 to 231 of the Penal Code ie offences against institutions of the state as well as regional and local government mainly corruption among the personnel of organisational units under supervision of the Minister of Finance Among numerous activities of the TC the following ones linked with assessment of use of budgetary fundsdetecting irregularities in use of budgetary funds should be mentioned 264 inspection of the use of budgetary and European funds control inspection of the purposefulness and legality of the management of public funds and funds from the European Union and international financial institutions 61 audit of the EU funds and funds from other foreign resources The General Inspector for Treasury Control is the Audit Institution for the Cohesion Policy operational programmes of the Cohesion Policy 200713 and with the assistance of the Department for Protection of EU Financial Assistance within the Ministry of Finance plays the role of the certification unit for the common agricultural policy examination while making decisions of the purposefulness and legality of the use and management of state property examination of the use of property received from the state treasury for the purpose of performance of public tasks examination of correctness of the state treasury property privatisation controls inspections connected with fulfilment of obligations resulting from guarantees granted by the state treasury 43 The Treasury Intelligence The activity of the TC includes the performance of the specialised subunits of the organisational units of fiscal control both in the offices and the ministry the Treasury Intelligence The Treasury Intelligence may carry out some of its tasks in the form of the operational and detective activities that include inter alia obtaining information in secret and fixing traces and evidence in secret 44 Initiative for controls inspections The basis for performance of the TC organisational units are their plans of control The plans are authorised by directors of TC offices in accordance with the tasks defined by the General Inspector of Treasury Control The performance of the TC may be carried out beyond the plan of control on the basis of obtained information or materials and conducted analyses 45 Coordination of activities of the TC and internal auditorsother control staff In accordance with the provisions of law all state and local government administration authorities and other state regional and local government administration organisational units are obliged to cooperate with and provide gratuitous information and assistance to the TC authorities inspectors and employees in order to enable execution of the tasks of the TC There is no formal obligation of coordination of tasks and engagements among the TC and internal auditorscomptrollersinspectors with the following exception in accordance with the provision of Articles 293 and 294 of the Act on Public Finance the General Inspector of Treasury Control may commission internal audit in organisations of central government and regionallocal government when relating to EU budget funds 61 The TC must not perform control of the purposefulness and the manner of the use of the budgetary funds and state property for special purposes in the units supervised by the Minister of National Defense in the Internal Security Agency and the Intelligence Agency in the Office of Government Protection in the police the frontier guard and the state fire brigades 265 assess the internal audit procedure in organisations of central government and regionallocal government when relating to EU budget funds The CHU as well as other departments of the Ministry of Finance may submit proposals to the draft TC control plan 5 Ongoingfuture reforms 51 Implementation of the new shape of the public internal control system The Act of 27 August 2009 on Public Finance redefined the essential components of the public internal control system The reform aimed at strengthening the risk management and assessment of the managerial system in the branches of government administration Currently the central government administration deals with the implementation of the reform At the end of 2010 the ministers in charge of the branches authorised and published their annual activity plans for the first time The ministers are obliged to determine fundamental objectives to be achieved by the branch within a year Appropriate indicators should also be specified to measure the level of achievement of set objectives The annual activity plan is a fundamental reform in ministers performance such a firm designation of objectives has not existed as yet Until the end of April 2011 for the first time statements on the state of management control in the branches of government administration were signed by the ministers and published on each ministrys website The top managers in many ministries established formal systems and procedures that should provide the ministers with reasonable assurance on the state of management control in the branches Such systems were coordinated by a team or person dedicated to that task and usually included inter alia a subsystem of risk management self assessment made by the units results and recommendations from audit and inspection engagements Individual statements of this kind are also new to the Polish administration The obligation concerns the submission of statements on the state of management control preparation of the annual activity plans and the reports on the annual plan execution does not applies to the local government entities However in practice some heads of entities voluntary drawn up a statement on the condition of management control within the entity and supervised units The statement mentioned above for local government is kind of summary of activities undertaking by the entity and source of information about activities planned to take for further improvement Some heads of local government entities also develop annual activities plans containing fundamental objectives to be achieved in the entity within a year and reports on the plans execution It is noticed as a good practice example that the statement the annual plans and the reports are published on the entity website It is indication of transparency and an important form of communication with the citizens who may obtain information about how the entity operates and what steps are planned to improve its operations Audit committees are expected to deliver valuable information and advise on risk connected to implementation of goals and tasks indicated by the ministers in their plans strengthen the role of internal audit in assessment of the management control system in the branches of government administration The key challenge for the top managers in line ministries is still how to connect the cycle of risk management with programming and monitoring the tasks formulated in the 266 performance budget both in yearly perspective and for midterm framework of the MultiYear Financial Plan of the State 52 Public expenditure management ongoing implementation of performance budgeting in the public administration The crucial issue within the sphere of public expenditure management is ongoing implementation of a new budget system the performancebased budgeting system PBB that will be working in parallel with the traditional system From 2008 the justification to the draft budget acts has comprised a part with taskrelated expenses which are in accordance with Polish performance budget methodology prepared by the Ministry of Finance Multiannual programmes including some public investment programmes and plans of executive agencies earmarked funds and state legal entities are prepared in accordance with performance planning methodology as well The Multi Year Financial Plan of the State was prepared in 2010 according to the new PBB structure and has been covering the functions of the state along with the objectives and related measures Many of the elements of the new budgeting system have been developed Such elements comprise management of funds in the lineministries development of the evaluation tool for the system and technical issues such as development of accounting and reporting systems development of the supporting IT system and ongoing work on defining and improvement of objectives and indicators Currently the milestones in implementation of PBB for the next years include preparation of the report on the execution of the budget act comprising the execution of the performance budget in 2013 in parallel to the traditional budget elaboration of a report on the ex post evaluation of the execution of the 2013 budget act as an instrument supporting the preparation of the 2014 draft budget act elaboration of a report concerning the impact of performance budget functioning on public finance financial settlement of the projects cofinanced from the European Social Fund 53 New governmental development strategies The shape of the system of programming implementation and assessment of development strategies was defined in the Act of 6 December 2006 on the Rules of Development Policymaking The ministries developed nine midterm government development strategies that are based on the longterm and midterm development strategy for the country the first out of nine strategies the National Regional Development Strategy 201020 was accepted by the council of ministers and published in July 2010 Currently the main strategies based on which the development policy is pursued were consolidated and closely correlated The main strategies crucial for the public sector are as follow LongTerm National Development Strategy Poland 2030 The third wave of modernity a document setting out the main trends challenges and the concept of development of the country in the long term adopted by the Council of Ministers on 5 February 2013 The National Development Strategy 2020 Active society competitive economy effective state document constituting update the National Development Strategy 20072015 adopted by the Council of Ministers on 25 September 2012 Development strategies called integrated strategies which consolidated over 400 sectorbased strategies The above mentioned strategies cover the coherent set of goals objectives for the government to be implemented by the public administration and mirrored in budgets and all programming documents 267 PORTUGAL Public internal control 62 The Member state did not propose an update for this edition of the Compendium 1 Brief history of the public internal control systems For almost a decade from the late 1990s to the mid2000s Portugal experienced structural budget deficits and problems of unsustainable growth of primary current expenditure To achieve this improvement the government undertook comprehensive structural reforms of the public sector including a large public administration reform reorganising and streamlining of government departments and agencies restructuring the civil service to make it more flexible and responsive and pension reform to enhance the longterm sustainability of public finances The process also includes the new Integrated System for Management and Performance Assessment of the Public Administration Siadap reform This will reinforce efforts to improve performance avoid overlaps or conflicts between reform efforts and reduce excessive paperwork for the line ministries Also a Restructuring Programme for the States Central Administration PRACE has involved the redesign of structures roles and responsibilities to consolidate organisations and reduce the numbers of managers accordingly general directorates public agencies as well as top and midlevel managers were reduced by around 25 In parallel with these important changes the Portuguese budget system is undergoing significant reforms in order to further improve fiscal discipline and the efficiency and effectiveness of public spending also through the recent amendment Law No 232011 of 20 May of the current Budgetary Framework Law Law No 912001 of 20 August revised by the Organic Law No 22002 of 28 August by Laws No 232003 of 2 July and 482004 of 24 August and 482010 of 19 October and recently by Law No 232011 of 20 May 2 Public internal control environment It is seeking to evolve from a traditional legalist and highly inputoriented system which concentrates on controlling expenditure through very detailed oversight of budget execution towards a more streamlined performanceoriented system Over the past three years a number of improvements to the budget process have already been introduced notably in terms of the quality availability and timeliness of the public accounts There have been significant improvements in the coverage and timeliness of the budget execution data The existence of internal control procedures is also mandatory for all budget users according to Article 58º of the Budgetary Framework Law Indeed exante financial control was mainly focused on centralised administrativedesk review and based on the formal verification of a sequence of authorisations With the budgetary reform in Portugal there was an important transition from the exante control to the internal 62 Contributed by the Ministry of Finance 268 control procedures more focused on correct financial management control systems in the operational units Article 58º of the Budgetary Framework Law as mentioned above and on the spending managers responsibility The key objectives of the reform were to allow for a much better monitoring of the budget implementation and execution as well as the introduction of a real concern on the quality and usefulness of the expenditure and an economic efficient and effective use of the resources However it is totally clear that the robustness and the reliability of the internal control systems require an effective management commitment but at the same time it is very important that the Ministry of Finance continue developing the appropriate tools to assure a stronger emphasis on a more global oversight monitoring and analytical review of the overall budget A pilot plan to implement accrual accounting across government was launched The reform process is ongoing Future changes are under consideration by both the government and the Committee for Programme Budgeting COP of the parliament including an expenditure rule a mediumterm expenditure framework MTEF and the details of the performance budgeting framework Given the effects of the international financial crisis it is vital that the Portuguese budget process continues to reform within the overall framework of the programme budgeting initiative To promote these changes and those envisaged by the programme budgeting initiative the role of the Budget DG must shift from detailed control of execution to a more global oversight and analysis The streamlining of financial management the shift to programme budgeting and changes in the role of the Budget DG pave the way for delegating responsibilities to line ministries who should take primary responsibility for programme management and budget execution At the same time it is important for ministries to have the necessary capacities and accountability structures in place Each ministry has its own budget office responsible for overall budget execution and financial oversight on programme budgeting within the ministry to serve as the Budget DG counterpart in that line ministry Within the context of a mediumterm expenditure framework each line minister should be primarily responsible for any spending overruns within hisher own ministry The adoption of a more performanceoriented approach to budgeting and management has been very important for Portugal However a multistage approach is under preparation for the comprehensive implementation of this reform the first stage is the development of a programme budget and a mediumterm expenditure framework the second stage involves the development of meaningful performance information for programmes and ministries and the design and implementation of the necessary information systems the third stage is the gradual integration of performance information into budgetary decisionmaking processes It should be clear that this reform is a longterm process Despite the fact that important steps have been taken it is however essential that these reforms continue and are fully implemented in practice This is especially important given the current unfavourable international economic climate 269 3 The concept of public internal control in your administration 31 Managerial accountability Taking into account the need to follow the budgetary reform and that the efficiency and effectiveness of the fiscal consolidation effort should go beyond the annual measures the Portuguese government approved recently new version of the Budgetary Framework Law of May 2011 the revision of the current fiscal framework in line with international good practices in order to guarantee a credible consolidation of public finances over the coming years In particular the council of ministers has approved a draft law to be presented to parliament which revises the Budgetary Framework Law establishing a multiannual framework with expenditure and budget balance rules an enlarged universe to which the law applies the strengthening of the programme budgeting approach an independent Council for Public Finances This draft law recently approved by the parliament April 2011 is also fully aligned with the reinforced mechanisms of economic policy coordination in the European Union and the European semester of policy coordination Within the new framework the government will present to the parliament a multiannual budgetary plan to be updated annually which includes the definition and commitment to expenditure ceilings for the years to follow The revised budgetary framework is extended to include all entities that are part of general government based on national accounting rules applied by the National Statistics Office In addition to their explicit inclusion in the yearly budget reports and multiannual plans full compliance with intraannual information requirements is applied to all entities thus further reinforcing the control of budget execution The Council of Public Finances which will be created as an independent body will assess the consistency between macroeconomic and budgetary scenarios and objectives as well as the consistency with the multiannual expenditure and budget balance rules In addition the government is about to approve the setting up of a new system to continuously monitor and control large investment projects This will include PPP and concessions paving the way for an approach that is geared to rolling out projects that are technically and financially sustainable Finally the effort to increase transparency and discipline in management of stateowned enterprises SOEs will continue with some measures already in place net borrowing thresholds defined in the Stability Programme 201013 7 in 2010 6 in 2011 5 in 2012 and 4 in 2013 a wage cut thus contributing to the 5 reduction in wages in the public sector at large a decrease of 15 in operating costs cutting back on transfers to the SOEs by consolidating measures geared to rationalisation and financial sustainability All these modifications will contribute to improve the budget execution and government management The move to a resultsoriented programme budget requires as said before the delegation of budget responsibility to programme managers andor ministries together with a need to reduce the old detailed budgetary oversight and increase the flexibility of programme managers Ministries and in particular agencies should have primary responsibility for programme management and for budget 270 execution which means that detailed and routine exante control procedures mainly focused on compliance and regularity with no concerns about the quality of the expenditure it could be legal and regular but is it really needed and useful were no longer able to help managers facing their new responsibilities Accordingly a reform of the internal control was developed with the aim to monitor and guarantee the compliance with all relevant legislation and procedures and to protect and safeguard the value of public assets and liabilities but also to ensure an economic efficient and effective use of the available resources according to the principles of sound financial management as well as to monitor and assure the achievement of policy aims priorities targets and objectives At the same time internal control procedures are key to provide adequate complete and accurate information to the management Article 58 of the Budgetary Framework Law The development in Portugal of a public internal audit system must of course be understood in line with all the above mentioned reforms Accordingly and in line with the overall improvements introduced on the government management policy the Portuguese government decided to develop an internal audit function as well Accountability for results performance budgeting and management However it must be clear that those initiatives to develop meaningful performance information take time It is important to see this reform as the first step in a longterm process which involves learning by doing It is also important to have an independent review or audit of performance information to ensure quality and credibility This is especially the case for Portugal since the Siadap proposes to link performance results to pay While this linkage creates incentives to achieve targets it would also generate incentives to manipulate information and might affect its integrity and reliability An independent role is also performed by the General Inspectorate of Finance IGF which reports directly to the Ministry of Finance IGF audit and control responsibilities encompass all central and local public administration including the stateowned enterprises the municipal enterprises the foundations and even private companies when using or receiving public funds In addition the Court of Auditors also has a role in reviewing the annual state accounts 32 Internal audit and coordination of public internal control Traditionally Portugal had a system of financial inspection based in the Ministry of Finance in a General Inspection of Finance Department In line with the budgetary reform the Portuguese government decided to reform its public internal financial control arrangements and as part of this adopted internal audit and revised the role of financial inspection However some internal audit units already existed in some public organisations before this reform started Internal audit units now exist in all line ministries and throughout most of the public sector in Portugal with the main exception being in smaller organisations There is a central harmonisation unit that is based in the IGF of the Ministry of Finance Financial inspection remains but has been refocused to examine serious irregularities and investigations and for policy review The IGF mandate includes different functions like financial system performancevalue for money and IT audits programmes and departments performance evaluation technical advice to the Ministry of Finance and methodological standard setter in the framework of the CHU functions related to the functioning of the Portuguese public internal audit system The IGF is also the European Commission counterpart on audit and financial control issues since 1986 when Portugal became a Member State and accordingly 271 IGF is the current audit authority 200713 with the closure audit work to be carried out until 2017 for the all the Structural and Cohesion Funds as well as for the Fisheries Fund and for the recent Justice and Home Affairs Funds IGF also carried out a similar role in the past programming periods from 198993 1994 99 and 200006 for the Agriculture Funds IGF is also the certifying body of the paying agencies annual accounts since the clearance of accounts procedure were approved in 1996 The context for the reform of the traditional financial control and inspection system with the introduction of internal audit was the budget reform The government undertook a reform of the public sector organisational arrangements to make the civil service more flexible and responsible and to enhance the long term sustainability of the public finances Included in these reforms was the development of internal audit At the same time the government decided upon a reform to the Portuguese budget system The aim was to improve fiscal discipline and the efficiency and effectiveness of public expenditure The objective was to move from a system which concentrated on controlling expenditure through very detailed oversight of budget execution towards a more streamlined performanceoriented system This reform process is still ongoing The strategy behind the development of internal audit in Portugal was based on two main critical factors first the clear commitment leadership and ownership by the Ministry of Finance and second a stepbystep approach The second factor meant that the next step would be taken only after having reasonable assurance that the previous steps were assimilated by the different stakeholders The whole process was managed by the Ministry of Finance through the General Inspection of Finance which has a leading and pivotal responsibility as the law concerning the Internal Audit System Law No 16698 of 20 June defines IGF as the strategic level body with a specific coordination and networking responsibility For the effective functioning of the system an Internal Audit Coordination Council chaired by the Director of the Ministry of Finance internal audit unit was created The members of the council are also the directors of other line ministries internal audit units second level and the Council consists of 15 members which is the current equivalent to the number of ministries The objective of the first step was to establish what actions had been taken by the different ministries to introduce internal audit So a horizontal assessment was undertaken to understand what the actual situation looked like in the different line ministries This assessment was carried out by a task force set up by the IGF of the Minister of Finance as the system strategic coordinator which carried out interviews in all ministries it also reviewed the reports of the few already existing internal audit units as well as the reports of the traditional inspections with the objectives of creating a better understanding of the real differences between inspection and internal audit techniques adopted by the different ministries and identifying areas where audit techniques were consistent with internal audit standards and were already in place After three months and following this assessment a report called The White Book Internal Audit in the Public Sector was issued and all the ministries were grouped in three different areas the white area no internal audit unit at all the grey area lowcapacity internal audit units not well developed but at least with some skilled people who could work with the CHU as counterparts to develop internal audit and the green area where the internal audit concept and function was known and already operating even if with different levels of professionalism 272 The White Book report was issued by the IGF as the CHU and presented to the Minister of Finance who approved it after a discussion at the council of ministries As a development of White Book recommendations the IGF as the CHU then prepared a roadmap with a proposal for the coherent development of a decentralised internal audit function throughout the public sector Accompanying this was the development of a network function with the line ministries counterparts These counterparts would function in each ministry as inhouse drivers for the development of internal audit A special coaching approach was also developed to ensure that specific problems identified by the different ministries could be properly addressed A task force was created in the IGF who reported directly to the Minister of Finance the information obtained from the assessment of internal audit reports and inspection reports referred to earlier was used to better target the roadmap the CHU guidance and the specialist coaching arrangements The second step was devoted to monitoring the roadmap implementation in order to ensure that specific support to each internal audit unit was designed in accordance with that units own particular situation and needs without losing the horizontal view needed to ensure that the overall internal audit system was developing in a coherent and consistent way A lesson learned from this implementation experience was that to overcome the resistance is a very demanding task and requires a very effective professional and practical coordinating structure CHU able to intervene both quickly and pragmatically to solve or to help in solving a very specific and detailed range of problems Some problems affected more than one ministry and therefore required considerable effort on the part of the CHU to properly address them This experience of the CHU demonstrated the high level of commitment required that implementation demanded a fulltime commitment with the continuing direct support of the Minister of Finance It also demonstrated that a very professional and pragmatic IGF coordination function CHU is also a key success factor To achieve the objective the CHU has to gain the professional respect of the other counterparts and all persons involved At the same time as the roadmap was launched with the monitoring of its implementation a programme of management training was introduced to both develop management awareness on the importance of the internal audit function and to explain the distinction between internal audit and inspection as tools to secure financial control and more widely the protection of the national financial interests These two issues management awareness of the role and benefits of internal audit and the difference between inspection and internal audit are significant crosscutting issues and in retrospect it was vital that both issues were given such high importance from the very beginning of the reform programme Indeed the diffusion and dissemination of these aspects paved the way for the smooth development and understanding of the internal audit function and helped to remove remaining opposition and negative reactions Finally the third step was devoted to the strengthening of the functioning of the internal audit system as a real system This meant strengthening individual internal audit organisations their capabilities and the network itself with the network meaning relationships between the different internal audit units and with the IGF as the CHU Audit units were in place with skilled staff and the challenge was then for the CHU to ensure that the whole internal audit process became fully effective To help it perform this task four technical committees were created under the Coordination Council These committees are Planning Monitoring Committee Training Committee 273 Methodological Committee Evaluation Committee 4 Financial inspection Despite the development of an internal audit function IGF kept a financial inspection capability amongst its responsibilities which also includes the evaluation of services activities and programmes as well as technical advice to the Ministry of Finance Concerning the financial inspection branch we also have undergone an important transition to modernise the function Indeed financial inspections were traditionally more transactionsoperations oriented and can now refocus on more risky areas whilst internal audit should focus on the reliability and efficiency of internal control systems and value for money There is thus no risk of overlapping or duplication of functions because inspections are mainly an investigative activity whereas internal audit is an adviser function to the management its activity programme should be discussed with the management with the aim of improving the internal control systems The change in the Portuguese inspection functions took account of the fact that inspection is now operating in an environment in which the spending departments themselves should be taking more responsibility for ensuring the proper and efficient financial management and control of the programmes and projects which they manage and the internal audit function is examining how the spending departments are operating in practice and also raising management awareness based on their wide experience on how to improve their systems and operations 5 Ongoing andor future reforms However the budgetary reform still requires some challenges that can be summarised as follows streamline budget execution and financial control processes Indeed shifting to a resultsoriented programme budget requires the delegation of budget responsibility to programme managers andor ministries Ministries and particularly agencies should have primary responsibility for programme management and for budget execution transfer primary responsibility for budget execution to spending units The Budget DG should provide clear guidance to the agencies on budget execution requirements and deadlines for budget reports Amongst this guidance they are organising training for ministryspending unit staff on delegated budget responsibilities The Budget DG should also shift its focus from detailed monitoring of transactions to analysis of budget execution anomalies and reviews of programme financial performance and strengthen accountability of line ministries Ministries need to be held more accountable for how they fulfil their new delegated responsibilities Before delegation occurs it is important for ministries to have the necessary capacities and accountability structures in place Each ministry has a budget and finance office that takes the responsibility for budget execution and provides oversight on programme budgeting within the ministry This office should be under the supervision of the financial controller who should report directly to the minister 274 ROMANIA Public Internal Control Summary of main changes in 20112013 The updating of the Compendium was determined by a series of events and actions of endogenous and exogenous factors imposing the adjustment of public internal control mechanisms and of budgetary procedures and the introduction of new elements in the overall management of the budgetary process Some of these factors are The necessity of coordinating the economic policies of the Member States of the European Union pursuant to the Treaty on the Functioning of the European Union The recent economic developments such as the economic and financial crisis and the sovereign debt crisis generated new budgetary policy challenges and underlined the necessity of setting out and undertaking at national level principles rules procedures mechanisms of public control over the budgetary process The adoption of the comprehensive legislative package of the European Commission on economic governance amendment of the European budgetary timetable so that national budgets should be finalised taking into account the guidelines and recommendations issued by the Commission for each state The entry into force of the legislative package on public expenditure reform in Romania imposed the reform of the financial management of public expenditure and a more rigorous shaping of the fiscal and budgetary policy conduct The updating of the provisions of Order No 9462005 of the Minister of Public Finance allowed the introduction within the managerial environment of a system for selfassessment of the degree of compliance of the internal control system depending on the fulfilment of criteria specific to each standard The abovementioned factors also determined the amendment and supplementation of Law No 5002002 and Law No 692010 and led to the rewording of Section 2 The public internal control environment subchapter A The general consolidated budget and subchapter 31 Managerial responsibility and accountability Section 32 Public internal audit was updated further to the amendment of the General rules on exercising the public internal audit activity of the Rules regarding the coordination and conduct of processes for national certification and lifelong professional training of internal auditors in the public sector and of natural persons as well as of the Rules regarding the cooperation system for ensuring the public internal audit function Section 4 Financial inspection was reworded with the title Economic and financial inspection further to its organisation within the Ministry of Public Finance as general directorate subordinated to the Minister of Public Finance At territorial level the economic and financial inspection is organised within the regional public finance general directorates and within the National Agency for Fiscal Administration ANAF a central structure and is conducted for economic operators 275 in which the state or a territorial and administrative unit is sole shareholder or majority shareholder For harmonisation purposes and in order to restrict the document to a reasonable number of pages certain sentences that do not affect the understanding of the document were deleted from the contents of several chapters 1 Brief history of the public internal control system in Romania The organisation of public administration on the basis of principles underlying the presentday concept of a public internal control system has a long tradition in Romania The Romanian public finance school made an important contribution to the establishment of the modern Romanian state and produced great personalities who contributed to the drafting of legislation with a strong impact on the economy in general and on public finance in particular Starting from 1990 Romanias transition to a market economy and the countrys efforts to join the European Union EU included concerted actions aimed at reforming public management and increasing its performance based on the values of private management through the introduction of private management working tools in the field of public administration In this context public internal control was approached from a pragmatic perspective in the framework of the general good practice principles constituting the Community acquis its meaning was associated not only with verification operations but also with the managerial function By implementing public internal control the management assumes responsibility for identifying any deviations of the achieved results from the planned objectives for analysing the causes thereof and for taking the necessary preventive and corrective measures Prior to its accession to the EU Romania integrated the Community acquis regarding Chapter 28 Financial Control in its entirety harmonised the national and Community legislation and developed the institutional infrastructure necessary for its implementation The Ministry of Public Finance Ministerul Finantelor Publice MFP took on the task of integrating the reforms in the field of public internal control The components of public internal control that is internal audit internal managerial control managerial responsibility and accountability and internal managerial control standards were implemented in the domain of public administration The state surrendered a part of its control tasks which were transferred to the management of public entities and concentrated the forms of control exercised in public institutions by independent structures shifting emphasis to management systems internal audit and actions ensuring effective public services The disciplinary function of public internal control only comes into play in exceptional cases stipulated by law The top management carries out its activity under public policies based on dynamic active and anticipatory strategies by promoting good practices and pursuant to risk assessments 2 The public internal control environment The reform of the internal control system in Romania means in fact the reform of the public management system The existing systems that are relevant for the public internal control environment include 276 A The general consolidated budget The budget is the document containing each years set and approved revenue and expenses or the expenses only as applicable depending on the financing system for public institutions Law No 5002002 on public finance introduces in the budgetary construction the notion of general consolidated budget which represents the ensemble of budgets composing the budgetary system aggregated and consolidated to form one whole Law No 692010 on tax and budgetary responsibility provides a more comprehensive definition of the general consolidated budget which is defined as all budgets in the budgetary system including the state budget the state social security budget the budgets of special funds the centralised general budget of the territorial administrative units the budget of the State Treasury the budgets of public autonomous institutions the budgets of public institutions fully or partially financed from the state budget from the state social security budget and from the budgets of special funds as the case may be the budgets of public institutions fully financed from their own revenue the budgets of funds from external loans contracted or guaranteed by the state and whose reimbursement interests and other costs are provided from public funds the budget of external nonreimbursable funds and of other entities classified within the general government aggregated consolidated and adjusted pursuant to Regulation EU No 5492013 of the European Parliament and of the Council on the European system of national and regional accounts in the European Union The adoption of Law No 2702013 amending and supplementing Law No 5002002 on public finance by the newly implemented concepts and rules creates a more flexible budgetary process mechanism procedures and rules focused on assessment results efficiency performance a solid management of public funds the integration of the budgetary process within the European budgetary procedure and increases the rigour in formulating fiscal and budgetary policy The main new elements introduced by Law No 2702013 are A new approach to including budgetary funds in the budget consisting in reflecting commitment appropriations approved by the budget in close connection with budgetary appropriations Thus both annual actions and multiannual actions shall be reflected in the budget at the level of commitment appropriations and budgetary appropriations Commitment of expenditure is carried out within the limit of commitment appropriations Payment of expenditure is carried out within the limit of approved budgetary appropriations and available funds for this purpose A clearer definition of concepts terms and phrases usedintegrated in the law commitment appropriation budgetary appropriation deficit calculated pursuant to the European System of Accounts transfer of appropriations redistribution of appropriations urgent or contingent expenditure budgetary commitment mediumterm budgetary framework validation of expenditure budgetary framework Redefining the budgetary timetable within the budgetary procedure correlated to the new legislative acts adopted after the entry into force of Law No 5002002 consisting in the specification of precise time limits for the phases of the budgetary process linked to the phases of the European Semester to the recommendations and guidelines adopted by the European Council Introduction of new provisions aiming at strengthening budgetary discipline 277 Provisions referring to subsidies transfers and other forms of financial aid from the state not used by the closing of the year for which the repayment obligation was instituted by legal granting grounds and not repaid by 31 December to be subject to calculation of accessories applicable to budgetary revenue for the period between 31 December and the date of repayment of the amounts to the budget Provisions referring to the recovery of amounts representing lossesillegal payments from public funds and provisions on the transfer of the revenue of public budgets for which no time limits were established by the legislative acts regulating them Introduction of comprehensive provisions referring to public investments and more flexible rules for budget implementation Introduction of provisions referring to external postaccession funds funds of other donors and from reimbursable funds as well as for the funds at the Governments disposal also taking into consideration the recommendations of audit missions The economic governance package approved at the level of the European Union emphasised the need to set out provisions regarding the definition and characteristics of the budgetary frameworks of Member States to ensure their compliance with the obligation provided by the Treaty on the Functioning of the European Union and in other treaties of the European Union ratified by Romania to avoid excessive general government deficits Introduction of provisions referring to budget amendments for harmonisation with Law No 692010 Laws on budget amendment are drafted subject to the rules and conditions provided by Law No 692010 If the forecast of the macroeconomic indicators significantly worsens a budget amendment may be promoted in the first semester of the year by way of exception from Law No 692010 The programmebased budgetary approach is another characteristic of the budgetary policy in Romania which will determine the orientation of fiscal and budgetary policies towards objectives results and performance Introduction of provisions referring to the consequences of nonpayment of arrears If the public institutions financed from the state budget from the state social security budget and budgets of special funds as the case may be incur arrears at the end of the month prior to the month for which payments are requested the territorial units of the State Treasury are under the obligation not to operate payments from their accounts except for payments of salaries and related contributions namely for extinguishment of arrears and also for the payment of capital ratios interests fees and other costs related to the general government debt The measures cease on the date when the accounts of the abovementioned public institutions no longer reflect arrears B The accounting system According to the regulations in force in the field of public finance Law No 5002002 and in the field of accounting Law No 821991 public accounting includes budgetary revenue and expenditure accounting reflecting the settlement of revenue and the payment of expenditure in a financial year state treasury accounting general accounting based on the principle of establishing rights and obligations and reflecting the 278 evolution of the financial situation and of the assets including the surplus or deficit of assets and cost analysis accounting for approved programs Moreover public accounting provides information on the assets under the administration of public institutions the execution of the revenue and expenditure budget the result of the budgetary execution the situation of assets and liabilities and the cost of approved programmes In Romania revenue and expenditure are registered in the accounting records of public institutions according to the rules of accrual accounting Thus the effects of transactions and other events are recognised when the said transactions and events take place as of fact not when cash amounts or equivalents are cashed in or paid and are consequently registered in the accounting records and reported in the financial statements of the corresponding periods The financial records of public institutions which are drawn up in the form of doubleentry accounting provide information to the users not only on past transactions that involved collections and payments but also on future payment obligations and on the resources corresponding to future proceeds The accounting of revenue is performed based on types of revenue by nature and source and the accounting of the revenue and expenses for the general budget is carried out according to the structure of the budgetary classification in force Under Law No 5002002 based on the financial statements presented by the main authorising institutions the accounts regarding the cash implementation of the state budget the state social security budget and the special funds budgets drawn up by the authorities legally entrusted with this task and following the analysis and verification thereof the Ministry of Public Finance drafts the state budget general annual implementation account and the state social security budget implementation account to which the special funds budget annual implementation accounts and the budgets of the main authorising institutions including annexes thereto are attached which are then submitted to the Government Following the verification by the Romanian Court of Auditors Curtea de Conturi a României RCC the implementation accounts are approved by the Parliament Under Law No 821991 the Ministry of Public Finance drafts the annual balance sheet of public institutions The information in the financial statements of public institutions is used for drafting financial reports by the Ministry of Public Finance the National Bank of Romania and the National Institute of Statistics the reports are submitted to the Statistical Institute of the European Union EUROSTAT according to the European system of national and regional accounts in the Community ESA 95 and to the International Monetary Fund C External audit External audit is carried out by the Romanian Court of Auditors RCC which controls the constitution management and use of state and public sector financial resources The control function of the Romanian Court of Auditors is exercised by means of public external audit procedures set out in audit standards drafted in accordance with the generally accepted international audit standards Within its tasks established by law the Romanian Court of Auditors carries out specific activities with regard to all public entities The specific activities of the Romanian Court of Auditors consist of control and public external audit Public external audit mainly includes financial audit and performance audit 279 The law on the organisation and functioning of the Romanian Court of Auditors lists the implementation accounts which are subject to the financial audit of the Court Additionally the Romanian Court of Auditors has the task to assess its own financial control and the internal audit activities of the legal persons falling within its competence In order to fulfil the obligations in the field of external audit devolving upon Romania as an EU Member State an Audit Authority was established and functions for non refundable preaccession and postaccession Community funds granted to Romania by the European Union The Audit Authority is the only national authority in charge of the public external audit of nonrefundable funds granted to Romania by the EU in accordance with the international and national legislation The Romanian Court of Auditors drafts an annual public report that is submitted to the Parliament and which includes observations on the budgets implementation accounts subject to its control the conclusions drawn based on the controls ordered by the Chamber of Deputies or by the Senate or performed on autonomous companies wholly or predominantly stateowned companies and other legal persons subject to the control of the Romanian Court of Auditors the infringements found and the coercive measures taken aspects regarding the assessment of the internal control system in the controlled public entities other aspects considered relevant by the Romanian Court of Auditors D Fight against fraud andor irregularities The European AntiFraud Office OLAF cooperates with the national control points In Romania the control point is the Department for the Fight against Fraud Departamentul pentru Lupta Antifrauda DLAF an entity with legal status which is coordinated by the PrimeMinister The Department for the Fight against Fraud ensures the protection of the financial interests of the European Union in Romania coordinates the antifraud activities at national level and has the following main tasks carries out the onsite control for the projects financed from European funds coordinates all the national institutions involved in antifraud activities cooperates with OLAF The protection of national funds against fraud corruption or any other illegal activities forms one of the objectives of specialised structures having control tasks 3 The concept of public internal control in Romania For the purpose of promoting good governance public internal control was implemented in the public sector and includes a internalmanagerial control system b internal audit c centralised coordination and harmonisation of the two components above 31 Managerial responsibility and accountability The existing legal framework describes managerial responsibility as a process in which managers at all levels are responsible for the decisions taken and actions made in order to achieve the objectives of the public entity of which they are part This involves the 280 accountability of the managers for good financial governance and the legality of public funds andor public assets management Managerial responsibility at the level of public entities includes the management of the entity or component thereof within the boundaries of internal or external determinations in order to achieve the established objectives efficiently effectively and in accordance with the legal provisions transparent communication in this regard and accountability for the nonfulfilment of managerial obligations according to their respective type of legal responsibility Responsibility is an essential obligation for all the managers in the public sector and is regulated in all cases by legislative acts such as laws Government decisions authorities rules and regulations etc In organising the management activity based on the concept of managerial responsibility the managers take the following premises into account The general managerauthorising officer is responsible for the optimum organisation and operation of the internal control system The internal control system of the public entity shall be based on verifications and corrective measures on the one hand and on independent internal and external assessments on the other hand The general managerauthorising officer is responsible for achieving the objectives of the entity The general managerauthorising officer may delegate authoritycompetence without being exempted from general accountability Managerial accountability may not be invoked in the absence of the corresponding authoritycompetence Responsibility requires transparency and accountability Managerial accountability derives from the responsibility of the manager for the five components of the internalmanagerial control in the public sector control environment performance and risk management information and communication control activities audit and assessment Managerial responsibility and accountability in the field of public management are regulated mainly as follows Fiscalbudgetary responsibility regulated by Law No 692010 includes as its main objectives to ensure and maintain the fiscalbudgetary discipline transparency and sustainability of public finances on the medium and long term to establish a framework of principles and rules based on which the Government ensures the implementation of fiscalbudgetary policies leading to a good financial management of the resources to manage public funds effectively so as to serve the public interest on the long term The law mentioned above which was drafted according to the principle of managerial responsibility and accountability establishes the responsibilities in the field of all parties involved in the budgetary process The main changes introduced by the Law amending and supplementing Law No 692010 are presented below Introduction of new definitions or revision of old definitions general consolidated budget fiscal and budgetary framework general government debt pursuant to 281 the European Union methodology annual structural balance of the general government mediumterm budgetary objective general government exceptional circumstances the Stability and Growth Pact social security funds fiscal expenditure Introduction of a numerical fiscal rule regarding the budgetary position of the general government In order to comply with the reference values for the budgetary deficit and general government debt as specified by the Protocol No 12 on the excessive deficit procedure annexed to the Treaty on the Functioning of the European Union the budgetary position of the general government is balanced or in surplus Introduction of a correction mechanism automatically triggered in case of deviations from the structural budgetary deficit rule This rule is activated if a deviation from the mediumterm budgetary objective is determined the deviation is considered significant if it is at least 05 of the GDP in one year and at least 025 of the GDP on average per year in two consecutive years The deviation correction measures are set out in quantifiable terms are spread out by years and produce effects at the latest on the next budgetary year Introduction of a derogation clause if exceptional circumstances occur It will allow the noncompliance with the fiscal rule on the structural budgetary deficit including the nonapplication of the correction mechanism Exceptional circumstance shall mean an unusual event outside the control of the general government authorities which has a major impact on the financial position of the general government or periods of severe economic downturn as set out in the revised Stability and Growth Pact The beginning and the end of exceptional circumstances shall be subject to the opinion of the Fiscal Council and the Government has the obligation to inform the Parliament and the European Commission Introduction of a numerical fiscal rule regarding the general government deb The general government debt pursuant to the European Union methodology shall not exceed 60 of the GDP If the ratio of the general government debt calculated pursuant to the European Union methodology to the GDP exceeds the reference value of 60 of the GDP the general government debt shall be reduced by an average rate of 5 per year Introduction of prudential intermediary thresholds for the general government debt including automatic measures if they are exceeded Introduction of new quality standards for macroeconomic forecasts used upon budgetary planning The underlying macroeconomic framework of the fiscal and budgetary strategy uses the most current information and represents the most likely macrofiscal scenario or a more prudent scenario The macroeconomic framework in the fiscal and budgetary strategy includes a statement regarding the consistency with or differences from the most recent forecasts of the European Commission Significant differences between the chosen macro budgetary scenario and forecasts of the European Commission shall be described and grounded especially if the level or increase of variable elements in the external hypotheses significantly deviates from the values set out in the forecasts of the Commission The Ministry of Public Finance shall publish on the Internet cashbased budgetary data or equivalent data from public accounting monthly and before the end of the following month for the central government the state government and subsectors of the social security funds quarterly and before the end of the following quarter for the subsector of the local government The Ministry of Public Finance shall also publish on the Internet data on the general government debt pursuant to the European Union methodology monthly and before the end of the following month for the general government debt of the central government subsector and of the subsector of the system of social security 282 funds quarterly and before the end of the following quarter for the general government debt of the local government subsector The Ministry of Public Finance shall annually publish on the Internet for all general government subsectors relevant information referring to contingent debts with a potential major impact on public budgets including information on state guarantees nonperforming loans and liabilities resulting from the operation of public companies including the amount of liabilities the general government holdings in the capital of trading companies and national companies The categories of authorising officers managers their roles and responsibilities are defined by Law No 5002002 on public finance and Law No 2732006 on local public finance The two laws stipulate that the main authorising officers may delegate their competence to their rightful delegates or to other persons authorised for such purposes In the delegation deed the main authorising officers have the obligation to state the limits and conditions of the delegation By delegation responsibility is transferred to the respective management levels which become accountable for the fulfilment of their transferred obligations while general responsibility remains at the managerial level that delegated the competence According to the said legislation failure to observe the rules on budgetary expenditure the competences and responsibilities in the budgetary process the conditions for including investment projects in the draft budget the principles of budgetary implementation the provisions on internal control budgetary authorisation cash implementation of public institutions budgets the legal regime for the financing of public institutions the regime of the amounts resulting from the sale of fixed assets and material goods etc gives rise to the accountability of the persons responsible and the application of sanctions by the Romanian Court of Auditors the Ministry of Public Finance and other authorised persons according to law The government has the duty to submit to the Parliament an annual budget that observes the fiscal responsibility principles fiscal rules fiscalbudgetary strategy and any other applicable legal provisions together with a statement certifying such conformity signed by the Prime Minister and the Minister of Public Finance The draft budget which falls within the specific responsibilities of the Ministry of Public Finance is elaborated based on the budgetary expenses proposals of the main authorising officers in accordance with the fiscalbudgetary strategy and with the methodology for the elaboration of the annual draft budget The state budget law provides for and authorises for the following budgetary year the revenues broken down into chapters and subchapters and the expenses classified according to destinations and main authorising officers In accordance with the current legal provisions the top management assumes responsibility for the establishment of objectives at all levels and for the planning of the budget in accordance with the allocated budget The establishment of the objectives is a balanced topdownbottomup process in which the managers reflect the priorities of the Government but also have the flexibility to identify their own objectives and the most effective means to achieve them while complying with the applicable budgetary ceilings The laws amending the state budget for the current year are based on modifications occurred in the state budget following changes in the evolution of macroeconomic indicators the approval of legislation leading to the modification of budgetary revenues andor expenses or as a result of the policies entered into by the Government Under Government Order No 1191999 on internal managerial control and financial preventive control the Ministry of Public Finance is responsible for the elaboration and implementation of the policy in the fields of internalmanagerial control and financial administration The Ministry of Public Finance offers 283 methodological guidance coordinates and supervises the implementation of internalmanagerial control systems and the assurance of a sound financial management in the use of public funds and in the management of public assets These tasks of the Ministry are assigned to the Central Unit for the Harmonisation of Financial Management and Control Systems Unitatea centrala de armonizare a sistemelor de management financiar şi control UCASMFC Internalmanagerial control comprises the ensemble of control mechanisms exercised at the level of the public entity including internal audit established by the management in accordance with its objectives and the legal provisions in force in order to ensure an economical efficient and effective fund management this also refers to the organisational structure methods and procedures Internalmanagerial control verifies the achievement of the following general objectives The regular effective economical and efficient accomplishment at a reasonable quality level of the tasks of public institutions as established in accordance with their mission The protection of public funds against losses due to errors misuse abuse or fraud The compliance with laws regulations and management decisions The development and maintenance of systems for the collection storage processing updating and dissemination of financial and management data and information as well as of public information systems and procedures by means of periodical reports In accordance with Government Order No 1191999 the top management of each public entity has the responsibility to draft an annual report on the internalmanagerial control system representing the official form of undertaking managerial responsibility and is presented as an annex to the financial statement of the concluded budgetary year The existing legal framework describes managerial responsibility as a process in which managers at all levels are responsible for the decisions made and actions undertaken to meet the objectives of the public entity This implies the managers liability for the proper financial management and legality of the management of public funds and or public assets A regulatory level subsequent to the abovementioned order is represented by Order No 9462005 Ordinul Ministrului Finantelor Publice OMFP of the Minister of Public Finance approving the Internal Control Code comprising the internal control standards for public entities and for the development of managerial control systems The order has a special significance for the managerial culture of public entities in Romania as it helped to align it based on standards to European good practices and value system in the field of public internal financial control Pursuant to the provisions of Order No 9462005 of the Minister of Public Finance the statements in the annual report rely on the data information and findings resulting from the selfassessment of the internalmanagerial control system expost controls internal or external audit reports The manner in which internmanagerial control standards are implemented implies the drafting of an implementation programme which includes objectives activities time limits responsibilities being interdependent with the mission and organisational structure of the public entity The selfassessment of the implementation stage of standards implies an assessment of the implementation of each standard by each department within the structure of the entity and subsequently a general assessment at entity level to centralise information in the selfassessment questionnaires filled out by department managers 284 Internalmanagerial control standards are considered implemented partially implemented or not implemented depending on the fulfilment of the specific criteria of each standard and the degree of compliance of the internmanagerial control system is determined depending on the number of implemented standards Managerial responsibility is also regulated by Law No 821991 Under this law the responsibility for the organisation and management of the accounting devolves upon the administrator the authorising officer or any other person entrusted with the management of the respective entity As a rule the accounting is organised and managed within separate departments run by the economic director the accountant general or any other person authorised for the position accountability for any misapplication of the accounting regulations devolves upon such persons and their subordinates The annual financial statements are accompanied by a written statement of the persons responsible for the organisation and management of the accounting in which they assume responsibility for the drafting of the annual financial statements and confirm that the accounting policies applied for the drafting of the annual financial statements are in accordance with the applicable accounting regulations the annual financial statements provide a clear overview of the financial position and financial performance the legal person carries out its activity in conditions of continuity The law also establishes for various infringements of its provisions the penalties applicable to the different management levels as well as the institutions authorised to apply such penalties The general regime for the legal relations between public officers and the state or the local public administration generically referred to as work relations is regulated by Law No 1881999 on the status of public officers The public position represents the ensemble of tasks and responsibilities stipulated according to law for the exercise of public power prerogatives by the central public administration the local public administration and autonomous administrative authorities Public positions are assigned general tasks and responsibilities common to all public authorities and institutions as well as tasks and responsibilities that are specific to some public authorities and institutions In general within public institutions the top manager or the secretarygeneral in charge of elaborating the policies in conjunction with the economic manager represent the competence level to which the endorsement of the following works is assigned the draft budget the revenue and expenditure budget the organisation of the exante control budgetary programming and implementation the modification of financial indicators the financial statements the payrolls etc Thus the top manager or the secretarygeneral elaborates the policies regarding the institutions budget based on the supporting activities carried out by the economic manager The wilful infringement by public officers of their work duties gives rise to disciplinary contraventional civil or criminal accountability as applicable The objectives activities tasks and main responsibilities of the management and personnel participating in the achievement of institutional objectives are established by the regulation on the organisation and operation of the institution and are set out in the job descriptions It results from the above that the principle of managerial responsibility and its resulting accountability are applied to public officers at all competence levels 285 Accountability as regulated by Law No 1151999 refers to the political accountability of the Government as a whole and of each of its individual members The Government is politically accountable to the Parliament pursuant to the confidence vote it received upon investiture and each member of the Government may be held politically accountable together with the other members for the activity and actions of the Government Besides political accountability the members of the Government may be held accountable from a civil contraventional disciplinary or criminal point of view according to the general legislation in the field notwithstanding derogatory provisions The scope of accountability includes the actions committed by the members of the Government in the exercise of their functions and which are considered offences under the criminal law For other offences committed outside the exercise of their function the members of the Government are accountable under the general law Criminal accountability is personal and concerns each individual member of the Government for the actions committed in the exercise of their function The Government the ministries and other specialised bodies of the central public administration transfer competencies to public local administration authorities in accordance with Law No 1952006 the framework law on decentralisation The transfer of competencies also implies the transfer of responsibilities in accordance with the principle of managerial responsibility Internal control organised at the level of the public authority or institution also includes the legality notice issued by the legal adviser for documents of a legal nature prior to their approval by the manager of the public institution which is regulated by Law No 5142003 on the organisation and practice of the profession of legal adviser Requesting the legal notice is compulsory but does not involve an obligation to comply on the part of the holder of the endorsement competence If the holder of the endorsement competence does not comply with the legal notice the operation is performed on hisher responsibility 32 Public internal audit Definition In Romania the public internal audit of public entities is defined by Law No 6722002 in accordance with the definition of the Internal Auditors Institute IIA as follows Internal audit in public entities is a functionally independent and objective activity which endorses and counsels the administration personnel for a good management of public revenue and expenses improving the activities of the public entity it helps the public entity to achieve its objectives through a systematic and methodical approach which evaluates and improves the efficiency and effectiveness of the management system based on risk management control and administration processes According to the national legal framework public internal audit is a component of the internalmanagerial control system having a distinct organisation directly subordinated to the management of the public entity which is involved neither in the drafting of the internal control procedures nor in the carrying out of the activities subject to the audit The functioning of internal audit within the public internal control system of Romania The public internal audit in the public sector of Romania is organised as follows Public Internal Audit Committee Comitetul pentru Audit Public Intern CAPI its description is available under point 322 286 Central Unit for the Harmonisation of Public Internal Audit Unitatea Centrala de Armonizare pentru Auditul Public Intern UCAAPI its description is available under point 33 Internal Audit Committees their description is available under point 322 Public internal audit structures within public entities Public internal audit structuresdepartments are established within each public entity and are directly subordinated to the manager or the collective management body Their tasks as set out by law mainly include the assessment of risk management systems control and good governance as well as the followup on the transparency and conformity with the legality regularity efficiency and effectiveness rules For local public entities that are not subordinated to other public entities and have an annual budget of up to the equivalent of EUR 100000 public internal audit is limited to the regularity audit performed by the territorial internal audit branches of the Ministry of Public Finance For central public entities having an annual budget of up to Lei 5000000 the public internal audit activity is ensured by the Ministry of Public Finance based on a protocol if they have not organised public internal audit departments Moreover at local level the Ministry of Public Finance coordinates and offers guidance to the public entities in implementing the cooperation system for ensuring the public internal audit function The cooperation system for ensuring the public internal audit function in the local public system involves the common exercise of the public internal audit activity by several local entities of which one acts as the organising entity or the performance of this activity for several public local entities by internal audit departments organised at the level of the public utility associative structures of the local public administration in accordance with the decisions of the local councils The functional independence of internal auditors in relation to the public entity manager to which they are subordinated is ensured by reporting directly the results of the public internal audit activity to the upper management of the public entity The independence of the internal audit structure in reporting its activity results directly is a legal requirement and is ensured by means of distinct organisation of the internal audit department under the direct subordination of the public entity top manager non involvement of the internal auditors in the controlinspection activities and in the audited activities appointmentdismissal of the head of the internal audit structure by the top manager of the public entity with the approval of the Central Unit for the Harmonisation of Public Internal Audit The application of the Internal Audit Charter The Central Unit for the Harmonisation of Public Internal Audit drafted General rules on exercising the public internal audit activity based on the Internal Audit Standards of the Internal Auditors Institute IIA including the Internal Audit Charter According to Government Decision No 10862013 approving the General rules on exercising the public internal audit activity the Internal Audit Charter regulates the role and objectives of internal audit the status of the internal audit department the principles applicable to the internal audit department and to the internal auditors the methodology and conduct rules governing the internal audit activity Each public internal audit structure elaborates its specific rules for the performance of the internal audit including its own Internal Audit Charter The specific internal audit rules including the Charter at the level of the main authorising officers must receive the prior approval of the Central Unit for the Harmonisation of Public Internal Audit and must be approved by the top management of the respective public entity 287 Lifelong professional training and public certification procedures in the field of public internal audit According to the current legislative framework internal auditors have the duty to continuously improve their professional knowledge the head of the public internal audit department or the management of the public entity has the responsibility to provide the conditions necessary for such professional training the period allocated for this purpose is at least 15 days per year In accordance with Government Decision No 125912122012 approving the Rules regarding the coordination and conduct of processes for national certification and lifelong professional training of internal auditors in the public sector and of natural persons internal auditors have the obligation to obtain a national certification The national system for the certification of internal auditors administered by the Central Unit for the Harmonisation of Public Internal Audit is based on the recognition of the competences capabilities and values acquired by the auditors during their basic training and lifelong professional training within the nationally acknowledged higher education institutions in accordance with the Competence framework of public sector internal auditors as approved by the CAPI On an annual basis internal auditors must report on the achievement of lifelong professional training and once every 5 years they must submit to the body issuing the certification Central Unit for the Harmonisation of Public Internal Audit a lifelong training report based on which the maintenancewithdrawal of their authorisation is decided The acceptance of tasks outside the scope of public internal audit According to the legislative framework in force the internal audit department shall not be involved in the operationsprocessessystems that may be subject to auditing that is the activities carried out within the public entity including the activities of its subordinated entities Pursuant to Government Decision No 10862013 in addition to assurance engagements internal auditors may also perform advisory missions at the request of the management To ensure the independence and objectivity of internal auditors the legislative framework in force establishes the obligation of the internal auditors involved in the performance of internal audit verification assessment andor counselling missions to declare under signature the existence of any incompatibilities andor conflicts of interests generated following their participation in the respective missions The head of the internal audit department has the obligation to resolve any incompatibility cases Reporting the findings and recommendations issued following internal audit missions The results of the internal audit missions that is the findings and recommendations presented by the internal auditors materialise in internal audit reports which are submitted for endorsement to the top management of the public entity accompanied by a summary of the main findings and recommendations The internal audit structures within public entities submit an annual report to the Central Unit for the Harmonisation of Public Internal Audit on the public internal audit activity performed and compile an activity report for such purposes In order to ensure the completeness and comparability of the information provided the annual reports are drafted according to the minimal requirements communicated by the Central Unit for the Harmonisation of Public Internal Audit Based on the reports the Central Unit for the Harmonisation of Public Internal Audit drafts the annual report on public internal audit activity which is submitted to the Government and the Romanian Court of Auditors This report is presented for debate to the Romanian Government and approved in a Government meeting 288 Types of audit performed The internal audit activity as regulated by law comprises assurance engagements assessment missions and advisory missions counselling Within assurance engagements the following types of audit are performed regularity conformity audit system audit performance audit The regularity audit represents the examination of actions on the financial effects related to public funds or public assets in what regards the compliance with the ensemble of the principles procedural and methodological rules in accordance with the legal rules The system audit represents an indepth assessment of the internal management and control systems in order to establish if they function in an economical efficient and effective manner with a view to identifying any shortcomings and issuing recommendations for corrective action The performance audit represents the activity that examines whether the criteria established for the implementation of the objectives and tasks of the public entity are correct for the purpose of evaluating the results and assesses if the results comply with the objectives In Romanian practice during the implementation period of public internal audit activity in the public sector the most frequent audit missions were the regularity audit and the system audit Currently following the limitation of budgetary resources internal auditors also plan and conduct performance audit missions focusing on the efficient and effective utilisation of public funds Followup on the implementation of recommendations presented in the internal audit reports identification during internal audit missions of any frauds or irregularities The internal audit reports endorsed by the top management of the public entity are submitted to the audited structures which subsequently draft the Action plan for the implementation of recommendations Based on this document the internal auditors schedule the followup on the implementation of the recommendations To this end the audited structures have the duty to inform the internal audit department on the implementation of recommendations but the internal auditors periodically request supplementary information on the progress made in the implementation and perform verifications for such purposes at the audited structures Where the management of the public entities does not accept a part or the whole of the internal audit recommendations the current legislative framework stipulates that the public internal audit structure should inform the Central Unit for the Harmonisation of Public Internal Audit or the hierarchically superior body of the recommendations that were not adopted by the management of the audited public entity and of the consequences of their nonimplementation Where during internal audit missions the internal auditors identify irregularities or possible damage they report them immediately to the management of the public entity and to the authorised internal control structure as they are not authorised to investigate them Internal auditors follow up the manner in which the competent authorities investigate the irregularities analyse the causes and results of such irregularities with a view to addressing them and propose measures for the implementation of internal control 289 Separation of tasks between public internal audit and inspection The distinct organisation and the functional independence of the public internal audit department as set out by the legislation in force allow for a clear separation of the internal audit tasks from any of the tasks exercised by the personnel of the public entity including in connection with the implementation of the internalmanagerial control system The functional relations between internal audit and the control or inspection activity which is performed by various structures the control body the inspection department the control structure for the management of Community funds develop in the following stages Where during the mission the internal auditors identify an irregularity or the elements of a possible fraud they report it to the head of the public internal audit structure by submitting the Irregularities Disclosure and Reporting Form Formularul de Constatare si Raportare a Iregularitatilor FCRI which contains the identified irregularities the infringed pieces of legislation and the issued recommendations accompanied by supporting documents The head of the internal audit structure informs within 3 days the management of the public entity and the internal control structure authorised to continue the verifications by communicating the Irregularities Disclosure and Reporting Form and the documents drafted by the internal auditors The management of the public entity issues a decision allowing the continuation of the verifications by the authorised inspectioncontrol structure which carries out the necessary investigations to ascertain the irregularity or fraud their amount the culprits and the necessary corrective measures and further informs the internal audit department 321 The relationship between public internal audit and public external audit One of the tasks of the Central Unit for the Harmonisation of Public Internal Audit as set out by Law No 6722002 is to cooperate with the Romanian Court of Auditors and with other authorities and public financial control bodies from Romania and abroad including the European Commission The Romanian Court of Auditors is in charge of the external evaluation of the public internal audit activity of public entities The opportunities for cooperation and collaboration between public internal audit and public external audit are valorised through a protocol concluded between the Ministry of Public Finance and the Romanian Court of Auditors While safeguarding the independence and objectivity of the public internal audit and public external audit the protocol regulates the relations between the two institutions according to the complementarity principle with regard to increasing the efficiency of the audit activity aligning the methodological framework ensuring the professional training of the auditors and exchanging information Based on these cooperation and collaboration directions common action programmes are established 322 Audit committees A The Public Internal Audit Committee CAPI operates in accordance with Law No 6722002 as a consultative body organised under the Central Unit for the Harmonisation of Public Internal Audit that carries out actions with a view to improving the strategy and the public internal audit activity in the public sector The Public Internal Audit Committee is formed of 11 members appointed by the Minister of Public Finances at the proposal of the ministries and other competent institutions The members of the Public Internal Audit Committee are the president of the Financial Auditors Chamber of Romania the manager of the Central Unit for the Harmonisation of Public Internal Audit university professors specialised in the field of public internal audit highly qualified specialists in the field of public internal audit 290 experts from other fields of activity such as accounting law and information systems The Public Internal Audit Committee has a high degree of independence and stability as the Minister of Public Finance may not discharge any of its members except upon the explicit request of the member and of the president of the Public Internal Audit Committee The main tasks of the Public Internal Audit Committee are to issue an opinion on the strategic development directions of public internal audit in the public sector to issue an opinion on the draft legislation in the field of internal audit to endorse the annual reports on public internal audit activity and submit them to the Government to issue an opinion on the reports of intersectoral audit missions that are significant at a national level to assess the consequences of the nonimplementation of the recommendations that were not assumed by the management of the public entities to assess the cooperation agreements between public internal audit and external audit as well as the common professional training of auditors B Internal Audit Committees CAI are set up at the level of those main authorising institutions within the public central administration that have an annual budget exceeding RON 2000000000 being made up of 5 to 7 members They are consultative bodies operate under public internal audit departments and act for the improvement of the internal audit activity The main duties of the Internal Audit Committees are they debate and endorse the multiannual and annual internal audit plans and the Annual report on the public internal audit performed within the public entity they issue an opinion on the recommendations that were not assumed by the management of the public entity they endorse the Internal Audit Charter and examine petitions regarding the noncompliance with the Code of Ethics of Internal Auditors 33 Coordination of the public internal control system The manager of the public entity has the task to ensure the elaboration and development of internalmanagerial control systems as well as to ensure an independent and functional internal audit The coordination and harmonisation thereof is assigned to the Ministry of Public Finance through its two specialised structures namely the Central Unit for the Harmonisation of Financial Management and Control Systems UCASMFC and the Central Unit for the Harmonisation of Public Internal Audit UCAAPI directly subordinated to the Minister of Public Finance A By establishing the Central Unit for the Harmonisation of Financial Management and Control Systems the Ministry of Public Finance enabled the assurance methodological guidance coordination and supervision of the implementation of internalmanagerial control systems by means of defining a unitary strategy in the field of financial management and internal control elaborating internal control standards harmonising the implementation rules with financial implications through the incorporation of control procedures in order to ensure a sound financial management of public funds and assets coordinating the professional training system of the specialists involved in internal control developing the system for reporting the results of the internal control activity The management of public entities takes the necessary measures for the elaboration andor development of the internalmanagerial control systems within the respective entities Such measures mainly consist in elaborating andor updating of the programme for the development of the entitys own internalmanagerial control system setting up the structure in charge of the monitoring coordination and methodological guidance of the own internalmanagerial control system elaborating andor updating formalised procedures per activities followingup on the implementation of the measures included in the development programme performing analyses on the development of the 291 internalmanagerial control system and on the monitoring coordination and methodological guidance actions carried out by the authorised structure The stage of the implementation and development of internalmanagerial control systems as well as the special situations identified during the monitoring coordination and methodological guidance actions performed by the constituted structures are reported in sixmonthlyannual statements which are communicated to the hierarchically superior public entities In the case of public institutions exercising the function of main authorising officer for the state budget the state social security budget or any special fund budget the reports are submitted to the Central Unit for the Harmonisation of Financial Management and Control Systems within the Ministry of Public Finance As of 2011 the management of each public entity elaborates an annual report on the internalmanagerial control system which represents a statement of conformity of the public entitys internalmanagerial control system with the internalmanagerial control standards The Ministry of Public Finance via the Central Unit for the Harmonisation of Financial Management and Control Systems issues and submits to the Government an annual national report on internal control which reflects the progress in the implementation of the internalmanagerial control system at the level of public institutions exercising the function of main authorising officer for the state budget the state social security budget or any special fund budget including their subordinated public institutions B For purposes of regulation coordination and monitoring in the field of public internal audit in the public system the Central Unit for the Harmonisation of Public Internal Audit was set up within the Ministry of Public Finance as a structure responsible for the elaboration management and application of a unitary strategy in the field of public internal audit and in the national monitoring thereof development of the legislative framework in the field of public internal audit development and implementation of uniform procedures and methodologies based on international internal audit standards development of the system for reporting the results of public internal audit activity elaboration of the annual report on the public internal audit activity for the public sector performance of audit missions of national interest assessment of the compliance with the rules instructions and the Code of Ethics of Internal Auditors by the public internal audit structures coordination of the recruitment system of the system of certification of internal auditors in the public sector and of natural persons and professional training in the field of public internal audit guidance of public entities with a view to cooperating to ensure the internal audit function endorsement of the appointmentdismissal of the heads of the public internal audit structures within public entities cooperation with the Romanian Court of Auditors and other public institutions and authorities from Romania and abroad 34 Assessment of the public internal control system The assessment of the public internal control activity performed within the public sector falls within the responsibilities of the Central Unit for the Harmonisation of Public Internal Audit represents an objective source of information on the stage of implementation of public internal audit at national level and forms a basis for the improvement of public internal audit activity The scope of public internal audit comprises all the activities carried out by public entities for achieving their objectives and includes the assessment of the internal control system The internal public audit carries out an indepth assessment of the internal control system in order to establish whether it functions in an economical efficient and effective manner highlights the significant shortcomings of the control mechanisms and proposes recommendations for improvement 292 The verification of the compliance with the internal audit rules and with the Code of Ethics of Internal Auditors is carried out based on the General Guide for the Assessment of the Public Internal Audit Activity The assessments are performed by the Central Unit for the Harmonisation of Public Internal Audit according to a schedule based on a five year cycle for the public entities within the central public administration and respectively by the territorial internal audit units of the Ministry of Public Finance in accordance with the tasks delegated by the Central Unit for the Harmonisation of Public Internal Audit for the entities within the local public administration The results of the assessments compiled at a national level are made available in the annual report on the public internal audit activity 4 Economic and financial inspection Pursuant to Government Emergency Order No 942011 the economic and financial inspection is organised and operates at central level within the Ministry of Public Finance as general directorate subordinated to the Minister of Public Finance and at territorial level through the economic and financial inspection services organised within regional public finance general directorates and within the National Agency for Fiscal Administration ANAF a central structure A structure specialised in exante control operative control and expost control the Economic and Financial Inspection ensures the proper and timely fulfilment of the duties of the Ministry of Public Finance in line with the increase of responsibilities for economic operators in exercising the economic and financial activity and of strengthening budgetary economic and financial discipline by conducting the inspection activity regarding the finding of irregularities and establishing budgetary claims in obtaining and using European funds andor related national public funds in the situations where there are incompatibilities at the level of control structures organised within the authority with competencies for the management of European funds or at the request of the certification authority when it determines that the control structures organised within the authority with competencies for the management of European funds did not properly investigate the findings with financial implication or with possible financial implications in its verification reports verifying the utilisation of public funds or other special funds of budgetary allocations for investments of subsidies and transfers and of other forms of financial aid from the state or territorial and administrative units verifying the management of the public and private assets of the state and of the territorial and administrative units by economic operators as well as the concession or lease of assets part of the public and private property of the state and the states territorial and administrative units verifying the economic and financial management and economy effectiveness and efficiency of the utilisation of public funds of economic operators in which the state or a territorial and administrative authority is the sole shareholder or majority shareholder verifying the utilisation of European funds andor the related national public funds at the request of the authorities with competencies in the management of European funds or of the certification authority where the control structure of authorities with competencies in the management of European funds is incompatible Inspectioncontrol tasks are also assigned to the Control Body of the PrimeMinister Corpul de Control al PrimuluiMinistru CCPM a structure without a legal status 293 subordinated to the PrimeMinister which controls and follows up the activity of the ministries and their decentralised public services public institutions subordinated to the Government specialised bodies of the central public administration subordinated to the Government offices departments commissions autonomous companies national companies and enterprises commercial enterprises and financialbanking institutions wholly or predominantly owned by the state The reports drafted by the Control Body of the PrimeMinister are submitted for information purposes to the PrimeMinister and the Romanian Court of Auditors and for utilisation purposes to the next hierarchical body as applicable depending on the findings they are also submitted to public procurement bodies or personnel rights bodies as well as to the Ministry of Public Finance including in the case of irregularities found in the field of internal public control Other control authorities within the central public administration The central public administration contains further control authorities that act for preventing identifying and sanctioning any noncompliance with the legal provisions in specific fields such as the National Authority for Regulating and Monitoring Public Procurement Labour Inspection Social Inspection Competition Council National Authority for Consumer Protection National Office for Prevention and Control of Money Laundering National Environment Guard State Construction Inspectorate National SanitaryVeterinary and Food Safety Authority 5 Ongoing andor future reforms In the immediate future a series of amendments to the legislation governing public internal control are envisaged as a result of continuing the process of the reform of state administration The reform of public administration aims at continuing the administrative decentralisation especially in the fields of culture education youth sport health and agriculture The purpose of decentralisation is to consolidate administrative and financial autonomy at the level of regies to be set up for several counties in the context of improving the general legislative framework and aligning it to the rules of the Council of the European Union and of the European Commission The reform of public expenditure management involves the development by the Ministry of Public Finance of an efficient management of financial resources which would contribute to macroeconomic stability and the increase of general prosperity Short term priorities qualitative consolidation of public finance by improving efficiency transparency and responsibility in the use of public resources establishment of a compulsory fiscal and budgetary framework on the medium term consolidation of the administrative capacity for the management of EU nonreimbursable financing ensuring the necessary conditions for the achievement of sustainable economic growth and the maintenance of macroeconomic stability improvement of revenue management by reforming the fiscal administration and reducing collection costs The strategy for the reform of public internal control aims primarily at achieving the following main objectives consolidation of the legal framework regulating public internal control development of methodologies and procedures for public internal control in the sense of aligning them to European standards and international good practices in the field concerted action for organising and ensuring the efficient functioning of internalmanagerial control structures that 294 ensure harmonisation coordination methodological guidance monitoring and reporting regarding own internalmanagerial control systems at the level of all public entities subordinated to the central administration the gradual integration of preventive financial control in the scope of managerial accountability to the extent that the internalmanagerial control ensures the elimination of risks in the administration of public funds by strengthening functional independence and improving the professional training of the comptrollers with the help of the guidance offered by the Central Unit for the Harmonisation of Financial Management and Control Systems periodical performance of a rigorous assessment of the implementation of internalmanagerial control standards in public entities increasing the degree of implementation of internal audit within the assessment of the internal audit activity in central and local public entities by proposing inter alia the implementation of the cooperation system with a view to integrating this activity in small local public entities and improving the professional training of the personnel involved in internal managerial control systems including the personnel with internal audit tasks Annex GENERAL LEGISLATIVE FRAMEWORK ON PUBLIC INTERNAL CONTROL 1 Law No 821991 on accounting as republished 2 Law No 941992 on the organisation and functioning of the Court of Auditors as republished as subsequently amended and supplemented 3 Law No 902001 on the organisation and functioning of the Romanian Government and of the ministries as subsequently amended and supplemented 4 Law No 6722002 on public internal audit as republished as subsequently amended and supplemented 5 Law No 5002002 on public finance as subsequently amended and supplemented 6 Law No 2732006 on local public finance as subsequently amended and supplemented 7 Law No 1952006 Frameworklaw on decentralisation 8 Law No 692010 on tax and budgetary responsibility as subsequently amended and supplemented 9 Government Order No 1191999 on internal managerial control and preventive financial control as republished as subsequently amended and supplemented 10 Government Emergency Order No 662011 on prevention determination and sanctioning of irregularities in obtaining and using European funds andor related national public funds as subsequently amended and supplemented 11 Government Emergency Order No 942011 on the organisation and functioning of the economic and financial inspection as subsequently amended and supplemented 12 Government Emergency Order No 22010 on measures for the organisation and functioning of the Governments working apparatus and for the amendment of certain regulatory acts 13 Government Decision No 2352003 approving the Rules for the nomination of members in the Public Internal Audit Committee 295 14 Government Decision No 342009 on the organisation and functioning of the Ministry of Public Finance as subsequently amended and supplemented 15 Government Decision No 12592012 approving the Rules regarding the coordination and conduct of processes for national certification and lifelong professional training of internal auditors in the public sector and of natural persons 16 Government Decision No 11832012 approving the Rules regarding the cooperation system for ensuring the public internal audit function 17 Government Decision No 10862013 approving the General rules on exercising the public internal audit activity as subsequently amended and supplemented 18 Order No 5222003 of the Minister of Public Finance approving the General methodological rules for exercising preventive financial control as subsequently amended and supplemented 19 Order No 9462005 of the Minister of Public Finance approving the Internal Control Code including the internal controlmanagement standards for public entities and for developing managerial control systems as subsequently amended and supplemented 20 Order No 19172005 of the Minister of Public Finance approving the Methodological rules for the organisation and management of accounting in public institutions the Chart of Accounts for public institutions and instructions for the application thereof as subsequently amended and supplemented 21 Order No 19542005 of the Minister of Public Finance approving the classification of public finance indicators as subsequently amended and supplemented 22 Order No 17022006 of the Minister of Public Finance on the counselling activity of internal auditors 296 SLOVAK REPUBLIC Public internal control 63 No major changes in the period 20112013 1 History of the recent establishment of public internal control system Based on socioeconomic changes since 1989 substantial changes occurred in the national legislation connected to the control of public expenditure The focus of public administration is directed into two areas financial management and the area of the obligations arising from generally binding legal regulations or obligations imposed by these regulations Act No 101996 Coll on Control in Public Administration hereinafter the Act on Control focused especially on control in the public administration and monitoring the performance thereof as well as on complaints and petitions However it did not fully comply with all the requirements of the unified concept of the financial control in public administration The Slovak legal system did not regulate a uniform system of financial control coordination establishment of internal audit at the level of central authorities methodical guidance of internal audit cooperation or training of the employees performing financial control and internal audit Prior to 2001 the control system was aimed mainly at the performance of ex post financial control and did not cover preventive actions There was no clearly stated responsibility for ex ante controls For these reasons new draft legislation introduced the principles of ex ante financial control interim financial control ex post financial control and a completely new element in the system was the introduction of internal audit at the central administration level In accordance with the public interest pushing for enhancing the economy efficiency and effectiveness of the public administration and with a view to the need for preparing the Slovak Republic for accession to the European Union it was necessary to create legal conditions for designing a system of financial control that could assure adequate and effective monitoring of management of the state budget funds state property and the future EU and other international funds For this reason international standards and good European practice were to be introduced In 2000 the government adopted a policy on internal financial control Resolution 8522000 as a basis for these measures On 7 January 2001 Act No 5022001 Coll on financial control and internal audit came into force defining a system of financial control in the government environment ie a system of public internal financial control PIFC One of the important objectives of the act is the definition of measures for increasing the accountability of management of public funds and state property At the same time the legal basis for liaising with the control authorities of the European Commission was introduced enabling to perform on thespot controls for EU funds to be performed 63 Contributed by the Ministry of Finance of the Slovak Republic 297 On 2 April 2008 the national council approved an important amendment to the Act No 5022001 Coll on financial control and internal audit and amendments to certain other acts hereinafter the amendment The amendment came into force on 1 June 2008 The amendment gives competence to the Ministry of Finance hereinafter the MoF for the programming period 2007 to 2013 for amongst other things performing the functions of the audit authority and certifying authority for operational programmes co financed with EU funds The amendment also refers to the establishment of the Central Harmonisation Unit for Financial Control Internal Audit and Government Audit based on the position of the MoF as the central authority for the activities stated in Section 7 paragraph 1 of Act No 5752001 on the Organisation of the Activities of the Government and Organisation of the Central Public Administration These activities include assessing the quality of implementation of financial controls internal audit and government audit Act No 5752001 also introduces the possibility to establish audit committees as an expert body to advise the head of a central authority Also new definitions have been introduced eg effectiveness risk audited entity audited person audit body central authority government audit audit body and previously used terminology updated eg public funds controlled entity financial transaction other funds from abroad provided on the basis of international treaties binding on the Slovak Republic based on experience Other important modifications are the updating and extending of the responsibility of the head of public administration for the process of public financial management The process of ex ante financial control has been modified Given the fact that the controlled entity suggested measures to overcome deficiencies as identified by ex post financial control and to eliminate the causes often only formally the rights of the control body were extended to require redesign of measures for the removal of deficiencies The principal change introduced by the amendment is the establishment of a new institute for government audit which is aimed at verifying the legality economy efficiency effectiveness and expediency of the management of public funds and at verifying the efficiency of management systems and control of public authorities that administer chapters of the state budget in order to strengthen the competencies of the MoF The introduction of government audit does not change the penalty system compared to ex post financial control Provisions for internal audit are also specified Rules for fines on controlled entities in the case of nonfulfilment of obligations under the amendment were modified and increased to the maximum fine limit from EUR 3 31932 to EUR 33 91392 The period for imposition of fines for failure to comply with the provisions of the act was extended from three to five years from the date of the violation of the obligations by the controlled entity The amendment also affected some specific acts which are also revised for the new Institute of Government Audit It is not possible to list all the changes in this short summary and their impact on the controlled entities audited entities and audited persons as well as for control bodies internal auditors and government auditors and others 2 Environment of public internal control The objective of public internal control PIC is to create an environment that provides reasonable assurance that public funds are used to achieve the set objectives as effectively as possible This environment should also be an effective tool to prevent corruption and fraud The external control and supervision of PIC is performed by the national council and the Supreme Audit Office SAO The government is accountable to the national council for the management implementation and monitoring of its policies and requires that the systems are in place for budgeting and accounting procedures internal control measures and inspection services to combat fraud and corruption The system of PIC also has a preventive nature its main objective being to ensure that systems are implemented to prevent irregularities corruption and fraud This area is also 298 covered by the legal framework of Act No 3002005 Coll on the Criminal Code for example in Title 4 Property offences where fraud is defined in Section 221 and Title 8 Crimes against order in public cases where the third part speaks of corruption In the case of suspected unauthorised use of funds discovered under the Act on Financial Control the financial controllers the internal auditors or government auditors must report to the law enforcement agencies any suspicion of criminal offence in the treatment and management of public funds property and property rights In a broader sense the term public internal control environment is understood as the environment concerning the adaptation of the legal process and law making in the PIC system to address problems identified Even in PIC law making is a logical step to fill the gaps identified in the present national PICsystem as compared to international standards and best practices For an overview of the most important legal acts relating to the system of public internal control see the box at the end of this contribution 3 Concept of public internal control 31 Managerial responsibilities The term public internal financial control system is defined in the Act on Financial Control as the system comprising financial management internal audit government audit and activities of the MoF while accomplishing the tasks of the Central Harmonisation Unit for Financial Control Internal Audit and Government Audit According to the Act on Financial Control financial management represents a set of procedures applied by the public authority in accountable and transparent planning budgeting use accounting reporting and financial control of public funds with the aim of their economic effective and efficient use The head of the public authority under Section 8 of the Act on Financial Control shall be responsible for ensuring creation continuation and development of financial management elimination of interventions aimed at influencing the employees performing financial control mutual incompatibility and separation of decisionmaking powers of managers from powers of employees responsible for the performance of the financial transaction and from powers of employees responsible for accounting appropriate qualification and professional competence of employees specified above for the performance of their activities ex post financial control verification of selected financial transactions as needed by the public authority adoption of measures correcting the identified deficiencies and eliminating their underlying causes identification of employees responsible for identified deficiencies and measures taken with respect to them according to specific legislation risk management to prevent violations of specific legislation and international treaties binding the Slovak Republic for funds received from abroad while implementing the plans and goals of the public authority 299 monitoring activities performed by the public authority with a view to obtaining information on them to assessing the standard of their performance to reporting deficiencies identified in activities performed by the public authority and their elimination In pursuing Act No 5752001 Coll on Organisation of the Activities of the Government and Organisation of the Central Public Administration the head of the public authority is the politically designated minister The minister can authorise based on an organisation order the state secretary or the head of the office with the rights and duties set forth above While preparing and executing transactions managers at all levels are responsible for activities carried out not only in terms of ensuring competence but also for financial management and control Draft financial transactions are verified by an ex ante financial control that can be divided into two stages The first stage puts the emphasis on the verification of the draft financial operation before entering into an obligation risk reduction of risk of loss while focusing on economy efficiency effectiveness and expediency in terms of compliance with the approved budget with contracts concluded with public authority or with other decisions on management of public funds internal regulatory acts government decrees and whether it is in accordance with generally binding legal regulations budgetary rules the management of state property public procurement etc The second stage is the verification before expenditure In accordance with the provision of Section 9 paragraph 2 of the Act on Financial Control ex ante financial control shall be performed by the manager commissioned by the head of the public authority and employees responsible for budget public procurement property administration and other specialised activities depending on the nature of the financial transaction In case of financial transactions that have not been verified by ex ante financial control andor in the case of proven deficiency in an ex ante financial control the financial operations cannot be performed or continued until the deficiency has been corrected 32 Internal audit The basic legal framework for regulation of the internal audit is the Act on Financial Control setting down basic rules objectives and ways of performing internal audit General provisions of the Act on Financial Control oblige the heads of central authorities to introduce internal audit to be performed by their own employees hereinafter internal auditors or by independent internal organisational units made up by internal auditors hereinafter internal audit units except where this would not be economic effective or efficient taking into account the size of the central authoritys staff public funds budget or organisational structure These internal auditors or internal audit units are separate from management structures both in terms of their function and organisation Exceptions from the obligation to establish internal audit in central authorities by their own employees shall be granted by the MoF The internal audit units or independent internal auditors of public authorities administering a chapter of the state budget are established pursuant to the provisions of Act on Financial Control which forms the legal basis for the definition of internal audit Independence and institutional status of an independent internal auditorinternal audit unit Regarding the independence of the internal auditor the system is set so that the head of the audited entity pursuant to Section 28 paragraph 4 of Act on Financial Control must 300 ensure that no interference that could have an adverse impact on the performance of internal audits by internal auditors is in place Internal auditors or internal audit units may not be assigned to any duties that go beyond the scope of internal audits or that interfere with independent execution of internal audit tasks The internal auditorinternal audit unit must have an independent position and reports directly to the head of central authority is independent from the activities audited thereby ensuring their objective assessment which is essential for the proper performance of internal audit and impartial advice to the audited entity and must have no internal external and personal interests and should be free from any political interference For these reasons the internal auditor should not perform activities that he would later audit Internal audit charter Under the Act on Financial Control the head of an internal audit unit or an internal auditor shall prepare and submit for approval to the head of the central authority the internal audit charter of the central authority in accordance with the Code of Ethics of Internal Audit which will define the objectives activities and position of internal audit in central authority and its relations with other departments and organisations within the scope of central authority Training of the internal auditors Training of the internal auditors is provided especially by the MoF which organises arranges and allows specialised training and systematic specialised training of internal auditors Special training provided by other organisations result from the character of audit tasks performed by internal audit in the special sector of public organisation Any internal audit unit prepares a training plan to cover all necessities of this unit or its auditors on a yearly basis Specialised training is carried out mainly by the professional training related to the deepening of skills in activities that the auditor performs and is carried out by fulltime education distance learning selfstudy electronic communication devices specialised visits participation in conferences participation in workshops attending courses and other forums Audit reporting The member of the audit team shall prepare a partial report on the findings of the audit operation hereinafter the partial audit report the report shall subsequently become an inseparable part of the report on the findings of the audit operation hereinafter the audit report in the following cases if there is an urgent need to warn of an impending risk that could have an adverse impact on the activities of the audited entity if there are any findings giving rise to a suspicion of criminal activity and if the internal audit is performed in several audited entities within a single audit operation 301 The member of the audit team shall submit a partial audit report to the head of the audited entity and to the head of the relevant central authority and if there is a suspicion of a criminal offence the report shall also be sent to law enforcement bodies if there is a suspicion of the misuse of EU funds the partial report shall also be sent to the legal person through the intermediary of which EU funds are provided and to the Central Contact Point of the European AntiFraud Office in the Slovak Republic The internal auditor shall submit his audit report to the head of the audited entity and to the head of relevant central authorities who are responsible for ensuring that the internal auditors recommendations are taken into account in the correction of identified deficiencies The internal auditor must verify whether the audited entity has taken hisher recommendations into account Where the audit operation reveals any facts that need to be addressed by competent authorities pursuant to specific legislation the internal auditor shall also submit the audit report to the competent authorities pursuant to specific legislation Where appropriate the head of the central authority shall submit the audit report also to the MoF The deficiencies identified in the internal audit are continuously documented during the audit operation Findings of the audit are used as a basis for drafting reports on the findings of the audit operation hereinafter the draft audit report The audit team leader is responsible for the preparation of the draft audit report which is submitted for approval to the manager Audit team members submit their documents in the draft audit report to the audit team leader within the time period determined When the draft audit report is prepared and approved by the head of internal audit it is recommended to submit it to the head of the audited entity for them to express their opinion After sending the opinion the audit team leader agrees with the head of the audited entity a date to discuss the draft audit report and during the discussion of the audit report all audit team members and the responsible employees of the audited entity are present After discussing the draft audit report the report is finalised and the audit report is approved by the manager In joint negotiation the audit team leader shall inform the head of the public authority about the results of internal the audit main findings and recommendations Types of internal audit Depending on the nature of the internal audit and on the type of activity to be assessed the internal auditor may apply mainly the procedures of financial audit audit of compliance audit of performance system audit and audit of information systems followup audit and the combination of individual audits Assigning of obligations arising from the Act on Financial Control to internal audit and financial control According to Section 28 paragraph 5 of the Act on Financial Control internal audit units or internal auditors may not be assigned any duties that go beyond the scope of internal audits or that interfere with the independent execution of internal audit tasks It follows that an internal audit unit shall not be allowed to perform activities including auditing the activity defined mainly in Part two of the Act on Financial Control that interfere with the stated provision of Section 28 paragraph 5 of the Act on Financial Control as well as interfere with the independent assessment of the control system of the organisation by the internal auditor 321 Relationship between internal audit and external audit According to National Council Act No 391993 Coll on the Supreme Audit Office SAO as amended the SAO shall adapt and apply international standards of control for the purposes of necessary quality control activities and competence The SAO control relates 302 to the government ministries and other central authorities and subordinate authorities and final beneficiaries of public funds as well The SAO is the state authority that is independent in its control activities regulated by its own law The SAO audits the management of budgetary funds approved according to the law by the national council or by the government property property rights funds obligations and receivables of state public service institutions the National Property Fund municipalities and higher regional units legal entities with capital participation of the state legal entities with capital participation of public service institutions legal entities with capital participation of the National Property Fund legal entities with capital participation of municipalities legal entities with capital participation of higher regional units and legal entities established by municipalities and higher regional units property property rights funds and receivables provided to the republic legal entities or natural persons under development programmes or from other similar reasons from abroad property property rights funds receivables and obligations for which the republic has taken over a guarantee and property property rights funds receivables and obligations of legal entities performing activities in the public interest The SAO also audits the methods of levying and enforcement of taxes custom duties payment of contributions fees and fines which are income of the state budget and the budgets of municipalities and higher regional units and the enforcement and exercise of rights and respect of obligations arising from financial and economic relationships resulting from the management of the funds For the purposes of the SAO Act the EU and other funds received for the financing of projects according to international treaties are considered as funds of the state budget The SAO as an independent public authority draws up an opinion on the proposal of the state budget which assesses the public administration budget proposal and opinion on the draft state closing account An opinion on the proposal of the state budget is submitted by the SAO to the national council Based on the resolution of the national council the SAO shall perform its control in accordance with its competence and shall submit a report on the results of control activities for the previous calendar year to the national council by the end of March A report on the results of control activities is submitted at any time when the national council so requests 322 Office of the government OG Based on the Act on Control the OG as a central state authority carries out the control of tasks in the state administration and the performance thereof The OG controls the management of public funds and takes action based on incoming petitions notices and submissions The OG also controls the professional organisational and technical requirements of the activities of the government and the governments consultative bodies 303 323 Audit committee The MoF in the scope of performing tasks of the central harmonisation unit coordinates the establishment and activities of committees for control and audit AC Relating to the establishment of the AC the MoF issues the templates for the charter and its procedures The possibility of establishment of the AC is set by Act No 1652008 Coll which amended the Act on Financial Control The AC is established pursuant to Section 3 of the Act on Financial Control At the moment one AC is established as an independent expert advisory body to the MoF Other ministries are in the process of considering establishing ACs The charter of the AC defines its tasks competences composition of the members and rules of procedure The main tasks of the committee are assessing the standard of performance of financial control internal audit and government audit and risk management with a view to their development in an independent manner monitoring the efficacy and efficiency of financial control internal audit and government audit with a view to the quality of their performance and providing advice and consultations to heads of central authorities and to managers 33 Coordination of public internal control The MoF coordinates the planning of financial control internal audit and government audit and other control authorities with the SAO and OG in order to avoid duplication of controls as much as possible and to put less control and audit stress on controlledaudited bodies The purpose of coordination is to lay the groundwork for the effective performance of internal controls ensuring the harmonising of the internal audit plans between the supervisor and coordination participants and ensuring smooth performance of the controls The objective of coordination is to avoid duplicity or overlapping of controls in the same controlled entity and to optimise the use of the human resources of the coordination supervisor and participants with regard to the position of the ministries and other central public authorities The coordination is performed through coordination meetings convened by the coordination supervisor working meetings organised from time to time as required by the coordination supervisor participants and performing mutually agreed joint controls The MoF also publishes methodological guidance In the area of control activities the MoF established the Working Group on Cooperation in the Coordination of Control Activities WG The WG was established on 8 November 2007 at the meeting of the Steering Committee for the Protection of EU financial interests The WG is an initiative taking executive and advisoryrecommendatory body of the Management Committee set up for the coordination of controls and audits of all network partners 64 Coordination of the control activities of network partners relates to the preparation of control and audit plans of the network partners covering international financial funds based on the 64 Network partners means the structure of cooperating bodies whose main purpose is mutual cooperation in accomplishing of tasks in the protection of EU financial interests 304 document Principles of Coordination of Network Partner Controls and Audits of the network partners version 20 The head of the WG is a Section of the Audit and Control of the MoF 4 Financial inspection Other than financial control internal audit and government audit there are no other government or financial inspection services in the Slovak Republic This chapter includes as well a specific type of inspection government audit introduced by the Amendment to the Act on Financial Control in 2008 Financial control ensures economy efficiency and effectiveness in the use of state funds compliance with relevant legislation in the management of public funds and timely and reliable information to the head of public authority on the management of public funds Financial control shall be performed as ex ante financial control interim financial control and ex post financial control Ex ante financial control covers financial operations in planning budgeting public procurement concluding of contracts or other acts of property ownership It verifies draft or planned financial expenditure in two stages The first stage focuses on the verification of the draft financial decision prior to becoming final The second stage focuses on fulfilment of the conditions for the expenditure Interim financial control is carried out at the stage of preparation and performance of selected financial operations This control verifies the completeness and conclusiveness of supporting documents relating to controlled financial transactions The head of the organisational unit whose activity is related to the financial transaction and which is functionally and organisationally independent from the organisational unit responsible for the preparation and performance of the transaction and for the performance of ex ante financial control shall select the financial transaction upon a written instruction from the head of public authority Interim financial control shall be performed by an employee of the organisational unit who is appointed by the manager of this unit The organisational unit responsible for preparing and performing the selected planned financial transaction and for the performance of ex ante control shall provide necessary cooperation in the performance of interim financial control Ex post financial control is performed by the public authority within their remit and the provider of EU funds Control bodies and controlled entities shall follow the basic rules of ex post financial control defined by Sections 13 to 25 of the Act on Financial Control if not otherwise stated The basic provision is the same as interim financial control it shall be performed by a functionally and organisationally independent unit from the organisational unit responsible for the preparation and performance of the transaction to be controlled Government audits carried out under this act and under specific legislation shall verify and assess o compliance with specific legislation concluded contracts international treaties binding on the Slovak Republic based on which the Slovak Republic receives funds from abroad decisions issued under specific legislation and internal regulatory acts in financial management and in other activities of audited persons o cost effectiveness efficacy and expediency in the management of public funds and use of human resources with a view to the fulfilment of the tasks of the audited person 305 o compliance with the requirements for the provision of public funds and requirements for their use o efficacy and efficiency of financial management of the audited person o security and functionality of information systems of the audited person and adequacy and completeness of data in the information system of the audited person considering the nature and scope of its activities o implementation of measures taken to correct the deficiencies identified by government audits and to eliminate their underlying causes and implementation of recommendations from partial reports on government audits hereinafter partial reports and from government audit reports o availability accuracy and completeness of information on financial operations and financial management of audited persons o other facts as provided for under specific legislation identify and evaluate possible risks related to financial management and other activities of audited persons recommend improvements in financial management of audited persons and minimisation of risks perform other activities as provided for under specific legislation Government audit is carried out by a special institute for the MoF and its cooperative bodies to execute external audit over other public bodies It was introduced to cover especially all competences of audit authority for the 200713 programming period 5 Ongoing and future reforms The MoF is planning to develop a new version of the Act on Financial Control that intends to harmonise the entire set of procedures to perform ex post financial control internal audit government audit and performance of control under the Act on Control in order to simplify the public control system For this to happen there is a need for political consensus If successful there will be a more uniform procedural approach for performing any type of control and audit 306 Annex 1 Major PICrelated legislation 1 Basic legislation Act of the National Council of the Slovak Republic No 5022001 Coll on Financial Control and Internal Audit and on the amendment to certain other acts as amended Act No 101996 Coll on Control in State Administration and on the amendment to certain other acts as amended Act No 5232004 Coll on Budgetary Rules in Public Administration and on the amendment to certain other acts as amended Act No 101996 Coll on Control in State Administration and on the amendment to certain other acts as amended Act No 4402000 Coll on Administrations of Financial Control as amended on the amendment to certain other acts as amended Act No 5752001 Coll on the Organisation of Government Activities and of Central State Administration on the amendment to certain other acts as amended Act No 4982010 on State Budget Act No 4312002 Coll on Accounting as amended Act No 2912002 Coll on the State Treasury and on the amendment to certain other acts as amended Act No 5832004 Coll on Budgetary Rules in Territorial SelfGovernment and on amendment to certain other acts as amended Act No 391993 Coll on the Supreme Audit Office of the Slovak Republic as amended Decree of Ministry of Finance of the Slovak Republic No 212009 Z z of 21 January 2009 amending certain provisions of Act No 5022001 Z z on Financial Control and Internal Audit and on amendment to certain other acts as amended 2 National PIC standards Internal Audit Manual Compliance Audit Manual IS Internal Audit Manual Performance Audit Manual Financial Audit Manual System Audit Manual Internal audit charter Code of Ethics of Internal Auditor Procedures for the Government Audit of the Structural Funds the Cohesion Fund and the European Fisheries Fund for the programme period of 200713 approved by the Government of the Slovak Republic Resolution No 5112008 Methodical guidance to Procedures for the Government Audit of the Structural Funds the Cohesion Fund and the European Fisheries Fund for the programme period of 200713 Procedures for Government Audit of National Funds of the Slovak Republic 307 SLOVENIA Public internal control 65 Summary of the major changes 20112013 There have been no major changes in the national legislation framework of public internal financial control in Slovenia since 2011 The most significant change in implementing framework of PIC was the edition of renewed Guidelines for State Internal Auditing in December 2013 and thus the adoption and adaptation of the mandatory elements of the International Professional Practices Framework IPPF issued by The Institute of Internal Auditors IIA to Slovenian public sector In order to adopt and adapt the mandatory elements of the IPPF to the Guidelines for State Internal Auditing permission has been obtained from The Institute of Internal Auditors IIA 1 Brief history of the development of internal control in public finance The development of the system of internal control of public finance began in 1993 when an internal organisational unit the Budget Inspectorate was set up within the Ministry of Finance pursuant to the Budget Implementation Act to enable the Ministry of Finance to exercise control of the financial material and accounting operations of spending units The ministry would inform the government of the controls it performed the government would in turn inform the national assembly The controls related exclusively to state budgetary resources The first systemic Public Finance Act was adopted in 1999 This act represented the beginning of the introduction of internal auditing of spending units including provisions relating to financial controls in the form of a system of internal controls and audits where an internal audit was presented as an ex post accounting and financial audit of efficiency costeffectiveness and performance Spending units that used state budgetary resources were obliged to set up financial services charged with preparing and implementing the budget and with performing other tasks connected with managing those state assets for which the spending units were responsible and internal audit services under the Minister of Finances instructions on the common bases for the procedures of work of financial services and internal audit services for the implementation of ex post accounting and financial audits and audits of efficiency cost effectiveness and performance This legal framework emphasised the responsibility of the head of a spending unit for the legitimacy purpose efficiency and economic use of budgetary resources It also determined the division of competencies between the authorising and accounting officers introduced a system of internal control determined the responsibility of an accounting officer to withhold payment if it would be in contravention of the law and set out the role 65 Contribution of the Ministry of Finance 308 of internal auditing and of reporting on improvement measures to the newly established Budget Supervision Office BSO This office succeeded the Budget Inspectorate and was charged with scrutinising the use of budgetary resources implementing ex post accounting and financial audits and audits of the efficiency costeffectiveness and performance of projects performed jointly by various spending units and drawing up guidelines for the implementation of internal audits at spending units In 2002 in order to bring the definitions of the function of internal auditing and internal controls into line with the development of internationally recognised standards and best practice the government adopted a document entitled Policy of the Establishment and Development of the System of Internal Control of Public Finance in the Republic of Slovenia In line with the policys action plan the government established a comprehensive legal framework for a modern system of internal control of public finance which is without major additions being required still in force and consists of the Public Finance Act 2002 the Rules Laying Down the Policies for a Coordinated Function of Internal Financial Control System 2002 the Rules on the Issuing of Certificates for the Title of State Internal Auditor and Certified State Internal Auditor 2002 the Guidelines for State Internal Auditing 2003 renovated in 2013 and the Guidelines for Internal Controls 2004 The legal framework provides that the head of a spending unit shall establish adequate and efficient internal control that must include internal auditing The BSO is the entity responsible for coordinating and developing the system of internal control of public finance A mandatory professional title for those performing internal auditing tasks was introduced state internal auditor or certified state internal auditor The training programme its implementation and the issuing of certificates for the title are the responsibility of the Ministry of Finance The special position of state internal auditor is laid down in law which guarantees functional independence The organisation and operation of internal auditing of spending units are defined precisely in the Guidelines for State Internal Auditing To accelerate the introduction of internal control of public finance with an emphasis on targetoriented budgets risk management and the strengthening of internal auditing the government adopted the Strategy for the Development of Internal Control of Public Finance 200508 The most important outcome of the strategy was the introduction of a risk register as a form of systematic risk management and an annual declaration from the head of a spending unit on the assessment of the internal control of public finance the primary aim of which was to make heads of spending units continually aware of the importance of risk management The majority of spending units have risk registers in place however they are not always updated The majority of spending units have ensured internal audit function InHouse internal audit service joint internal audit service internal audit full outsourcing however internal audit services where established are relatively weak in terms of staff numbers All spending units complete the declaration on the assessment of public internal financial control based on a selfassessment questionnaire and reports submitted by internal audit services All internal auditors have acquired the title of state internal auditor and the training programme for acquisition of the title has been established The BSO compiles an annual report on the state of internal control of public finance for the government and the Court of Audit and 309 The BSO organises meetings and workshops for internal auditors and provides prompt and ongoing support in the area of internal control The development and enforcement of public internal financial control is linked to the introduction and development of the targetoriented budget The BSO is the entity responsible for developing internal control of public finance It reports annually to the government and the Court of Audit on the state of internal control highlights the weaknesses and recommends improvements The BSO works closely with the Court of Audit with due regard to the independence of both institutions it also works with other institutions which have a particular impact on the control environment such as the Commission for the Prevention of Corruption At the beginning of 2011 at the proposal of the Minister of Finance the government adopted a new strategy for the development of internal control of public finance which was drawn up by the BSO to cover the 201115 period The most important objectives are to guarantee the quality of internal auditing introduction of joint internal audit services where feasible and economic the development of unified IT support for the requirements of internal audit services the improvement of the position of internal auditors within the salary system the training of heads and all management levels in the field of internal control of public finance and the replacement of a declaration on the assessment of internal control of public finance with a statement of assurance At the end of 2013 the Ministry of Finance issued renovated Guidelines for State Internal Auditing which present the application of international standards issued by the Institute of Internal Auditors IIA to Slovenian public sector Renovated guidelines encompass all mandatory elements of the IIA International Professional Practices Framework IPPF Definition of Internal Auditing Code of Ethics and International Standards for the Professional Practice of Internal Auditing including interpretations and glossary and additional requirementsinterpretations which refer to characteristics and requirements of Slovenian public internal financial control legislation Additional requirements and interpretations have been inserted in such a way as to preserve the integrity of the text of the mandatory elements of the IPPF 2 Public internal control environment In 2009 the Slovenian government announced its objective to change the way the budget was drawn up In future years it intends to gradually introduce budget formulation in line with the principle of a targetoriented budget The 2011 budget has been drawn up as a developmentoriented budget whose content relates specifically to policies and to development programmes and subprogrammes The programme budget consists of a midterm plan and a twoyear budget The twoyear budget comprises a basket in which all expenditure has been planned according to the priorities set put into operation in subprogrammes and allocated to programmes and indicators Expenditure has also been planned in accordance with the fiscal rule of the midterm scenario Policies that are outside the basket also have a certain nominal value based on the fiscal rule Under the midterm scenario and the fundamental breakdown of resources by policy those entities responsible for particular policies have in cooperation with other participating authorities defined the main subprogrammes under the proposed programmes and the breakdown by policy The entity responsible for a policy is responsible for coordination annual reporting evaluation and drafting of amended proposals This turn towards targets and the evaluation of achievement of the targets set is connected with the introduction of the managerial principle of management within state administration public sector reform which will reflect positively on the introduction of risk management 310 The accounting function for all direct national budget spending units except for the Ministry of the Interior and the Ministry of Defence is centralised at the Ministry of Finance Accounting is still currently based predominantly on the principle of cash flow External control is provided by the Court of Audit and the national assemblys Public Finance Control Committee Any opinion on operations submitted by the Court of Audit must be adhered to by every state body local community body or public spending unit to whose operations the opinion relates The Commission for the Prevention of Corruption is an independent state body established by law in 2003 It decides on matters at sessions at which it adopts opinions on principle positions and other types of decision Spending units are obliged to appoint persons responsible for drawing up integrity plans and reporting to the commission if needed The professional officials position officials directorgeneral general secretaries of ministries heads of ministryaffiliated bodies heads of government services directors of administrative units municipal directors or secretaries directors and management bodies of public sector authorities and persons responsible for public procurement all provide details of their assets to the commission 3 Concept of public internal control 31 Managerial accountabilityresponsibility The head of a spending unit is responsible for ensuring that the financial management system internal controls and internal auditing work adequately and efficiently where financial management encompasses the establishment and implementation of budget planning and the implementation of financial plans accounting and reporting so as to guarantee the legitimate costeffective and efficient use of public resources and achieve the objectives that have been set Internal controls consist of a system of procedures and methods to control those risks that could affect the legitimacy costeffectiveness and efficiency of use of public resources and the achievement of the objectives set The head responsible for the operations of a spending unit on the state level led by a minister is the minister himself meanwhile on the local selfgovernment level is the mayor The heads of other spending units are directors headmasters etc ie they are not politically appointed The tasks and responsibilities of individuals the flow of information and coordinated operation are defined by a spending units act on internal organisation and the classification of posts adopted by the government and by the internal rules of procedure of the spending unit The management of internal organisational units or functions are involved in preparing and reporting on budget implementation in collaboration with the financial service which is charged with the task of coordinating the preparation of and reporting on budget implementation and with other tasks connected with the management of state assets Notwithstanding the delegation of its responsibilities the final responsibility for the operations of the spending unit the achievement of its objectives and the maintenance of a properly functioning internal control system always lies with its head The head also signs the annual declaration on the assessment of internal public financial control drawn up in accordance with the prescribed methodology In the declaration the spending unit assesses the adequacy of the internal control system in place which includes the control environment a risk assessment internal controls information flow and internal auditing and sets out the most important measures for improving the system that have been conducted in the last year and the measures the unit intends to implement in the year to come 311 Spending units report to the Ministry of Finance this in turn reports to the government and the national assembly The annual budget implementation report is audited by the Court of Audit 32 Internal audit An internal audit is according to the legal framework of internal public financial control a constituent part of the internal control of a spending unit Its organisation and operations are laid down by the Public Finance Act secondary legislation and the Guidelines for State Internal Auditing which are based on internationally recognised internal auditing standards As internal auditor of a spending unit a person who has acquired the title of state internal auditor may be employed The BSO ensures implementation of the training programme for state internal auditors which is adopted by the Minister of Finance The Public Finance Act explicitly sets out the requirement to ensure the functional independence and impartiality of internal auditors The basis for the organisation and operation of an internal audit at a spending unit is provided by the Act on Internal Organisation and the Classification of Posts which organisationally places an internal audit directly under the responsibility of the head of the spending unit and the internal Act on the Organisation and Operations of the Internal Audit which includes the competencies and responsibilities of the internal audit in accordance with the Guidelines for State Internal Auditing based on IPPF Among other things the internal act has to ensure functional independence of internal audit activity within the spending unit direct subordination of internal audit activity to the head of the spending unit the right to unobstructed access to premises persons and documentation relating to audit implementation monitoring of the implementation of recommendations and reporting to the BSO in the event that they have not been sufficiently adhered to the possibility of engaging an external auditor if there is a need for special knowledge or extra capacity procedures and required disclosures in case of impairment to independence or objectivity and the obligations attached to the professional title of state internal auditor The BSO conducts audits of the compliance of an internal audit at spending units with the Guidelines for State Internal Auditing and gives recommendations for improvements in reports submitted to the head of the spending unit Under the Guidelines for State Internal Auditing the internal audit team reports directly to the head of the spending unit and at least once per year to the board66 According to the legal framework of internal control of public finance the head of a spending unit is responsible for ensuring that the internal control system functions adequately and efficiently An internal audit comprises all types of audit particularly of compliance and efficiency and also includes advisory functions Under the regulations and the Guidelines for State Internal Auditing an internal auditor must report without delay to the head of the spending unit and the BSO upon any suspicion of fraud or another criminal offence 66 According to the Guidelines for State Internal Auditing the Board refers to The entity of individual spending unit charged with the responsibility to oversee public spending regularity and performance of its business operations ie supervisory boards of municipalities councils of public institutions and agencies supervisory boards of public funds etc Audit board if it is established in the case of joint internal audit service In other cases Board refers to the head of the spending unit 312 Internal audit is not connected with the budgetary inspection sector Internal audit is a constituent part of the internal control system of a spending unit while the budgetary inspection sector is a form of internal control exercised by the Ministry of Finance of the legitimacy and purpose of use of budgetary resources at spending units Internal auditors may take account of information provided by the budgetary inspection sector regarding irregularities uncovered when planning their work and audits 321 Cooperation between external and internal audit Adequate though informal cooperation has been established between the Court of Audit spending units internal auditors and the BSO This cooperation has various forms or effects the operation of external auditors is important for the creation of a positive audit environment an internal auditor is the first point of professional contact for external auditors and a point of contact between them and the spending unit when analysing risk internal auditors take into account the reports provided by external auditors which enables them to focus on the important risks and to use their own capacities more rationally external and internal auditors exchange knowledge from their respective areas of expertise at conferences and workshops cooperation between an internal and external auditor helps to relieve the workload of the spending unit The BSO and the Court of Audit regularly and also whenever required exchange information and opinions on issues associated with the development of the system of internal control of public finance 322 Audit committees The legal framework of internal control of public finance makes no mention of audit committees In the specific environment of spending units the role of audit committees particularly as regards the provision of functional independence is played by the BSO Where internal auditing regulations have been infringed an internal auditor may consult the BSO which has the right to take measures where required However the renewed Guidelines for State Internal Auditing emphasise the importance of functional reporting relationship of the internal audit activity to the board67 in order to enable support and maintain the independence of the internal audit activity within the spending unit 33 Coordination of public internal control The BSO is responsible and competent for the harmonisation and coordination of financial management internal controls and internal auditing It is responsible for designing the whole public internal control system The BSO therefore draws up o proposals for amendments to regulations on the internal control of public finance 67 See footnote Nr2 313 o proposals for guidelines for the establishment and development of internal controls and internal auditing o proposals relating to the requirements and rules applying to acquisition of the professional titles of state internal auditor and certified state internal auditor and organises training and processes applications for professional titles monitors the implementation of the regulations and guidelines referred to above by o verifying compliance of the organisation and operations of internal audit services with the Guidelines for State Internal Auditing o analysing the declarations made by heads of spending units on the assessment of internal public financial control and the annual reports of internal audit services o providing advice concerning risk management and internal auditing drafts an annual report on internal control of public finance for the Minister of Finance the government and the Court of Audit 4 Budgetary inspection The competent authority for inspection and supervision is laid down by the Public Finance Act Under the act in force the authority responsible for inspection inspects and scrutinises implementation of the Public Finance Act and the regulations governing transactions with national budgetary resources A party in inspection proceedings is a direct or indirect user of state budgetary resources or state budgetary resources used by municipalities Any other recipient of resources may also be inspected like the spending units mentioned above they are obliged to enable budget inspectors to perform inspection and scrutiny submit all the required information documents and reports relating to the inspection and enable the information to be processed by computer In matters falling within the competence of the Budgetary Inspection Sector budget inspectors also handle reports appeals communications and other submissions allocated to them for resolution and inform those submitting these documents of the measures they have taken Two halfyearly reports are drafted on the inspections conducted and the findings and decisions of the Budgetary Inspection Sector pursuant to Article 106 of the Public Finance Act These reports are sent to the Minister of Finance The Ministry of Finance submits the reports to the government and the Court of Audit the government then sends them to the national assembly 5 Ongoing and future reforms In the area of internal control of public finance the strategy drawn up by the BSO and adopted by the government sets out objectives and activities that include the following Introduction of a licence for the internal auditing of spending units In the light of the fact that bearers of the professional title of state internal auditor which is one of the conditions for employment as an internal auditor of a spending unit are also individuals who after acquiring the title have not performed any internal auditing the BSO intends by introducing a timerestricted licence to conduct internal auditing with 314 extension of the licence being linked to ongoing continuing supplementary training as required under the internal auditing standards and the performance of auditing tasks within a certain period of time to ensure that individuals employed as internal auditors have the appropriate experience and knowledge and undergo continuous training Joint internal audit services The establishment of joint internal audit services organised at ministrylevel that will perform the function of internal auditing for ministries as well as for interested indirect spending units from an individual ministrys area of activity will constitute an advance and significant improvement of the current situation in the area of internal control of public finance The establishment of joint internal audit services represents an organisational solution to the problem of securing internal auditing for a larger number of smaller spending units and is from the point of view of efficient use of budgetary resources and the limited number of internal auditors available more suitable than the independent provision of internal auditing by each spending unit separately Unified IT support The internal audit services of spending units are entitled to expect appropriate IT support from the BSO as the central authority responsible for the harmonisation and coordination of internal public financial control the BSO itself requires it in order to ensure within decentralised internal control and auditing system a unified manner of operations Educating heads of spending units on the importance of risk management Taking into account new recruitment the achievements made in the area of best practice and the planned amendments to regulations education and training must be bolstered and enable all heads of spending units and other civil servants most closely involved with internal control of public finance to refresh their basic theoretical knowledge and present best practice from a single source ie the authority responsible for the harmonisation and coordination of internal control of public finance the BSO Introduction of managerial responsibility In accordance with best practice and the introduction of responsibility of heads for the adequacy and efficiency of the internal control system and its prompt and ongoing adaptation to changing objectives and the operating environment it makes sense to replace the declaration on the assessment of internal control of public finance whose purpose was primarily educational with the globally recognised statement of assurance The statement of assurance presupposes that the head or management body of a spending unit assesses at least once a year the adequacy of internal control across the entirety of operations including the control environment risk management risk control and information flow The statement of assurance places emphasis on the responsibility of the head or management body to institute all appropriate measures to ensure that the objectives are achieved operations are efficient and legitimate fraud and corruption are prevented and reports are made on time and are reliable 315 SPAIN Public Internal Control Summary of the major changes in 20112013 The changes introduced into our public internal control system are a result of the deep reforms that have been approved in the field of economic and financial activity in the Spanish public sector which is subject to internal controls by the General State Comptroller Intervención General de la Administración del Estado hereinafter IGAE The reform process implemented during the last two years in Spain originated from the reform of the Spanish Constitution approved in September 2011 which introduced into the regulation on public financial activities two fiscal rules which limit both structural public deficit and the volume of public debt This process of reform beginning with the reform of the Constitution and affecting the area of internal control continued with the approval of subsequent laws introducing changes to the exercise of control over public economic and financial activities These changes highlighted the need to strengthen existing control mechanisms to adapt to the changes and needs arising from the reforms Reforms which affect the IGAEs actions are the following The application of Organic Law 22012 on budgetary stability and financial sustainability requires that internal control bodies monitor compliance with certain rules and instruments created by the law The IGAE is authorised to implement controls over territorial administrations which have had access to additional funding mechanisms The approval of Law 192013 on transparency introduces the obligation to publish account audit reports together with annual financial statements which will improve the transparency of our internal control measures Organic Law 92013 on the control of commercial debt in the public sector states that the internal control body of local councils will be responsible for monitoring compliance with the deadlines for issuing payments to suppliers Continuing at local level the local internal control system is also reformed through Law 272013 on rationalisation and sustainability of local administration reinforcing its role introducing the auditing technique and strengthening the independence of the internal inspectorauditor providing that the Spanish State is responsible for their recruitment and training and holds disciplinary powers over such officials Law 252013 on electronic invoicing and creation of the accounting register for invoices in the public sector will enable the IGAE and other internal control bodies to carry out controls over the invoice accounting register and to evaluate compliance with rules on late payments Regarding subsidy control the subsequent repayment procedure is to be 316 integrated into the control procedure And finally a Council of Ministers Agreement has introduced mechanisms for facilitating the periodic monitoring and correction of weaknesses identified in the role of permanent financial control and internal auditing carried out by the IGAE 1 Introduction Basic principles and goals of the Spanish Internal Control System The State Internal Control System in Spain was developed by the General Government Audit Office Intervención General de la Administración del Estado hereinafter the IGAE an institution that has been established for 140 years The control model takes as its starting point a series of constitutional principles which include the following a The principles of legality and budgetary specification in a qualitative quantitative and temporal sense and the principles of budgetary unity and universality b The guiding principles governing both aspects of public spending an equitable allocation of public resources and the planning and implementation of public spending in accordance with criteria of efficiency and economy c The principle of the effectiveness of the public administration In September 2011 the Spanish Constitution was reformed to introduce at the highest regulatory level of our legislation a fiscal rule which limits our countrys structural public deficit and limits public debt to the target value indicated in the Treaty on the Functioning of the European Union Budgetary stability assumes an entirely structural value and determines the States capacity for action limiting and orienting with the broadest regulatory scope the intervention of public powers and supporting new measures incorporated into our control system The evolution of the internal control regulation has been influenced by the goal of making legality control compatible with a management of services and public expenditure that follows criteria of efficiency and economy and which more recently satisfies the related principles of budgetary stability financial sustainability and transparency allowing the IGAE to monitor their compliance Law 472003 of 26 November on the general budget hereinafter LGB has been the basic legislation on internal controls for the state public sector since January 2005 The LGB lays down a systematic and comprehensive regulation of control in three independent different forms preliminary control of legality financial permanent control and public auditing The LGB views the control implemented by the IGAE as an internal control exercised with full autonomy with respect to the authorities and entities whose economicfinancial management is under scrutiny Among its aims are verification that such management is legal and complies with the principles of good financial management as well as with those set forth in Organic Law 22012 of 27 April 2012 on budgetary stability and financial sustainability particularly in the control of compliance with the principles of budgetary stability financial sustainability and transparency Additionally and inline with the relevance assigned to targetbased budgeting control is also perceived as an additional instrument for ensuring its effectiveness The General Budgetary Law places particular emphasis on the principle of autonomy of internal control bodies with respect to the authorities and entities whose economicfinancial management they are controlling Along these lines government 317 workers who exercise control shall be functionally independent from the owners of the entities whose operations they are controlling and shall adjust their activities according to the relevant instructions given by the IGAE This functional independence is achieved through accountability to inspectorsauditors of the Ministry of Treasury independent of the ministry or body in which they carry out their control activity There are three forms of control exercised by the IGAE preliminary control of legality financial permanent control and public auditing Preliminary control of legality comprises a control exclusively of legality which is carried out prior to approval of any act that results in the application of obligations or which involves expenditures Preliminary control of legality is carried out during the different phases of execution of expenditure for the act in question during which the process may be suspended by way of an objection until the contested points are remedied Financial permanent control unlike preliminary control of legality is carried out after the approval and execution of expenditures and income in order to continuously monitor all aspects of legality budgetary application and attainment of the targets set for each budget schedule as well as to analyse the entitys operations and management procedures with a view to evaluating its economicfinancial rationality and its adherence to the principles of economy efficacy efficiency and sustainability The Law assigns an essential role to financial permanent control in the monitoring and control of the principle of budgetary stability In turn auditing unlike financial permanent control which is conducted on a continuous basis by control offices permanently set up in the entity being controlled involves individual control measures identified based on an annual plan and implemented by deployed control teams applying selective samplingbased auditing procedures in accordance with the auditing rules and instructions provided by the IGAE These procedures may assume various forms as follows Accounts Audit Compliance Audit and Operational Audit The incorporation of audit measures has led to a fundamental advancement in the control of public management significantly helping to improve its transparency legality economy and sustainability We are living in times of substantial restrictions and pressure on public finances at all levels in Spain and in Europe More than ever public authorities and society as a whole are expected to ensure that common resources are used efficiently and target the essentials In a period when the management and control of public finances are at the centre of national and international attention and scrutiny it is important to ensure adequate control and audit systems that can contribute to good governance and greater transparency There is a general perception that government must adapt to the societys needs and that public management is crucial If one of the strategic variables for economic development is increasing competitiveness an organisation which is equivalent to around 44 of Spains GDP has to be competitive The role of government in a modern society is clearly very important A healthy well being is one of the pillars of the social system in European economies The services needed by the public must be provided and with maximum efficiency and quality The evolution of the control system has involved strengthening alongside the traditional control of legality other forms of control with a view to improving efficiency when providing public services enhancing the function of control with operational and financial auditing In the context described above the IGAE as an institution which has operated continuously over the last 140 years and which has a profound recognition qualification 318 and fortitude in public treasury management is tackling the challenge thrust upon it by public institutions and through them the Spanish society to help improve efficiency in the management of public services under the premise of continuing to provide the same service of equal or better quality at a lower cost At the same time the Spanish society demands that we continue to help generate greater transparency and trust in public management by strengthening control and account record mechanisms The IGAE is immersed in the general process of public administration reform which is currently being implemented in Spain with the primary goal of ensuring efficiency and transparency in the management of public services The area of control is not unusual to this reform impetus and highlights the need to strengthen and improve existing control mechanisms so that they may be adapted to the changes and necessities which can arise unexpectedly in the Spanish public sector There is a need to introduce a flexibility into the design of the control model which through a selective application of the different types and techniques of control and based on a careful risk assessment makes it possible to adapt the intensity and the object of control to the changing needs and requirements that arise irrespective of the public or private nature of the entity and going beyond the present configuration which allocates control types to those applicable to an entity based on its legalinstitutional nature 2 Public internal control environment The operating framework for internal controls is determined by the main rules governing the economic and financial activities of the public sector The following rules should be emphasised Organic Law No 22012 of 27 April 2012 on budgetary stability and financial sustainability satisfying the constitutional mandate of implementing the new Article 135 of the Constitution into an Organic Law This law repeals Royal Legislative Decree No 22007 of 28 December 2007 approving the consolidated text of the General Law on Budgetary Stability incorporating for the first time financial sustainability as a guiding principle for the economic and financial actions of all public administrations and reinforcing the of stability not only at the present moment in time but on a permanent basis Introducing this principle of financial sustainability by Organic Law is a means of reporting the control measures implemented by the IGAE focusing on the analysis of medium and longterm planning on specific public bodies with a view to evaluating their solvency and permanent financial conduct The new Organic Law retains the four principles from the expired law budgetary stability the multiannual principle the principle of transparency and the principle of efficient allocation and use of public resources while strengthening in some areas and introducing three new principles financial sustainability as already mentioned responsibility and institutional loyalty The fundamental aspects introduced by this new law are its application to all public administrations improvement of transparency at all levels of government and of its capacity for control in budgetary implementation in new instruments and preventive and corrective measures Organic Law No 21982 of 12 May on the Court of Auditors and Law No 71988 of 5 April on the Functioning of the Court of Auditors implementing the provisions of the constitution establish that the Court of Auditors is the supreme body responsible for auditing the accounts and financial management of the state and those of the public sector and makes it directly accountable to the Spanish Parliament The Court of Auditors is to exercise its functions in examining and verifying the general state accounts The accounts of the state public sector are to be submitted to the Court of Auditors and are to be audited by the latter 319 The rules governing the financial relationships between the state public sector and the Autonomous Communities and local authorities that is Organic Law No 81980 of 22 September on the Financing of the Autonomous Communities the LOFCA recently amended by Organic Law No 22012 of 7 April and Royal Legislative Decree No 22004 of 5 March approving the consolidated text of the Law Governing Local Authority Finances Law No 472003 of 26 November the LGB which is intended to govern the budgetary economic financial accounting auditing and financial control system of the state public sector Accordingly it identifies which bodies carry out the controls on the financial and economic management of the state public sector by drawing a distinction between two types of controls one external control carried out by the Court of Auditors which is accountable to the Spanish Parliament and one internal control carried out by the IGAE a body that is accountable to the council of ministers to which it submits general reports on such economic and financial management and that has ultimate responsibility for taking decisions concerning any discrepancies detected in the course of controls between the IGAE and management bodies of the state public sector It also provides that entities forming part of the state public sector must apply the accounting principles set out in the applicable accounting plans undertaking to provide records on all types of transactions to the Court of Auditors by way of the IGAE The framework of internal controls also comprises the rules contained in the LGB on the budget system for the entities which make up the state public sector as well as the annual budget laws Law No 382003 of 17 November on general subsidies which in accordance with the principles of transparency and effectiveness in the allocation and use of public resources governs the management instruments for public subsidies and assistance and the system of monitoring by means of controls and evaluation of both the procedures and the recipients of such public resources Together with these other rules such as Royal Legislative Decree No 32011 of 14 November approving the consolidated text of the Law on Public Sector Contracts Law No 61997 of 14 April on the organisation and functioning of the National State Administration and Law No 332003 of 3 November on the assets of the government bodies lay down requirements which influence and govern the system of internal controls in Spain 3 The concept of public internal controls in the Spanish administration 31 Managerial accountabilityresponsibility There is a connection between accountability and internal controls although that link does not coincide with the elements defined by the International Organisation of Supreme Audit Institutions INTOSAI since the information management process and internal controls are carried out by an independent body the IGAE Highlevel decisions in public management are adopted by political decision makers that is public management is headed by a political decision maker The various public policies are established by the government which has ultimate responsibility and is also responsible for their implementation and therefore there is no separation of responsibilities in the development and implementation of policies 320 In the Spanish administration a distinction is drawn between on the one hand political representatives who draw up the various public policies and managers who implement those policies In the latter case positions are normally held by public servants with high levels of technical skills who provide support and advice for the various actions and decisions of senior managers Public servants must diligently perform their assigned tasks and safeguard the general interest subject to and in compliance with the Constitution and other legislation and must act in accordance with inter alia the following principles objectivity integrity neutrality liability impartiality confidentiality dedication to the public service transparency and effectiveness The different centres of management are involved in determining budgetary policies and budget objectives and are responsible for drawing up multiannual budget programmes Our General Budget Law requires that spending management centres draw up and design a system of objectives which they must achieve in their respective fields This target based system is based on the allocation of budgetary resources in order to achieve set objectives This budgeting system is supplemented with the necessary introduction of public spending management and control systems created to ensure that the final budget objectives are attained and to provide information on their attainment as well as any discrepancies that may have occurred including their causes with the Ministry of Treasury and Public Administrations in collaboration with the ministries responsible for promoting and coordinating the ongoing evaluation of spending policies to ensure that they achieve their strategic objectives and have their intended socioeconomic impact Spending policies and budget programmes are the core element of allocations of resources evaluation of management and attainment of objectives It is envisaged that budget allocations to spending management centres are based on the level of attainment of targets from previous financial periods Subsequently during the implementation state of these policies and at a later stage these centres of management are subject to controls by the IGAE and by the external control body the Court of Auditors Thus the entities within the state public sector are accountable in respect of their operations whatever their nature to the Court of Auditors through the IGAE The Court of Auditors is a constitutional body of the state as provided in Article 136 of the Spanish constitution It is viewed in the Spanish Carta Magna and Organic and Functioning Laws as the countrys supreme auditing body for the accounts and economic management of the state and the public sector without prejudice to its own jurisdiction holding legislative power and being directly accountable to the Spanish Parliament even though it is not a body of the National Parliament The Spanish Parliament appoints its twelve members Accounts Ministers six of which by the Congress of Deputies and six by the Senate and the Constitution grants them the same rules of independence tenure and disqualification as those applicable to the judges and magistrates of the judiciary The Spanish Constitution assigns it two very clear functions auditing and judicial review The auditing function which is external ongoing and complete ensures that the economic and financial activity of the public sector is subject to the principles of legality efficiency and economy and addressed to the Spanish Parliament or within their fields of competence the legislative assemblies of the Autonomous Communities thus the Court of Auditors carries out external controls in its field as the technical body which it is and the Spanish Parliament or where applicable the Parliaments of the Autonomous Communities on the basis of the results from such audits implement political or parliamentary control The judicial function consists in bringing proceedings in relation to accounting liability incurred by those who are responsible for managing public property funds or assets with the purpose of indemnifying the public funds affected by way of 321 misappropriation incorrect incomplete or lack of justification or due to other causes or conduct Apart from the controls exercised by the bodies referred to the information provided by the accounts of state public sector entities is essential since it represents a system of economic financial and budgetary information on the activities carried out by those entities This information is provided to their governing and management bodies to policymaking bodies to external and internal control bodies and to international agencies with the aim of determining the costs of the public services and facilitating management and decision making For all the above reasons and for the purpose of their subsequent consolidation the accounts of those entities must be filed in accordance with the applicable accounting principles using a standardised form Once the information is generated the heads of the entities and bodies known as cuentadantes reporting officers that is the authorities and officials who are responsible for managing revenues and carrying out expenditure and the other operations of the general state administration submit their accounts to the IGAE for subsequent consolidation and reporting to the Court of Auditors With regard specifically to the issue of liability public managers may incur three types of liability when carrying out their activities disciplinary criminal and financial The LGB is concerned with the latter in conjunction with the rules contained in the legislation of the Court of Auditors concerning accounting liability Financial liability relates to the obligation to compensate the public treasury for injury caused to it while accounting liability relates to liability resulting from the accounts which must be filed by those who manage public funds cuentadantes Accordingly the Spanish rules provide that the authorities and other staff in the service of entities comprising the state public sector who intentionally or through gross negligence adopt decisions or perform acts in infringement of the provisions of that law are required to compensate the state public treasury or where appropriate the relevant entity for the damage resulting therefrom irrespective of any criminal or disciplinary liability which they may incur Thus the legislative provisions provide that the following constitute offences bringing about a deficit or making a misappropriation in the administration of public funds managing resources and other interests of the state public treasury without complying with the provisions governing their assessment collection or receipt in the treasury incurring expenditure settling obligations and ordering payments without sufficient credit to carry them out or in infringement of the provisions in that law or in the applicable budget law generating recoverable payments failing to substantiate the payment of funds intended for cash advances payments to be substantiated and subsidies or any other act or decision in infringement of that law In regard to the responsibility of public managers significant new elements are introduced by the recently approved Law on Transparency Access to Public Information and Good Governance which together with increasing and strengthening transparency in public activities and guaranteeing access to information lays down obligations of good governance applicable to public managers as well as the judicial consequences deriving from their nonfulfilment In brief its aim is to reinforce the principle of responsibility and its enforceability among all those entrusted with activities of public interest 322 With respect to good governance a regulation with the force of law incorporates programmatic principles for interpreting the enforcement of a penalty regime which is applicable to all public managers on the basis of their individual liability Thus it lays down a penalty regime in the area of economic and budgetary management to ensure that all actions of public managers are in compliance with the principle of responsibility The regulation also provides for violations deriving from noncompliance with Organic Law 22012 of 27 April 2012 on budgetary stability and financial sustainability A fundamental control mechanism has been introduced to ensure accountability in the decisions of public managers The law provides that commission of the aforesaid violations shall result in the application of penalties such as dismissal from public posts denial of pensions the obligation to reimburse any amounts illegally received and the obligation to indemnify the public treasury It also lays down that those found guilty of very serious violations may not be appointed to certain public posts for a period of 5 to 10 years This penalty procedure laid down in the law on good governance can be filed alongside the asset liability procedure pursuant to the LGB Finally it is necessary to highlight the features of the internal controls of the public sector in Spain and the objectives of the controls carried out by the IGAE which are laid down in the LGB With regard to features the following should be highlighted a They are carried out with full independence from the authorities and bodies which are subject to controls b They are carried out by means of the preliminary control of legality permanent financial control and public auditing control c They are carried out in a decentralised manner in accordance with the powers of the body which is subject to controls d They take as an overall frame of reference both the legal aspect or compliance with the legislation and other fundamental principles relating to public sector activities such as economy efficiency effectiveness sustainability and balanced budget As regards objectives the following should be highlighted 1 Checking compliance with the rules applicable to the management subject to controls This relates to compliance with the law in the traditional form of controls based on the fact that all the activities of the administration are subject to the legal system This is a control objective set out in the LGB the attainment of which is provided for in the three forms of controls preliminary control of legality financial permanent control and public auditing 2 Ensuring the appropriate recording and accounting of transactions made and accurate and regular recording in the accounts and statements which under the applicable provisions must be drawn up by each control body or entity This seeks to establish the reliability of accounting documents relating to economic and financial management that is undertaken The LGB requires state public sector entities to record their transactions in accounts and to file accounts with the Court of Auditors through the IGAE 3 Assessing whether the activities and procedures subject to controls are carried out in accordance with the principles of sound financial management and in particular those provided for in the General Law on Budgetary Stability This means that the activity must be subject to the principles of effectiveness 323 efficiency and economy verification of which is carried out using the two forms of subsequent controls 4 Verifying compliance with the objectives assigned to expenditure management centres in the general state budget This relates to achieving the objectives assigned to the management centre in the general state budget in accordance with the provisions of the LGB Over the last two years the Spanish treasury has implemented funding mechanisms supporting liquidity for territorial administrations to mitigate the effects deriving from restrictions placed on Autonomous Communities and councils in obtaining resources on the financial markets which has resulted in an accumulation of commercial debt These additional funding mechanisms are subject to a specific fiscal condition consisting in an adjustment plan which lays down specific conditions on monitoring and adoption of extraordinary adjustment measures for achieving the objectives of budgetary stability public debt limits and obligations on payments to suppliers intended to limit delinquency on commercial markets Alongside the regular internal control competencies the internal inspectorsauditors of these territorial administrations are required to submit a report on the execution of adjustment plans to the Ministry of Treasury The Ministry of Treasury as part of its monitoring of adjustment plans and in order to ensure reimbursement deriving from the amounts specified in debt operations may arrange depending on the risk of default for these to be subject to controls by the IGAE These control measures within the Autonomous Communities are to be implemented in cooperation with their internal control bodies 32 Internal audit The subsequent financial controls are defined in the LGB in their twofold form of financial permanent control and public auditing which constitute the internal audit system together with the financial controls of public subsidies and aid However in the Spanish system great importance is attached to an ex ante form of control called the preliminary control of legality The preliminary control of legality covers the control prior to their approval of acts of the state public sector resulting in the recognition of rights or the incurring of expenditure and the revenues and payments arising therefrom and the investment or general application of its public funds in order to ensure that their management complies with the provisions applicable in each case With regard to application the LGB states that preliminary control of legality is to be exercised with respect to acts of the Spanish State administration including social security and its independent bodies The preliminary control of legality is exercised in the forms of formal and material control Formal control consists in verifying compliance with the legal requirements necessary for adopting a decision by examining all the documents which compulsorily must be included in the file The material control involves checking the actual and effective application of the public funds The exercise of the preliminary control of legality includes a the preliminary control of acts which recognise economic rights approve expenditure enter into spending commitments or agree to the movement of funds and securities b the control of recognition of obligations and of verification of investment 324 c formal control of the authorisation of payments d the material control of payments This preliminary control may be full or limited depending on the type of file Full control involves checking the compliance of all processes and requirements established by the legislation in examining the documents and reports included in the file Limited control or preliminary control and audit of basic requirements involves checking a number of details specified by Resolution of the Council of Ministers Meanwhile if in accordance with the law the preliminary control of legality were mandatory and were not carried out neither the payment obligation nor the processing of the payment would be permitted until the omission is rectified within the terms of the LGB with the Council of Ministers responsible for adopting the pertinent resolution If during the preliminary control or audit the inspectorsauditors should be in disagreement with the managers activity they shall file an objection which will suspend processing of the file until it is resolved If the managing body does not accept the objection it must submit a written disagreement to the IGAE initiating a contradictory proceeding which shall be resolved depending on the case by the IGAE or the Council of Ministers For its part the financial permanent control forms part of the subsequent control and includes the following measures a verification of compliance with the rules and procedures applicable to the aspects of economic management which the preliminary control of legality does not cover b monitoring of budget implementation and verification of compliance with the objectives assigned to the management centres spending programmes and checking the balance sheet of results and the management report c reporting on the proposed distribution of the revenues referred to in the LGB d checking cash planning and management and the cash position e the measures provided for in the remaining titles of that law and in the other budgetary rules and rules governing the economic management of the state public sector attributed to the delegated controls f Analysis of operations and procedures in order to provide an assessment of their financial and economic rationale and their observance of the principles of sound management with the aim of identifying possible shortcomings and proposing recommendations in order to correct the latter g In the ministerial departments and managing entities and common services of social security use of audit methods to check whether the economic data and information provided by the managing bodies in support of accounting information reasonably reflect the operations deriving from their activity The IGAE shall establish the procedure scope and frequency of the measures to be implemented The financial permanent control measures to be implemented in each financial year and the specific scope determined for them is to be established in the annual financial permanent control plan prepared by the IGAE which may be amended where the prevailing circumstances so warrant The aforementioned measures are documented in reports which are submitted to the body directly managing the activity subject to controls 325 A comprehensive report on the results of the financial permanent control measures taken during the year is drawn up annually and sent by the Comptroller General to the heads of each ministerial department to the Minister for Economy and Finance and to the State Secretary of Finance and Budget The public audit consists in the auditing carried out subsequently and systematically of the economic and financial activities of the state public sector by applying the selective review procedures contained in the auditing rules and directions issued by the IGAE Auditing rules in the public sector field are governed by the LGB circulars instructions and the Public Sector Auditing Rules The IGAE compiles an Annual Audit Plan which includes measures to be implemented during the corresponding financial year Similarly the Annual Audit Plan includes measures relating to public aid and subsidies Public auditing is carried out on the basis of the provisions in the Annual Audit Plan on all bodies and entities forming part of the state public sector and on the funds referred to in the LGB without prejudice to measures relating to the exercise of the preliminary control of legality and financial permanent control and to the measures subject to private auditing under Law No 191988 of 12 July on the auditing of accounts which are applicable to stateowned commercial companies under commercial legislation The following types of special public audits included in the law may be highlighted 1 Audit of annual accounts This is the method of auditing the regularity of accounts which is intended to ensure that the annual accounts represent in all significant respects a true picture of the assets financial position and results of the entity and where appropriate implementation of the budget in accordance with the applicable accounting and budgetary rules and principles and that they contain the information necessary for their interpretation and proper understanding 2 Compliance audit The IGAE carries out a compliance audit on those bodies and entities of the state public sector that are included in the Annual Audit Plan which audit includes selective checks on compliance with the legislation on budget management procurement personnel revenues and subsidies management as well as any other aspect of the economic and financial activity of the audited entities 3 Operational audit The IGAE carries out an operational audit on those bodies and entities of the state public sector that are included in the Annual Audit Plan and which has the scope laid down in that plan through the procedures outlined below a Audit of budgetary programmes this consists in the analysis of the suitability of the objectives and the monitoring and selfassessment systems put in place by the management bodies the verification of the reliability of the account balance sheets and management reports and the assessment of the outcome achieved the alternatives considered and the effects produced in relation to resources used in the management of budgetary action programmes and plans b Audit of systems and procedures this consists in the thorough examination of a financial management administrative procedure in order to identify its possible shortcomings or where appropriate its obsolescence and to propose appropriate corrective measures or the replacement of the procedure in accordance with general principles of sound management 326 c Audit of economy effectiveness and efficiency this consists in the independent and objective assessment of the level of effectiveness efficiency and economy achieved in the use of public resources 4 Audit of programme contracts in situations where under programme contracts or other agreements between the state and entities referred to in the LGB the amount of contributions to be made by the state is conditional on achieving certain objectives on the amount of or change in certain financial indicators or on certain macroeconomic assumptions being met the IGAE must carry out an audit which is intended to verify whether the settlement proposal made by the body set out in the agreement meets those conditions 5 Audit of state tax accounts the audit of state tax accounts and the resources of other administrations and public bodies managed by the State Tax Administration Agency Agencia Estatal de Administración Tributaria are to take place annually in accordance with the procedure established by the IGAE for that purpose 6 Audit of privatisations the IGAE must audit each operation to dispose of securities representing the capital of state commercial companies that entails for the state public sector the loss of political control of such companies This audit is to be carried out on the accounts of the financial and accounting results and the explanatory note concerning aspects of the operation which must be issued for each disposal operation referred to above The IGAE may decide to carry out audits which combine auditing objectives relating to accounting regularity compliance and operations To carry out the controls resulting from this plan the IGAE may seek the cooperation of private auditing firms that must comply with the rules and directions established by the IGAE The results of each public audit measure are recorded in written reports and prepared in accordance with the rules approved by the IGAE which must determine the content the addressees and the procedure for the preparation of those reports The public audit report is sent to the direct head of management of the relevant body Final public audit reports are sent both to the direct head of management of the body subject to the control and to the head of the ministerial department to which it is attached or to which the body or entity subject to the control is accountable At the same time with respect to financial permanent control measures the corresponding annual reports are sent to the head of each ministerial department containing the most significant results from the financial permanent control measures implemented both within the department and in the public bodies and entities subject to this type of control This informing of department heads of control results is done periodically every six months submitting before 31 January and 31 July each year the reports issued during the previous semester In addition to the issue of individual financial permanent control and public audit reports in conformity with Articles 1461 and 1665 of Law 472003 of 26 November on the general budget and with the objective of furnishing the Council of Ministers with organised information on the economic and financial management of the state public sector the IGAE submits annual general reports to the Council of Ministers containing the most significant results from the implementation of the annual financial permanent control and public audit plans for each year in the general report on account audits completed in particular mention is made of the exceptions contained in those reports With respect to monitoring the correction of issues identified in financial permanent control and public audit reports it is also necessary to emphasise the importance of the performance reports The IGAE may prepare these reports on the basis of the recommendations and proposals for action for managing bodies contained in the annual 327 reports of financial permanent control and the public auditing reports In drafting these types of reports some of the following circumstances must be met a where shortcomings have been identified and the heads of management subject to controls fail to indicate the measures necessary to resolve them and the planned deadline for doing so b where they express disagreement with the conclusions and recommendations and those points of disagreement are not accepted by the control body c where having agreed to do so they fail to take measures to remedy the shortcomings identified Those performance reports are sent to the head of the ministry having responsibility for the body or entity subject to controls or to which that body or entity is attached and in the event of disagreement by the head of the ministry will be referred to the council of ministers through the Minister for Finance Decisions to that effect adopted by the council of ministers are binding on both the management and the control bodies The IGAE carries out continuous monitoring of the corrective measures that have been adopted as a result of shortcomings identified in the reports In order to enhance the effectiveness of the reports issued by the IGAE so that they may contribute to the attainment of the primary objective of the control measures that being the constant and permanent improvement of public management from economic financial asset budgetary accounting organisational and procedural perspectives measures have been adopted recently whereby managing bodies are to be more proactive in adopting the appropriate corrective measures and in setting a schedule for remedying any discrepancies identified and for the implementation of measures for repairing or avoiding damages caused to the public treasury or to the managing body itself The internal control system has integrated measures for monitoring the corrective measures adopted by managing bodies in order to check whether they resolve discrepancies identified in the financial permanent control and public audit reports and report any general improvements in the observance of the principles of sound public financial management and particularly the fulfilment of legality in the reliability of public accounts and in the objectives of financial equilibrium and sustainability These measures supporting the monitoring and correction of discrepancies have been formalised in a Resolution of the Council of Ministers in which the government provides that each ministerial department shall draw up a Plan of Action in conformity with the IGAE laying down measures to be adopted for remedying weaknesses discrepancies errors and violations identified in the reports drawn up by the IGAE The IGAE shall periodically inform the Council of Ministers on the situation of the correction of weaknesses identified in the financial permanent control and public audit reports thus enabling the government to periodically monitor the corrective measures implemented to improve the economic and financial management of the state public sector 33 Coordination of public internal control Political and administrative decentralisation to territorial authorities in Spain Autonomous Communities and local authorities has led to a process of transfers and a resizing of the various levels of political and administrative power which necessitates a tight system of controls and coordination and cooperation among all the entities comprising the Spanish public sector understood in a broad sense 328 This process of transfers in the area of controls has been accompanied by the replacement of a single form of internal control carried out by the IGAE with a model based on several organs and systems of control which are functionally independent but organically under the authority of the administration of which they form a part The IGAE shares responsibilities for controls of economic and financial activities with the General Control and Audit Offices of the Autonomous Communities and the General Control and Audit Offices of the local authorities each one acting within its own clearly delineated area of competence and territorial scope The constitution itself contains a number of criteria for controls relating to autonomous community bodies and to the exercise of their financial powers In addition it is important to highlight a number of previously mentioned legislative provisions which affect the exercise of the economic and financial powers of the various territorial authorities such as the LGB and the law supplementary to the Law on Budgetary Stability which while respecting the autonomy of the Autonomous Communities seeks to coordinate their economic and financial activities with the rest of the public sector The framework of controls in Spain is therefore characterised by the fact that within the three territorial administrations there are internal and external controls carried out by separate bodies and with the aim of coordination between them and with the state thereby establishing as a general rule a budgetary accounting and control framework similar to that of the state However in Spain the model of controls seems to be determined both by political and administrative decentralisation of the state where each territorial administration has its own control bodies and by the fact that Spain forms part of a supranational structure the European Union which in turn also has internal and external controls All the above requires the introduction of mechanisms for coordination in carrying out control activities which avoid overlaps and duplication The single audit concept includes techniques and procedures that may allow cohesive action by all the control bodies in a state based on a wholly or partially common methodology and on mutual recognition of the results of control measures We advocate neither the abolition of nor a reduction in the number of control bodies whose existence and legitimacy should not be called into question but rather the elimination of unnecessary duplication in those cases where separate control bodies carry out their activities with the same subject matter and scope and in respect of the same public body In short the ultimate aim of a single auditing system is to support in a more effective way the activity of control bodies On the basis of these premises the single audit concept observes the following three principles a The establishment of a single conceptual framework for all control bodies as well as common methodological rules for carrying out controls In that regard it is essential that there be technical rules for controls and auditing which allow the application of common standards for carrying out the work and issuing reports b The coordinated planning of control activities so that the control plans of controlling institutions should take into account the control planning of each institution in order to avoid possible overlaps Coordination at that preliminary stage presupposes the existence of continuous communication and interaction between controlling bodies and the agreement of a system for determining precedence in cases where provision is made for carrying out controls on the same administrative bodies 329 c Each control body must accept the results of the work carried out by other control bodies provided that that work has been conducted in accordance with approved common methods and procedures as well as supervision by the principal auditor of the work of other auditors involved in ensuring that the work of the participating bodies has been conducted in accordance with the established standards The main effect implicit in that model is the reduction and elimination of costs both for control bodies and for the bodies subject to audit activities The removal of unnecessary elements in the implementation of control measures allows control objectives and strategies to be established in areas where such controls have not been carried out by any administrative body a fact which requires a proper system for the recognition and planning of measures Among the instruments included within the single auditing framework which are already being applied in the field of controls of EU funds it is important to emphasise the preparation of documents for coordination between the IGAE and the control and auditing bodies of the Autonomous Communities such as a guide for the auditing of systems and operations standard contract documents for the appointment of private auditors minimum requirements to be imposed when appointing private auditors a quality control guide a procedure for random sampling error identification and issuance of opinions a procedure for reporting issues to the European AntiFraud Office hereinafter OLAF via the IMS application 4 Recent reforms affecting the Spanish government The control of public sector economic and financial activity must be inline with the changes in the current economicfinancial situation As the situation evolves and shifts towards the attainment of specific goals or it takes on new forms control over it must be sufficiently flexible so that it can be shaped according to the object to which it is applied In mid2012 the government initiated a programme of reforms aimed at overcoming the economic crisis correcting the discrepancies that were halting growth and creating suitable foundations on which to build a new cycle of economic prosperity and employment for Spaniards It was with these aims that the Public Administration Reform Commission hereinafter CORA was created with the purpose of implementing measures for evolving towards an austere and more efficient public administration Numerous measures were adopted for streamlining structures procedures and resources In this respect the Organic Law on budgetary stability and financial sustainability constitutes a milestone in the public resources management in that it lays down specific spending and debt targets for all administrations as well as the obligation to submit plans for attaining those targets and the related mechanisms for ensuring they are achieved The Commission has focused its efforts in different areas Administrative duplications Aimed at identifying and eliminating duplications and strengthening cooperation mechanisms in order to reduce administrative costs 330 Administrative simplification Aimed at reviewing bureaucratic obstacles which impede the processing of administrative proceedings in order to achieve greater simplification which will in turn benefit the public Management of services and common resources Aimed at centralising management activities which being similar or identical in nature can be carried out in a unified or coordinated manner in order to maximise the use of public resources In this group it is essential to study successful models already implemented among Spanish business groups drawing both information and collaboration therefrom Institutional administration Research is ongoing into the different types of entities this includes in order to review the regulatory framework and what are the considered to be the best models The following are measures affecting the management of public resources which have been implemented to date A BUDGETARY DISCIPLINE AND PUBLIC TRANSPARENCY The Organic Law on budgetary stability and financial sustainability as already referred to on numerous occasions which lays down the principle of budgetary stability as provided for in the Spanish Constitution The rules on late payments in the public sector On 20 December 2013 Organic Law No 92013 on controlling commercial debt in the public sector was approved extending the control of public sector financial debt to the control of commercial debt considered as the volume of debt owed to suppliers of the public administrations This law was passed in order to limit delays in payments to suppliers and to eradicate late payments among the public administrations With this in mind and as an indicator of commercial debt volume it was made mandatory for public administrations to publicise the average time it takes them to pay their suppliers the legal deadline for which is 30 days by law The law requires that administrations include in their treasury plans information on payments to suppliers to ensure their financial management falls in line with supplier protection This is supplemented with measures to be unilaterally applied by each administration upon discovering average payment periods which exceed the permissible limits In the case of local corporations the law provides that the controllingauditing body shall be responsible for monitoring compliance with the average payment term This increases the involvement of inspectorsauditors in controlling local sustainability to give suppliers backing The Law on Transparency Access to Public Information and Good Governance The Law on Transparency has recently been approved by Law 192013 of 9 December 2013 on transparency access to public information and good governance This law has introduced figures and elements of transparency which will help society scrutinise the actions of public managers by giving them the tools they need to find out how decisions which affect them are made how public funds are managed and under what criteria our institutions are operating The scope of this law is threefold it increases and strengthens transparency in public activity imposing active advertising obligations for all administrations and public entities it grants and guarantees access to information regulated as a law with a broad subjective and objective scope and it lays down obligations of good governance to be fulfilled by public managers along with the judicial consequences resulting from nonfulfilment forming a responsibility which falls upon all those which carry out activities of public significance 331 As regards the specific scope of control in question the law introduces the obligation to publish together with annual accounts account audit reports and reports from preliminary controls drawn up by external control bodies on them Creation of an Independent Authority for Fiscal Responsibility Together with the legal measures approved for guaranteeing budgetary discipline the government is developing an improvement in economic governance to ensure greater control of budgetary discipline In this respect in early 2014 Organic Law 62013 created an Independent Authority for Fiscal Responsibility which will serve as a key element of governance for the government when it comes to designing implementing and evaluating fiscal policies Its creation is particularly appropriate in light of the current financial and fiscal crisis in which it is essential to ensure tight and comprehensive control of compliance with the objectives of budgetary stability and public debt as well as regulating spending This Organic Law reinforces the commitment to ensuring an effective monitoring of compliance with the targets on budgetary stability public debt and regulated spending through the introduction of new mechanisms for supervision and transparency within our budget framework establishing an independent fiscal institution which effectively monitors compliance with fiscal rules based on reliable and independent analysis vying for strict compliance with the principles of budgetary stability and financial sustainability through continuous evaluation of the budget cycle and public debt and analysis of economic forecasts B RATIONALISATION OF THE LOCAL PUBLIC SECTOR The local administration has been heavily reformed by Law 272013 of 27 December 2013 on rationalisation and sustainability of the local administration which recently took effect The reform of Article 135 of the Spanish constitution in its new version issued in 2011 establishes budgetary stability as a guiding principle to be followed in the actions of all public administrations In implementing this constitutional provision Organic Law 22012 of 27 April 2012 on budgetary stability and financial sustainability was passed which provides for new adaptations to the basic regulations on local administration to ensure an adequate application of the principles of budgetary stability financial sustainability and efficiency in the use of local public resources This requires adapting certain aspects of the organisation and functioning of the local administration and improving its economic and financial control With this in mind this reform was proposed which pursues several basic targets clarifying municipal competencies to avoid duplicities with the competencies of other administrations thus adhering to the one administration one competency principle rationalising the organisational structure of the local administration based on the principles of financial efficiency stability and sustainability ensuring a stricter financial and budgetary control and supporting the private economic initiative to avoid disproportionate administrative audits Regarding the aim of clarifying local competencies and carrying forward the one administration one competency principle efforts will be made to avoid existing problems with competencies overlapping between administrations At a time when the fulfilment of European commitments on fiscal consolidation are a top priority the local administration must also contribute to this objective by rationalising its structure which is in some cases oversized and ensuring financial sustainability 332 Local administration reform is carried out on the one hand to try to accurately define the competencies applicable to the local administration and to distinguish them from state and autonomous competencies and on the other hand to ensure a stricter economic and budgetary control reinforcing the role of the preliminary control of legality in local entities Accordingly as of this point in time the government will establish rules on control procedures a methodology of application and implementation criteria as well as rights and duties in the implementation of public functions necessary in all local corporations This will cover a gap in the law and facilitate the generalised application of techniques such as auditing in its different forms to local entities under the same terms as those implemented in other areas of the public sector This will involve the participation of the IGAE Similarly with the goal of strengthening its independence with respect to local entities in which nationallyqualified public servants provide their services the state shall be responsible for their selection training and qualification and shall hold powers to issue penalties for the most serious violations This proposal will ensure a greater transparency of economic and financial information in local entities which will undoubtedly help to improve decisionmaking by elected officials in the exercise of their constitutionallyassigned representative roles Accordingly there is a need to clarify and define the different areas in which specific functions are to be carried out While the functions under the regime of preliminary control of legality and auditing are subject to parameters of control and internal auditing of economic financial and budgetary management those corresponding to elected positions are based by necessity on aspects of opportunity or convenience To guarantee the professionalism and effectiveness of internal control functions the law also regulates the regime of local administration civil servants qualified to work in any national entity C IMPROVE THE EFFICIENCY OF PUBLIC ADMINISTRATIONS Law on electronic invoicing and creation of the accounting register The approval of Law 252013 of 27 December on electronic invoicing and creation of the accounting register for invoices in the public sector together with the measures from the law on control of commercial debt will help to expedite procedures for payments to suppliers and provide security in regard to unpaid invoices The law establishes an electronic invoice control system which by facilitating the tracking of invoices will better protect suppliers against administrative delinquency easing their relations with public administrations Similarly this protection will also be reinforced with a greater accounting control of invoices received by administrations which will not only help improve the monitoring of compliance of public administrations with payment obligations but also provide greater control over public spending and the deficit generating greater confidence in public accounts In relation to the IGAE and the equivalent control bodies at the autonomous and local levels these shall have access to substantiating documentation to the information contained in the invoice accounting register and to public accounts at any time and shall draw up an annual report evaluating compliance with the regulations on delinquency Reform of the law on subsidies A draft law is currently in process for amending General Subsidies Law 382003 of 17 November with the aim of intensifying the fight against fraud and corruption The draft contributes to the principle of transparency through a reconfiguration of the National Subsidies Database which in addition to being a tool which is essential to combatting fraud will also now be used as a source of public information The IGAE is in 333 charge of the administration and safekeeping of the national subsidies database and will take the necessary steps to guarantee the confidentiality and security of the information it contains Another introduction is its inclusion of a penalty system for cases of non fulfilment of obligations to provide information to the national subsidies database Meanwhile the control procedure is supplemented with the subsequent repayment procedure Through this model the IGAE is entrusted with settling repayments deriving from controls carried out by its control bodies This solution aims to a Reduce administrative and financial burdens on entities subject to controls b Simplify the procedure and shorten processing times which are reduced by up to one year c Smoothly link repayment control procedures with the penalty procedure d Strengthen the role of the IGAE as the universal body for subsidy control which it implements selectively and intensively and as a means of securing and ensuring the correct application of subsidies Finally as a mechanism for combatting fraud and corruption the Spanish AntiFraud Coordination Service Servicio Nacional de Coordinación Antifraude was created for cooperation with OLAF 334 SWEDEN Public internal control This contribution is not an updating but replaces the original contribution on the PIC Compendium 2012 1 Brief history of the development of internal control in public finance Summary of development of public internal management and control The forerunner of todays autonomous agencies was acquired by the public administration at the beginning of the 17th century with authority being exercised independently under the law agency managements being accountable to the government for their operations Secretariats with heads the agencies of those days then began to take charge of public administration As the exercise of authority became more autonomous a system of auditing began to emerge the forerunner of todays standalone internal auditing and independent external auditing 11 The origin and development of internal management and control within the State apparatus In the draft budget for 2007 the government stated that internal management and control in government agencies urgently needed to function effectively draft 200620071 The government considers it vital that the activities of the State should meet the expectations of households and businesses with respect to such activities The most recent formulation of public internal management and control is contained in the Agency Regulation 2007515 the Regulation 2007603 on Internal Management and Control Regulation 2000605 on Annual Accounting and Budget Information and the Internal Audit Regulation 20061228 12 Parallel reforms in the public administration The changes which came about with the advent of the present regulations in the field of internal management and control took place without any other accompanying longterm change in the public administration The developments were however preceded by the introduction of a new accounting model for the public administration freer use of public resources and targetdriven and resultdriven management 13 Pressure from government for continued development It was the Department of Finance in the Swedish Government Offices which took the initiative of drawing up draft statutory proposals in the field of public internal management and control The government adopted new rules on internal management and control environments with the Agency Regulation 2007515 335 on risk management with Regulation 2007603 on Internal Management and Control on internal auditing with the Internal Audit Regulation 20061228 on responsibility for internal management and control with an amendment to Regulation 2000605 on Annual Accounting and Budget Information There had however previously been rules governing the internal management and control environment risk management and internal auditing within the State apparatus 2 The public internal management and control environment Administration in Sweden is based on openness and the rule of law Openness is safeguarded by the public access principle The public access principle provides that documents received by or drawn up at an authority are public documents and accessible to the public There must be explicit grounds in law for a document to be regarded as confidential In their work the agencies must respect the equality of all before the law and exercise objectivity and impartiality No individual department other authority or the Swedish Parliament may decide how an agency should rule in a case affecting the exercise of authority with regard to an individual The agencies are independent in their decisions 21 The national budget and the national accounting model In the national budget procedure the authorities submit an annual accounting statement and annual budgetary information to the government on their operations and the financing of these The agencies annual accounting statements and budgetary information support the governments budgetary work and the work on the governments appropriation directions annual directives on the agencies operations and financing to the agencies The national budget has a ceiling on expenditure and is broken down into areas of expenditure on the agencies operations National accounting records are accrualbased and each agency has its own general ledger The agencies general ledgers are aggregated and consolidated in the central government accounts The consolidation depends on the agencies complying with the ordinary rules of central government accounting Central government accounting also includes accounting for appropriations and income headings in the national budget 22 Budgeting by purpose The national budget is broken down by different purposes and public resources may only be used by the agencies for those purposes The budget is not broken down into costs for staff and premises or other operating costs 23 The public external audit The annual audit and performance audit by the Swedish National Audit Office come under the Swedish Parliaments control powers The Swedish National Audit Office inspects Parliaments agencies the government and the governments agencies The Swedish National Audit Office is independent in the conducting of its inspections and independent of those it audits 336 The review carried out in the context of the annual audit is done in accordance with good auditing practice and is intended to assess whether the accounting statement is reliable and the accounts are accurate as regards in particular central government and the Swedish Government Offices Inspections are done on the basis of material errors The performance audit reviews the implementation of the national budget and the results of government operations The inspections take the Swedish Parliaments decisions as their starting point and encompass the way the government implements manages follows up and reports to Parliament The Swedish National Audit Office also reviews implementation by the agencies and reporting by them to the government In the annual audit the Swedish National Audit Office reviews and assesses whether the public agencies annual accounting statements are reliable and correct whether the accounts are accurate and whether the agencies comply with current rules and decisions 24 Action against corruption The risk of corruption and irregularities falls within the regulatory framework for an agencys risk management and the assessment of risks by the internal audit team The government has set up a council within the Swedish National Economic Crimes Bureau to safeguard the EUs financial interests in Sweden The council promotes efficient and proper use of EU resources and coordinates measures against undue influence fraud and other irregularities The council has drawn up guidelines for reporting to the Swedish National Economic Crimes Bureau if there is any suspicion of fraud 3 The concept of internal management and control in the public sector Public internal management and control is in addition to the powers held and responsibilities borne by agency managements which follow from the tasks objectives and missions assigned to agency managements in Sections 3 and 4 of the Agency Regulation 2007515 31 Responsibility of agency managements for their operations The purpose of the regulatory framework for internal management and control is to give agency managements assurance that they are discharging their responsibility for the agencies operations The purpose of the regulatory framework is also to give the government assurance that its agencies are discharging that responsibility 311 Assumption of responsibility by agency managements for internal management and control An agency management takes responsibility when it certifies in its annual accounting statement to the government that the information it contains gives an accurate and reliable picture of the agencys operations An agency management also takes responsibility when it delivers an assessment in the annual accounting statement of whether internal management and control at the agency function satisfactorily Introducing an internal management and control environment Agency managements establish rules of procedure and an operating plan for the agency The Head of Agency must ensure that staff are fully aware of the objectives for the agencys operations and must create good working conditions and exploit and develop employees skills and experience These are parts of the internal management and control environment which can be expressed through the regulatory framework 337 Risk management An agency management can delegate the task of identifying evaluating and deciding whether a risk should be accepted or managed in the course of the agencys operations but the agency management is still accountable to the government for the agencys operations Introducing control measures Responsibility for introducing control measures in an agencys operations and the power to do so match the organisational level to which authority to carry out the operations has been delegated Informing and communicating Feedback to an agency management on how the measures taken to manage risks in the agencys operations are functioning is normally given in the same order as feedback to the agency management on the results of other operations Monitoring and control activities and their effectiveness Followup and testing of control activities is a responsibility borne by the person to whom responsibility and authority to take charge of ongoing operations has been delegated within the agency Agency management also decides on guidelines and the audit plan for its internal audit The internal audit review is a basis for ongoing followup and assessment of internal management and control 312 Agency management is accountable for its operations Agency management is accountable for its operations and must ensure that there is satisfactory internal management and control Agency management is appointed by the government but is not appointed to carry out a political management function Agency management consists of a board or failing that a head of agency The head of agency is the agencys highest official 313 Farreaching delegation of responsibility and authority The government delegates its right of decisionmaking to agency managements The delegation is a prerequisite for the functioning of the public administration Normally the right of decisionmaking is also subdelegated within the agencies from the agency management to heads and onwards to other members of staff What cannot be delegated under the Agency Regulation is accountability to the government whether it be the responsibility for its operations or responsibility for ensuring that internal management and control function satisfactorily Decisions on the operating plan rules of procedure and annual accounting statement cannot be delegated either nor can decisions in cases of major significance and involving questions of principle 314 Responsibility for developing and implementing government policy The government manages the agencies by specifying the tasks they are to work on in the instructions to the agencies In the appropriation directions to each agency the government states any objectives and missions for the agencys operations and what financing the agency is being given The agencies must independently carry out their tasks strive to achieve their objectives and implement their missions within the financing framework laid down by the government Under the Constitution neither the government nor individual members of the government may interfere in the exercise of authority with respect to individuals The government normally also gives the agencies tasks to perform other than the exercise of authority This means that in their application of the law the agencies are independent of the government The government may not interfere in individual cases and the 338 government takes decisions on a collegial basis This prevents socalled government by ministers The government does however have the right to give the agencies instructions in cases which directly concern the exercise of authority against an individual 315 Information to agency management It is for agency managements and agency heads to define their requirements for information regarding their work and how internal management and control function In each agency there is an administrative function whose task is to produce the information which the agency management needs 316 Responsibility of agency management for planning its operations Agency management takes responsibility for the operations by drawing up an operating plan covering what the agency is supposed to do and a procedure for how the operations are to be carried out There are no detailed rules as to what is to be included in an operating plan but it allocates the agencys tasks and missions and in general reflects the organisational structure allocation of work and delegation of decisionmaking powers laid down in the procedure 317 The purpose and inclusion of internal management and control The purpose of regulating internal management and control is to give agency management responsibility for ensuring and the tools to ensure that there is satisfactory internal management and control The responsibility involves being able with the help of risk management at the agency to certify that the operations are being performed efficiently and with good housekeeping comply with current law and are reliably and accurately accounted for Internal management and control cover the operations for which the agency management is responsible 318 System for reporting to government The agencies submit an annual accounting statement to the government on the operations performed and the financing of these In the annual accounting statement agency management states whether the report is accurate and reliable If the agency is covered by the Internal Audit Regulation agency management also gives its assessment of whether internal management and control is satisfactory Agency management adopts the annual accounting statement by signing its certification and its assessment The government uses the annual accounting statement for the purpose of following up and testing the work of an agency 32 Internal auditing within the agencies The purpose of the public internal audit is to inspect and propose improvements to internal management and control within the agencies Internal auditing takes place in the agencies with the greatest turnover eg the agencies working on social security pension systems tax collection customs duty collection and others Internal auditing also takes place in agencies administering resources from the EU Public internal auditing is regulated Public internal auditing was introduced by the government and regulated by the Internal Audit Regulation 20061228 The regulation states that public internal auditing must 339 follow good practice Where national conditions warrant applying good practice in a customised manner this is stated in the regulation The regulation states that the agency must arrange for internal auditing in a selfcontained and independent manner as regards the work being inspected and that the internal audit team is led by a head appointed in the agency that the internal audit team reviews the agencys internal management and control in respect of the operations for which the agency is responsible that the internal audit team gives good advice and support to agency management and the head of agency that it is agency management which instructs the internal audit team on its tasks and decides on guidelines and an audit plan for the internal audit that agency management tests for confidentiality and ensures that the internal audit team is given the information it needs A standalone function which is independent in carrying out its reviews The internal audit team is independent in its observations and recommendations which the internal audit team reports to the agency management Agency management decides on guidelines for the internal audit The guidelines deal with the arrangements for internal auditing in the agency and the relationship with agency management and can in particular lay down how internal auditing is organised within the agency how the internal audit team submits proposals for improvements how the internal audit team is given access to the agencys analysis of risks at the agency to whom the internal auditing team can give advice and support what agency managements responsibility for the operations covers and therefore what the internal audit teams remit for review is what adaptations are being made to the operations for the sake of good practice whether and if so how internal auditing is coordinated with any other agency how the internal audit team reports observations and recommendations to agency management how agency management guarantees that the internal audit team has access to information The internal audit team has no tasks apart from the internal audit which is carried out as a review or as advice and support If the internal audit team reviews an operation to which it has previously given advice and support the internal audit team states this in its reporting so that any conflicts of interest will be apparent It is the responsibility of the head of agency to develop and make the best use of employees skills and experience This responsibility also covers the agencys internal audit The internal audit team follows the guidelines for skills development within the agency decided on by the head of agency If an internal auditor is certified this is usually done through the scheme run by the auditors professional association or by other organisations There is no public certification of internal auditors 340 The internal audit team reports to agency management The internal audit team reports the outcome of each completed review to agency management in the form of observations and recommendations The internal audit team usually also submits an annual report to agency management with observations and recommendations collected together The internal audit team communicates its observations to the head of the operation reviewed so that any measures for agency management can be included The internal audits focus is on reviewing internal management and control The internal audit team examines whether the internal management and control process is designed in such a way that agency management can with reasonable certainty discharge its responsibility for the agencys operations The review is carried out on the basis of an analysis of the risks associated with the operations The review is carried out as an audit of operations operational audit which can include input from the financial audit team and the compliance audit team More rarely a review of work results performance audit or the agencys annual accounting statement is included The internal audit team can review transactions to check for effectiveness in the operational system and processes but itself chooses its review techniques and can adapt them according to the needs of the review The internal audit team on request also gives advice and support in its area of expertise to agency management Followup of internal audit reports and suspicions of fraud Agency management decides on measures in connection with the observations and recommendations submitted by the internal audit team in its reports Followup on agency managements decisions regarding measures follows the detailed regulations which agency management has laid down with respect to the operations The internal audit team also checks that the measures decided on by agency management function effectively in the agencys operations In line with good practice the internal audit team informs agency management if there is any suspicion of undue influence fraud or other irregularities in accordance with the guidelines for internal auditing laid down by agency management 321 Internal audit teams relations with external audit teams The public internal audit team shall supply such assistance and such information and particulars as the Swedish National Audit Office may need for its review work The internal audit team usually also on its own initiative submits its audit plan and its audit reports to the Swedish National Audit Office for information 322 Audit committees are uncommon An audit committee can prepare cases before a decision is taken but cannot function as a board of directors It is agency management which decides on the guidelines and audit plan for its internal audit The internal audit team also reports the outcome of the review to agency management The agencies can themselves decide to set up an audit committee but few agencies have decided to do so If an agency sets up an audit committee the agencys guidelines for the internal audit team must state how the internal audit team is to cooperate with the audit committee 341 33 Coordination of public internal management and control The coordination of internal management and control and internal audit is mainly done in accordance with the governments regulations and the National Financial Management Authority EkonomistyrningsverketESV rules for these regulations The ESV also coordinates the agencies by advising on the application of the regulations 331 Coordinating function with respect to internal management and control and internal audit The ESV is the governments coordinating authority Central Harmonising Unit and national contact point for internal management and control and internal audit The coordination of the public internal audit is done by the ESV issuing rules and giving support with respect to the application of the Regulation on Internal Management and Control the Internal Audit Regulation and the Regulation on Annual Accounting and Budget Information The ESV provides support in the form of methods guidelines studies training and advice There is also an internal audit council at the ESV The councils task is to give the head of the ESV advice on promoting the development of the public internal audit 332 Regular followup of internal management and control and internal audit Once a year the ESV conducts an assessment of how well the agencies are complying with the provisions on accounting financing internal management and control and internal audit The ESV communicates this to the government and the government uses the information in its followup and testing of the agencies work The ESV also assesses the possibility of using the review carried out by the agencies internal audit teams for the opinion on the administration and control system in the agencies which administer EU resources It is however unusual for the ESV to rely on a review carried out by an agencys internal audit team 4 Financial inspection There is no agency whose task is to conduct a financial inspection of the use of the national budget The use of the national budget is covered by annual auditing by the Swedish National Audit Office 41 Audit of EU resources The government has designated the ESV as the auditing agency for all EU programmes in Sweden executed on a shared management basis between the Commission and a Member State The mission includes ensuring both that audits are carried out to check that the management and control system functions effectively and that an appropriate selection of initiatives is covered by auditing with a view to checking the expenditure declared to the Commission The ESV is also the certifying body for the agricultural funds in Sweden As the certifying body the ESV approves the paying bodys accounts as to their truthfulness completeness and accuracy This is done having regard to the system which the agencies have set up for management and control The tasks of acting as auditing agency and certifying body are centralised in one agency the ESV The ESV is organisationally and operationally distinct from the agencies which implement EU programmes The ESV plays no part in the management of programmes 342 The ESV communicates the results of the audits by means of audit reports and annual control reports which are sent to the Commission The ESV also submits a combined account of the control reports to the government 5 Ongoing or future improvements At present no major overall improvement work is under way in the public administration Each agency is however supposed to develop its work on an ongoing basis and is under an obligation to raise productivity and reduce costs in its work This requirement entails ongoing development in the public administration No improvement work affecting the regulatory framework for public internal management and control is under way either There is however ongoing development in the application of the regulatory framework at the responsible agencies concerned 343 UNITED KINGDOM Public internal control 68 Summary of the major changes in 20112013 1 Replacement of Government Internal Audit Standards with Public Sector Internal Audit Standards applicable across the UK public sector from April 1st 2013 2 Requirement for Accounting Officers to sign an annual Statement on Internal Control replaced by annual Governance Statements as a key element of annual reports and accounts 3 Audit Committees now usually termed Audit and Risk Assurance Committees 4 Orange Book risk management guidance has been supplemented by a risk management annex to Managing Public Money guidance 5 Emphasis that internal audit plans should be risk based 6 New arrangements are to be put in place for the external auditing of local public bodies in the UK to replace the Audit Commission 7 Requirement for five yearly external quality assurance reviews of government internal audit services to be carried out by a fully independent organisation 8 More emphasis on use of three lines of defence assurance model 9 Information included on internal audit transformation Internal Audit Shared Service Groups with associated cross government governance arrangements have been established from April 2013 Subsequently a decision has been to consolidate incrementally into a single Government Internal Audit Service which will be an independent agency of the Treasury 1 Brief history of present PIC systems The main origins of the current system of accountability and audit date back to the major reforms of public finance and parliamentary accountability in the 1860s The primary concepts hold true to this day whereby the seniormost civil servant in each department is responsible directly to parliament for its effective management and the Comptroller and Auditor General C AG working through his staff in the National Audit Office NAO remains an independent source of assurance to parliament Central government has always been judged on its ability to effectively implement policy Throughout the 1960s and 1970s other important factors came to the fore such as efficiency performance value for money and customer responsiveness In the 1980s there was significant structural change to government with the breaking away of service delivery components from policy formulation to create executive agencies This separation of policy and delivery remains a key part of the way government works today 68 Contributed by HM Treasury 344 with accountability established at each level but with the Departmental Accounting Officer expected to exercise effective oversight of any subsidiary From the late 1980s in response to findings from an NAO report the Treasury established a central unit to oversee the quality and calibre of internal audit across government It did this by establishing internal audit practice and competence standards The previous Government Internal Audit Standards have been superseded from April 2013 by the Public Sector Internal Audit Standards PSIAS which apply to all UK public sector bodies and incorporate the international standards of the Institute of Internal Auditors IIA In line with governance developments in the private sector the focus of internal audit has evolved from a control focus to a riskbased approach as incorporated into the standards 2000 onwards was a period of significant change across government A highprofile programme of work was instigated aimed at strengthening risk management across government This ran from 2002 to 2006 introducing central guidance on the principles of risk management and a maturity assessment framework to support ongoing improvement Another significant development in 2002 was the requirement for the Accounting Officer to sign and disclose a Statement on Internal Control SIC in the Annual Report and Accounts From 201112 this was superseded by a Governance Statement which covers the same material as the SIC but in addition draws in wider governance reporting including on risk management While much of this was already required on a complyorexplain basis as part of governance reporting the governance statement now puts these disclosures in one place Complementary developments were occurring in the move from cashbased accounting to resourcebased accounting increasing openness in relation to financial reporting and the use of assets In 2005 the first Corporate Governance Code for central government departments was produced Until this point boards had existed only in some parts of government but the code mandated the existence of boards for all central government departments supported by an independent audit and risk assurance committee The Corporate Governance Code and supporting Audit and Risk Assurance Committee Handbook made it clear that audit and risk assurance committees were to be made up of independent non executive directors to provide an independent challenge to the executive and to enhance the independence and focus of internal and external audit These changes were designed to align central government with best practice in the private sector Whilst different political views have influenced the size and shape of central government the principles of good governance control and risk management and openness and transparency have remained constant The role of the Accounting Officer has been central to accountability in central government over the years separating the day to day management of the civil service from undue political influence The basic concepts have changed very little Regularity propriety and value for money remain key objectives as does feasibility and the need to avoid waste fraud poor control and other management deficiencies The Treasury leads on governance and financial discipline working hand in hand with the Cabinet Office on these and other policy issues informed by the findings and advice of the NAO and the Public Accounts Committee a parliamentary committee that reviews valueformoney issues across government and developments in private sector corporate governance 2 Public internal control environment The internal control environment in the UK operates within a framework of governance and financial discipline designed specifically for the central government environment It is allied to the corporate governance requirements that operate in the private sector but has been adapted to reflect the unique accountability structures in the government sector The duty to safeguard public funds is central to this 345 The Treasury The Treasury sets the ground rules for the administration of public money and is accountable to Parliament for doing so Devolved governments may use their own interpretation of these ground rules but are usually very closely aligned Accounts are produced on a resource accounting basis reporting on the expenditure of central government and analysing expenditure by objectives and operating segments Accounts are based on International Financial Reporting Standards The powers used to deploy public resources are a blend of common law primary and secondary legislation parliamentary procedure the duties of ministers and other long standing practice or precedent The relationship between the government acting on behalf of the Crown and Parliament representing the public is central to how public resources are managed Ministers seek to implement government policies and deliver public services through public servants but are able to do so only when Parliament grants the right to raise commit and spend resources It falls to the Treasury to respect and secure the rights of both government and Parliament in this process Civil servants are also bound by ethical and behavioural rules as set out in the Civil Service Code for example setting out the values and the standards of behaviour expected of all civil servants such as integrity honesty objectivity and impartiality There is also a Civil Service Management Code that sets out regulations and instructions to departments and agencies regarding the terms and conditions of service of civil servants and the delegations that have been made to ministers and office holders in charge of departments together with the conditions attaching to those delegations The standards of conduct expected of ministers are set out in the Ministerial Code Ministers have wide powers to make policies and to issue instructions to their officials However specific legislation is required to authorise expenditure of public funds to pursue their objectives Only ministers can make a proposal to Parliament to raise public revenue through taxation or to commit or spend public funds to pursue their policy objectives Taxes may be collected and public funds may be drawn only with parliamentary authority to do so Parliament approves the legislation that empowers ministers to carry out their policies It finances services when it approves requests for resources including approval of net cash resources year by year The Treasury makes sure that departments use their powers only as it has intended and that revenue is raised and resources spent only within the agreed limits The Treasury controls public expenditure therefore all legislation with expenditure implications both primary and secondary must have the support of the Treasury before it is introduced Key to the central control process are the budgets and estimates Departments are allocated budgets split into resource and capital totals In turn each central government department allocates its budget among its own responsibilities cascading provision appropriately to those that receive grants from it eg nondepartmental public bodies NDPBs Within the budgeting framework a variety of mechanisms are used to encourage the wise and effective deployment of public expenditure to meet the governments objectives including delegated authority limits and the requirement for the Treasury to approve all novel and contentious spending The budgeting framework is set out in Consolidated Budgeting Guidance The agreed departmental budgets do not of themselves confer authority to spend or commit resources That requires parliamentary agreement through the estimates process Departmental estimates containing one or more requests for resources RfRs are put to Parliament covering one financial year at a time In turn departmental estimates also contain provisions for cash and other resources to finance their arms length bodies ALBs through grants or loans Departmental select committees may 346 examine the plans contained in departmental estimates Once agreed the estimates become the expenditure limits voted by parliament set in the appropriation acts These provide the legal authority for public expenditure within the ambit which describes the activities on which expenditure is permitted Within the standards expected by parliament and subject to the overall control and direction of their ministers departments have considerable freedom about how they organise direct and manage the resources at their disposal It is for the Accounting Officer in each department acting within ministers instructions to control and account for the departments business The Accounting Officer is usually the most senior civil servant in the organisation and must be able to assure parliament and the public of high standards of probity in the management of public funds The Accounting Officer personally signs the resource accounts the annual report and an annual governance statement Public bodies must provide assurance that they are appropriately managing and controlling the resources for which they are responsible The governance statement is an important accountability document in communicating these assurances to Parliament and citizens The governance statement provides a transparent and accountable report of the control issues and risks faced by central government organisations The governance statement is the means by which the Accounting Officer declares his or her approach to and responsibility for risk management internal control and corporate governance It is also the vehicle for highlighting weaknesses which exist in the internal control system within the organisation It forms part of the annual report and accounts The governance statement is a mandatory disclosure for all central government entities that comply with the treasurys Financial Reporting Manual FReM It is a primary accountability document The external auditors will review the governance statement to ensure that it has been prepared in accordance with government guidance and that it is consistent with the auditors knowledge of the entity All organisations will have developed their own risk management arrangements and management assurances to support regular reporting and incorporation into the SIC This will include how they ensure the efficient and effective conduct of their business and avoidance of waste and fraud There will also be independent internal audit activity as a key component of organisational governance arrangements providing the Accounting Officer with an objective evaluation of and opinion on the overall adequacy and effectiveness of the organisations framework of governance risk management and control The Head of Internal Audits opinions are a key element of the framework of assurance that the Accounting Officer needs to inform hisher completion of the annual governance statement National Audit Office Supported by the NAO the Comptroller and Auditor General C AG helps Parliament scrutinise how public funds have been deployed in practice Independent of the government the C AG is the external auditor of nearly all bodies in central government the devolved governments have their own Auditors General The C AG has significant and farreaching rights to inspect the books of a wide variety of public bodies This includes financial auditing of the resource accounts of departments and NDPBs providing assurance that resource accounts have been properly prepared and are free from material misstatements and providing confirmation that the underlying transactions have appropriate parliamentary authority The NAO also conducts valueformoney reviews assessing the economy efficiency and effectiveness with which public money has been deployed in selected areas of public business The combination of these factors means that the NAO plays a key role in terms of financial discipline propriety and efficiency 347 By reporting the results of audits to parliament the financial statements of all government departments and a wide range of other public bodies the NAO holds government departments and bodies to account for the way they use public money They also help public service managers improve performance and service delivery by producing approximately 60 valueformoney reports per year The NAO works with a range of government and nongovernment bodies to tackle fraud and reduce the cost of fraud to the UK economy Stakeholders include the National Fraud Authority NFA the Cabinet Office Fraud Error and Debt team the CIPFA Better Governance Forum the Audit Commission and the Counter Fraud Champions See below The audit rights of the NAO are vested in the head of the NAO the C AG The parliamentary committee the Public Accounts Commission carries out oversight of the NAO around 900 staff and appoints the external auditors of the NAO and scrutinises its performance These specific powers and duties are laid down in several acts of Parliament which establish the NAO and the appointment of the C AG and place many of the C AGs audits on a statutory footing allow for the carrying out of valueformoney examinations and give the NAO wide rights of access to information for audit purposes Separate legislation provides the legal authority for the C AG to audit the collection of certain taxes duties and license fees and ascertain whether the bodies responsible for collecting revenue have framed and duly implemented adequate regulations and procedures to secure an effective check on the assessment collection and allocation of the revenues for which they are responsible The NAO audit of financial statements is carried out in accordance with International Standards on Auditing UK Ireland issued by the Auditing Practices Board APB NAO output is focused on the following three general areas informed government to encourage government to do more to base its decision making on reliable comprehensive and comparable information financial management and reporting to improve management of activities and to encourage the finance function in departments to make a full contribution costeffective delivery to encourage departments to better understand the key elements in the delivery cycle and what they cost The NAO also reviews governance statements to ensure that they are supported by robust evidence and that the underlying controls are sufficiently reliable 3 The concept of public internal control in your administration 31 Implementation of the control environment Management accountability is clearly established in terms of governance and financial discipline The seniormost official that heads up the department or organisation is normally appointed as its Accounting Officer This accountability will be clearly set out upon appointment The Accounting Officer must establish and document a clear allocation and delegation of responsibilities amongst officials in the department but he or she retains personal responsibility and accountability to parliament for this independent of the minister 348 The Accounting Officer is personally responsible to Parliament for regularity propriety and value for money and feasibility in respect of the use of public money This includes ensuring that there is an effective governance structure and reliable internal controls Other senior officials in a large department may be appointed as additional Accounting Officers but the Departmental or Principal Accounting Officer retains overall responsibility to Parliament for ensuring a high standard of financial management in the department as a whole In line with Managing Public Money it is incumbent upon the Accounting Officer to establish an appropriate control environment suitable for the nature business and unique profile of risk faced by the organisation Financial and functional delegations will be assigned so that the Accounting Officer is supported on the full spectrum of their responsibilities Adequate delegations controls and reporting arrangements must be in place to provide assurance to the board the Accounting Officer and ultimately ministers about what is being achieved to what standards and with what effect In turn these arrangements should provide the management with information to enable delivery plans to be adjusted as necessary Similar feedback should enable ministers to reconsider their policies where the evidence shows that this is appropriate 32 Risk management It is for the Accounting Officer to determine an appropriate and sound system of internal control This includes a robust framework of risk management Central guidance on the principles of good risk management is set out centrally in the Treasurys Orange Book and subsequently in an annex to Managing Public Money Departments and their Arms Length Bodies ALBs are responsible for establishing appropriate risk management arrangements to meet their own specific governance and accountability needs Therefore how risk management has been implemented will vary by nature of the diverse business models and structures in place but will follow similar principles as advocated in the Orange Book and Managing Public Money Both documents make clear that the management of risk should be led from the top and embedded in the normal working routines and activities of the organisation The Treasury has also produced a Risk Management Assessment Framework that departments can use to assess the relative maturity of their risk management arrangements 33 Implementation of control activities Control activities will vary by department depending upon the type of services delivered Each organisation will have put in place specific arrangements and policies to control their activities including decision making performance monitoring fraud response financial management risk management arrangements etc Departments are advised to document the chain of responsibilities and the processes by which they will be delivered 34 Processes to manage information and communication Departments must have in place management information systems to secure assurance about value for money and the quality of delivery enabling timely adjustments They need regular and meaningful management information on costs including unit costs efficiency quality and performance against targets to enable the assessment of value for money 35 Monitoring of control activities and their ongoing improvement Having established a sound system of internal control it must be regularly reviewed and reported on Public bodies must provide assurance that they are appropriately managing and controlling the resources for which they are responsible The governance statement is an important accountability document in communicating these assurances to 349 Parliament and citizens The governance statement provides a transparent and accountable report of the control issues and risks faced by central government organisations Although formally completed annually it is recommended that it be considered at various points during the year The Audit and Risk Assurance Committee made up of independent nonexecutive directors supports the Accounting Officer with the primary responsibility of reviewing the comprehensiveness and reliability of assurances throughout the year On an annual basis the Accounting Officer will sign a governance statement declaring his or her approach to and responsibility for risk management internal control and corporate governance This will highlight any existing weaknesses in the organisations internal control system to be disclosed as part of the Annual Report and Accounts In order to meet this obligation there must be an evidence base underpinning the completion of the governance statement This will be in the form of stewardship or assurance reports from directors and senior managers attesting to how they have met their individual delegated obligations supported by a separate and independent opinion provided by the Head of Internal Audit The Audit and Risk Assurance Committee will have considered the underpinning assurances and reviewed the governance statement on behalf of the Accounting Officer before it is finalised In addition the board should support the accounting officer by scanning the horizon to spot remote but potentially serious risks The governance statement is reviewed by external auditors as part of their financial statement audit to ensure it is consistent with the financial statements and the evidence gathered during their work Where it is not or where it is not compiled in accordance with the relevant guidance they will report that fact The above arrangements cover exchequerfunded work Where work is subject to EU funding the additional regulatory control audit and checking arrangements are rigorously applied 36 Internal audit 361 Context The minister is responsible for government policy but is not an executive part of the organisation responsible for policy implementation and delivery The seniormost executive within an organisation is usually designated as its Accounting Officer and as well as supporting the minister is separately and personally accountable to Parliament and the public for the propriety regularity and value for money of the funds their organisation consumes and the feasibility of the work Heshe is required to maintain a sound system of internal control in the stewardship of hisher organisation and is required to sign an annual declaration to attest to the fact that they have kept this under review disclosing any significant weaknesses within a governance statement that is incorporated into the annual report and accounts Internal audit is not a regulatory requirement but is enshrined as a mandatory part of governance and assurance arrangements within central policy rules This means that every government department and ALB will have an internal audit service The primary purpose of internal audit is to provide the Accounting Officer with an objective evaluation of and opinion on the overall adequacy and effectiveness of the organisations framework of governance risk management and control The Head of Internal Audits opinion is a key element of the framework of assurance that the Accounting Officer needs to use to inform hisher completion of the annual governance statement For this reason our standards state that each government bodys designated Head of Internal Audit must be professionally qualified 350 362 The internal audit role In order to maintain its independence within the organisation internal audit should report directly to the Accounting Officer independent of all other directors It should also have a reporting line to the board which is usually fulfilled through an independent non executive Audit and Risk Assurance Committee These arrangements are set out in the Public Sector Internal Audit Standards Audit Charters set out the purpose authority and responsibility of internal audit addressing its independence needs and are approved by senior management and the board Internal auditors should not carry out duties outside their professional remit and capability Should they do so such duties must be openly disclosed and associated steps must be taken to avoid compromising their objective and independent role The programme of audit work requires professional audit judgement to determine what coverage is necessary to provide a sufficiently robust assurance on the framework of risk management control and governance Audit strategies and plans must be risk based and agreed with the Accounting Officer and the boardAudit and Risk Assurance Committee to ensure that they are appropriately targeted and resourced This will incorporate many different types of audit including financial audit work IT coverage strategic and operational work programme and project work security and information security and regulatory review as deemed appropriate to the governance structure responsibilities and unique profile of risk of the specific organisation The audit work will cover key areas of risk as well as efficiency effectiveness and economy while paying attention to the potential for fraud Some internal auditors may carry out elements of compliance work but we would normally expect this to be an independent part of managements own assurance arrangements on which internal audit may choose to place reliance if it is satisfied that it has been carried out objectively and effectively Consulting assignments are a recognised part of internal audit work However our standards go further than the international standards stating that consulting engagements should aim to improve governance risk management and control that the evidence gathered should contribute to the Head of Internal Audits opinion and that the internal auditor must maintain objectivity and not take on management responsibility The internal audit role is not to manage fraud risk on behalf of the organisation but to provide an assurance that risks including fraud risk are being managed effectively If during an audit assignment internal auditors identify control weaknesses that could allow fraud or find evidence that fraud has been or is being perpetrated they will refer to local internal audit policyprocedures on handling suspected fraud and consult the organisations fraud response plan This will normally identify what they need to do and who they need to alert They may need to extend the audit work and design additional tests directed towards the identification of activities which may be indicators of fraud and consider the rights of any alleged perpetrators in order to decide whether there is clear evidence of fraud to recommend an investigation The extent of the concern would be recorded so that it can be part of the Head of Internal Audits overall assurance A key consideration would be at what point to alert management eg staff with designated antifraud responsibilities or a Money Laundering Reporting Officer This will be a key decision for the Head of Internal Audit based upon the individual circumstances and the locally established policies procedures and responsibilities Audit recommendations are handled as agreed management actions for which implementation responsibility lies with line management Internal audit must establish a followup process to monitor and ensure that management actions have been effectively implemented or that senior management has accepted the risk of not taking action It is incumbent upon the Head of Internal Audit to develop clear escalation procedures for any management response which they judge is inadequate in relation to the identified risk The Audit and Risk Assurance Committee plays a key role in ensuring that managements 351 response and resolution of issues is satisfactory Audit and Risk Assurance Committee responsibilities are set out in the Audit and Risk Assurance Committee Handbook published by the Treasury Internal auditors are required by the Public Sector Internal Audit Standards to carry out periodic internal reviews of their own effectiveness and at least once in a five year period commission an independent external review For government the Treasury requires the reviews to be commissioned by the Accounting Officer as the main recipient of the assurances The Treasury External Quality Assessment Framework requires this to be carried out by a professionally qualified reviewer with sufficient status and experience from an organisation which is fully independent of the organisation being reviewed There is a Head of Government Internal Audit within the Treasury who is responsible for government internal audit policy the standard of internal audit across government and driving forward a programme of improvement In terms of coordination the Treasury supports networking and continuous professional development 363 Relationship with external audit In central government the NAO under the C AG is responsible for external audit The NAO audits the financial statements of all central government departments agencies and other public bodies and reports the results to Parliament It also carries out approximately 60 valueformoney studies each year looking at how government projects programmes and initiatives have been implemented The external auditor is independent of government and the work is primarily conducted for the benefit of parliament and the public but is still of significant benefit to the organisation The results of external audit reviews are published and in the public domain There are equivalent external audit bodies for each area of devolved government and the Audit Commission is responsible for appointing the auditors for local authorities and health service bodies in England and for promoting value for money in these sectors In August 2010 the Department for Communities and Local Government DCLG announced in the Local Audit and Accountability Bill plans to put in place new arrangements for auditing Englands local public bodies which will involve the closure of the Audit Commission The Audit Commission is working alongside its sponsor Departments and other key stakeholders to help design a new regime for local public audit that will be robust and sustainable It is anticipated that the effective date for these changes will be from April 2015 Internal audit and external audit are encouraged to cooperate by sharing strategies plans and working practices to optimise audit coverage and reduce the audit burden on the organisation External auditors may seek to place reliance on internal audit work in accordance with ISA 610 if it considers that the work is sufficiently objective and technically competent and has been carried out with due professional care 364 The Audit and Risk Assurance Committee role The Audit and Risk Assurance Committee is an independent committee of the board comprising independent nonexecutive directors The Committee has particular responsibilities relating to the work of internal and external audit and to assurance and financial reporting issues It provides an independent challenge to the executive and one of its primary duties is to ensure that there is comprehensive and reliable assurance to support the Accounting Officer in discharging hisher responsibilities There is consequently a major synergy between the purpose of the Head of Internal Audit and the role of the Audit and Risk Assurance Committee The committee will typically be interested in internal audits charterterms of reference to ensure that it has sufficient status and independence to operate freely and effectively in its work It will also take a close interest in the adequacy of audit resources The committee will advise the board 352 and Accounting Officer on internal audit strategy and plans forming a view on how well they support the Head of Internal Audits responsibility to provide an annual opinion on the overall adequacy and effectiveness of the organisations governance risk management and control processes The committee will monitor the results of internal audit work and how well management responds to issues raised by that work 37 Coordination of public internal control The Treasury and cabinet office are the lead departments in government responsible for setting policy and advocating goodpractice principles The rules and principles for governance financial discipline and control are centrally established An independent Financial Reporting Advisory Board FRAB advises the treasury on technical accounting principles for the preparation of financial statements The FRAB acts as an independent element in the process of setting accounting standards for government and exists to promote the highest possible standards in financial reporting The FRAB ensures that any interpretations or adaptations of generally accepted accounting practice in the context of the public sector are justifiable and appropriate Coordination of good practice is largely achieved through professional networking arrangements For example the Treasury has a central team that takes the lead in supporting the government finance and internal audit professions setting policy and best practice arranging events and providing direction for the development of the respective professions Professionals are encouraged to share areas of common interest and to help promote crossgovernment improvements There is also an Interdepartmental Audit Group that shares good practice in auditing EUfunded work regarding Structural Funds Departments take personal ownership of their performance and drive their own programmes of continuous improvement Every department has to disclose how well its system of internal control has operated on an annual basis in its report and accounts which are audited and published The Accounting Officer has to make an evidenced assessment and make appropriate disclosures based upon stewardshipassurance reports from the directors and an independent opinion from the Head of Internal Audit There are a number of tools that have been developed centrally that are made available to departments for them to assess and improve their capability For example there are assessment tools for procurement programme and project control financial management internal audit risk management information risk management security fraud financial systems risk value for money etc It is for departments to assess their own capability by exercising their daytoday responsibilities and drawing upon such tools with the results often independently validated by peer review or internal audit The Treasury Assurance Framework guidance encourages adoption of the three lines of defence model as an effective way to ensure a coordinated and cohesive approach to obtaining assurance across all elements of a government organisation including its ALBs and suppliers In this model the first line of defence is provided by operational management the second by risk managementcompliance functions and the third by independent assurance providers in particular internal audit Effectively deployed this model can avoid duplications and gaps in assurance effort and ensure efficient use of specialist resources including internal audit The NAO in selecting valueformoney audits will often give a crossgovernment perspective on particular subjects such as risk management or financial control This can make evident situations in which particular departments are not performing as well as others and need to make improvements Reports are publicly available and the valuefor money reports provide evidence for the Committee of Public Accounts hearings on behalf of parliament 353 The Cabinet Office is responsible for supporting the prime minister and the cabinet of the UK government It works closely with the treasury on governance and takes the lead on capability and in relation to security From time to time the Treasury will review the current state of the governance risk management and control and work collaboratively with departments to plan and implement any necessary improvements Occasionally the reviews or proposals are of such a nature or profile that they will be discussed by a parliamentary committee For example the Public Administration Select Committee may review proposed changes to board level governance arrangements For some highrisk programmes and projects there is greater central visibility and intervention For example there is a Major Projects Review Group MPRG that scrutinises and approves governments largest and most complex major projects Other significantly important projects also go through a Treasury approval process to ensure that there is a strong business case for the work and that it is affordable and viable For such projects there needs to be a comprehensive Integrated Assurance and Approvals Plan to coordinate assurance activity and subsequent recommendations and the project will be subject to Treasury approval points throughout the project lifecycle Internal auditors review their own departments internal control arrangements in order to inform the Accounting Officer enabling himher to meet the accountability obligations Internal audit reports are purely for internal consumption They could be released as part of a request for information under the Freedom of Information Act but would be subject to the public interest test before being disclosed 4 Fight against fraud The NAO works with a range of government and nongovernment bodies to tackle fraud and reduce the cost of fraud to the UK economy Stakeholders include the National Fraud Authority NFA the Cabinet Office Fraud Error and Debt unit the CIPFA Better Governance Forum the Audit Commission and the Counter Fraud Champions The NFA is an executive agency within central government that brings together the efforts of a large number of counterfraud bodies across the private public and voluntary sectors that are involved in gathering intelligence and taking action against fraudsters In central government a network of Counter Fraud Champions has been established representing all main departments with a view to tackling fraud and error The Counter Fraud Champions will lead the fight against fraud and error in their own central government department and in the agencies and other public bodies for which the department has responsibility Their priorities will include instilling an antifraud culture in their organisation measuring fraud in their departments and publishing the figures for the first time making sure new policies and programmes are fraud proofed by undertaking fraud risk assessments 5 Ongoing andor future reforms Resource accounting International Financial Reporting Standards IFRS For some time UK government accounts and budgets have been prepared on a resource accounting basis This entails the application of accruals accounting for reporting on the expenditure of central government and a framework for analysing expenditure by departmental aims and objectives relating these to outputs where possible This has provided incentives to departments to improve the management of what it owns and what it owes its assets and liabilities It provides information on how resources have been used to meet objectives and enables users of the accounts to assess more easily 354 whether taxpayers are receiving value for money A recent development has been the adoption of IFRS providing greater readacross between the preparation of private and public sector accounts Clear Line of Sight This development has simplified financial reporting to Parliament by ensuring that it reports in a more consistent fashion in line with the fiscal rules at three stages in the process on plans estimates and expenditure outturns The work has aligned budgets estimates and accounts in a way that allows the treasury to control what is needed to deliver the fiscal rules incentivises value for money and reduces burdens on government departments It has combined andor aligned the timing of the publication of government financial reporting documents in order to avoid duplication and make them more coherent Whole of Government Accounts This work is the consolidation of accounts from some 300 central government bodies including devolved administrations 600 local authority bodies 300 NHS and Foundation Trusts and 60 public corporations The aim is to improve accountability to parliament allowing comparisons across the public sector and improving the quality of data including those used in the national accounts Sustainability The government encourages both companies and public bodies to disclose their sustainability and environmental performance via their annual reports and accounts and some aspects were made mandatory across central government in 201112 Transparency The government is encouraging greater transparency across its operations to enable the public to hold public bodies and politicians to account This includes commitments relating to public expenditure intended to help reduce the deficit and achieve better value for money As part of this transparency agenda the government has made a number of initial commitments with regard to central government expenditure including increased publication Business plans and progress against key commitments will also be routinely published Governance Lead NonExecutive Board Members Since May 2010 the Ministerial Code has been changed whereby the Secretary of State will chair the departmental board the Lead NonExecutive Board Member or another ministerial board member may occasionally deputise if necessary Previously the Accounting Officer usually chaired the board for departments This change has been incorporated into a revised Corporate Governance Code for central government To coincide with this change each board now has a Lead NonExecutive Board Member who meets regularly with other nonexecutive board members to ensure their views are understood and that the Secretary of State is made aware of any concerns including through ensuring that the nonexecs meet alone with the Secretary of State from time to time The Lead NonExecutive Board Members support the Secretary of State in his or her role as Chair of the Board and liaise with the governmentwide Lead NonExecutive Board Member 355 Internal audit transformation Changes to the way that the internal audit service is provided in central government have been implemented from April 2013 These are based around group or shared service structures to ensure that the service provided is clearly linked to the strategic objectives of the department with a more flexible people and resourcing model designed to stimulate innovation and renewal and provide development and career opportunities This change has been carried out through effective engagement with key stakeholders on risk management and assurance so that internal audit can help to make a positive and tangible contribution to an organisations success and delivery imperatives Where internal audit is provided by a group or shared service the overall delivery of the service is the responsibility of the Group Chief Internal Auditor GCIA who may be supported by one or more designated Heads of Internal Audit HIA The GCIA may also be the designated HIA to certain organisations In other organisations there may simply be a HIA who leads the service The HIA must report functionally to the board which can be represented by the ARAC and should be accountable to Accounting Officers Audit and Risk Assurance Committees and boards for the delivery of the agreed internal audit plan see below The HIA should periodically be invited to attend board meetings particularly where discussion relates to governance risk management or control and the Accounting Officer should undertake countersign contribute to or review the HIAs performance appraisal Governance of internal audit services in central government is focused on two main bodies the Internal Audit Leadership Group IALG and the Internal Audit Quality Oversight Committee IAQOC The IALG is collectively responsible for the quality of internal audit services in central government and for continuous improvement in those services Within this it is expected that individual members will take a leadership role for certain areas and report back on these to the group as a whole The Group will be accountable to the IAQOC The IAQOC has been established as the senior governance body to ensure the full benefits of internal audit transformation and strengthened functional leadership are realised In representing Permanent Secretaries it also provides oversight of the profession in their approach to setting and maintaining quality standards and providing senior level independent challenge to the IALG Further changes are now planned regarding UK central government internal audit operation as a result of the recommendations of the Government Financial Management Review FMR published in December 2013 The FMR made three key recommendations regarding internal audit 1 Over the medium term to consolidate the shared services even further providing a single integrated internal audit service This service will be internal to central government as well as to departments and ALB clients and be an independent agency of the Treasury 2 The service will provide robust and consistent advice and assurance to Accounting Officers Audit Committees and the central departments a service to the centre of government in the latter respect to provide assurance explicitly on cross government risks and common performance measures 3 The role of the head of profession for internal audit will also be strengthened and become the Head of Government Internal Audit to whom other chief internal auditors and heads of internal audit HIA will be accountable 356 Implementation plans for all of these recommendations will be finalised in early 2014 Simplifying Streamlining Accounts An initiative is underway to examine whether changes can be made to simplify and streamline annual reports and accounts produced by government departments to make them more transparent and accessible to users and to make the main statements that support accountability within the document more prominent Following a detailed consultation exercise the views of a wide range of users of accounts including Parliament and the National Audit Office have been sought and proposals for implementation are under consideration It is expected that approval will be sought for a range of changes during 2014 with the move to the new reporting format taking place for the 201516 year of account 357 Appendices 358 APPENDIX 1 Structure for national contributions to the questionnaire as suggested by DG BUDGB4 Public internal control systems in the EU Member States A Introduction The 27 Member States have produced their contributions on the basis of a structuretemplate developed by the Budget DG specifically for this Compendium This template helps the reader to benchmark each of the Member States contributions against the suggested structure The headings and subheadings of one contribution to similar headings in other contributions as much as possible facilitating the comparison of items A1 The objective of the Compendium The objective of this exercise is to make Member States contributions comparable for future analysis and discussions In turn such an analysis will provide a description of the different structures and roles of Public Internal Control systems in the environment in which they operate In other words this exercise tries to describe the current state of affairs rather than looking for an ideal system A2 The scope of the description of the public internal control systems We limit the information sought to firstlevel spending units eg ministries agencies etc We do not refer to regional bodies and municipalities In the case of public federal structures we suggest descriptions of the public internal control systems be restricted to performance at federal level If you think that it would be appropriate to describe a specific public internal control system at subfederal level then please do so A3 Structure of the template We suggest that your contribution could be structured to cover the following points brief history of your present public internal control systems the public internal control environment the concept of public internal control in your administration managerial accountability and responsibility internal audit coordination of internal control financial inspection ongoing and future reforms For each of the above categories a short description is provided below of what we believe could if appropriate be usefully included Nevertheless participants may of course introduce further elements if deemed necessary 359 In order to appreciate the different components in the internal control concept point three it is necessary to take a broad view that will allow for a contextual understanding The brief history of the public internal control system the public internal control environment and the ongoing and future reforms points one two and five are intended to serve the purpose of promoting such a contextual approach Since the strength and appropriateness of the legal framework is fundamental to effective internal control it is essential that a list of the legal bases of public internal control is provided eg organic budget laws framework or implementation laws It is also useful to indicate at what level laws have been adopted eg government Ministry of Finance or individual line ministries However it is not intended to list the articles of the different laws Finally a legal framework in itself does not make for an efficient and effective internal control system Therefore please also try to reflect the practical operation and implications of the legal framework in the public internal control system B Suggested structure of the contribution Please find hereafter the INTOSAI 69 definition of public internal control Public internal control is an integral process that is effected by an entitys management and personnel and is designed to address risks and provide reasonable assurance that in pursuit of the entitys mission the following general objectives are being achieved executing orderly ethical economical efficient and effective operations fulfilling accountability obligations complying with applicable laws and regulations and safeguarding resources against loss misuse and damage B1 Brief history of your present public internal control systems Please provide a brief overview of the origins and history of your present PIC systems To set the history in context it could be worthwhile where appropriate to describe what kind of parallel strategies are or were supporting the PIC reforms These could be strategies or policies related to public administration reforms PAR or public expenditure management PEM Public administration reform refers to the overall efforts to improve management administrative capacity and the way in which the public sector is organised Public expenditure management focuses on budgeting accounting and central inspection functions as well as internal control Again where appropriate please outline who were the drivers of the reform or which institutions played a leading role in the steps towards a modernised government eg Parliament Supreme Audit Institution Ministry of Finance Ministry of Interior etc and how the reform was managed B2 Public internal control environment Please describe the main characteristics of the current systems that provide for the PIC environment such as the national budget and accounting systems cashbased or accrual accounting central accounting system input or programme budgeting external audit and the fight against fraud andor irregularities 69 International Organisation of Supreme Audit Institutions 360 B3 The concept of public internal control in your administration Please find herewith the INTOSAI guidelines for internal control in the public sector standards The components mentioned below constitute the accountability and responsibility of the manager The guidelines cover the following five interrelated components implementation of the control environment risk management implementation of control activities processes to manage information and communication monitoring of control activities and their ongoing improvement Please describe the characteristics andor elements on which your PIC system is built We would like you to focus on three elements which we think are relevant if appropriate for the situation in your country if not a statement to the effect that it does not is sufficient 1 Managerial accountabilityresponsibility 2 Internal audit 3 Coordination of public internal control development B31 Managerial accountabilityresponsibility Managerial accountability refers to a process whereby managers at all levels are responsible for and may be required to explain the decisions and actions taken to meet the objectives of the organisation they manage Managerial accountability implies responsibility for sound financial management at all levels ie the adequate organisation procedures and reporting of the results of the organisation This is a democratic principle and relates to the transparency of the government Managerial accountability in relation to the INTOSAI guidelines mentioned above refers to the managers responsibility for all five components mentioned above Please describe how the principle of managerial accountabilityresponsibility is understood in your administration and whether you recognise that it is or is not interlinked to your PIC system If you recognise a link between the principle of managerial accountability and your PIC system please then describe this by taking into account the aspects below How do top managers assume their responsibility for establishing an adequate internal control system Please cover where applicable the five interrelated components referred to above Is managerial accountability exercised by a politically appointed manager or by the top administrative manager To what extent is delegation of responsibility and of authority used as a tool to delegate decisionmaking powers To what extent are the responsibilities for policy development and for the implementation of these policies split The support that top managers the term top manager is here used for senior officials that are responsible for either policy development or carrying out these policies receive 361 from financial officers 70 for example budget preparation preparation of the authorising officers financial decisions ex ante control processes tendering and contracting management advice accounting and elaboration of financial procedures and guidelines How do top managers assume their responsibility for determining objectives at all levels and budget planning accordingly The objectives of the internal control system focus on regularitylegality of transactions andor on value for money performance and fulfilment of policy objectives and its scope does it cover all financial decisions ie appropriationscommitments tendering and contracting procedures income disbursements management of assets and liabilities and recovery of unduly paid amounts How is the reporting system organised in general and especially any kind of signing off and reporting about the overall performance If applicable please include information about for example a system of annual declaration of assurance or other means of signing off B32 Internal audit We define internal audit using the following IIA 71 definition Internal auditing is an independent objective assurance and consulting activity designed to add value and improve an organisations operations It helps an organisation accomplish its objectives by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management control and governance process the Institute of Internal Auditors Internal audit is an integral part of public internal control However unlike the other aspects of internal control that fall under the managers responsibility internal audit is functionally independent from the top management If your administration has developed internal audit of this kind in the framework of PIC please describe how it is functionally organised with reference to the legal basis for internal audit the nature of functional independence of the internal auditor visàvis the top manager to which the internal auditor is attached in particular regarding o freedom of audit reporting and to make recommendations to the top management or lower levels o the use of audit charters to be agreed upon between management and the internal audit function o the acceptance of duties that are outside the scope of internal audit and fall under managerial responsibility including rules to solve conflicts of interest o the function of internal audit to be subject to continuous professional training and public certification procedures please describe briefly the training scheme o to whom internal audit reports 70 A financial officer is an officer who is responsible for implementing the rules related to the financial management accounting and preparation of the financial statements in the unit and reports to the top management of the unit 71 Institute of Internal Auditors 362 o types of audits that can be performed eg assurance assignments financial audit compliance audit performance audit and consultancy assignments Please explain the formal followup procedure for managers related to internal audit reports Also explain the procedures to be followed when during the course of an audit indications of fraud andor irregularities are identified Please describe whether and how the duties between internal audit and financial inspection are separated B33 Internal audit relations with external audit The external audit is defined as the activity carried out by the supreme audit institution SAI which is external to and independent of the auditee the purpose being to give an opinion on and report on the accounts and the financial statements the regularity and legality of operations andor the financial management to the parliament Please describe existing processes for coordination between internal audit and the supreme audit institution from the point of view of the internal audit B34 Audit boards or audit committees Audit boards are defined here as organisations that provide the government with policy advice on the quality and functioning of internal audit in the entire public sector Audit committees are defined as organisations in for example ministriesagencies that defend the functional independent role of internal audit visàvis management and support management in understanding and following up on internal audit recommendations Please indicate whether any such organisations exist and if so provide a short description of the functioning of such audit boards or audit committees Please also explain the reasons why in your country audit boards or audit committees have or have not been developed B35 Coordination of public internal control Please indicate whether in your country there is coordination of internal control policymethods throughout the administration with particular reference where appropriate to any central coordination or harmonisation units their location and to whom they report Do these units regularly assess the functioning of internal control systems or internal audit across the public sector and do they produce regular reports periodical reviews on the state of these systems If so to whom are these reports addressed and how are they followed up B4 Financial inspection Financial inspection refers to the activities of a centralised governmental body acting either on its own initiative or on receipt of complaints that aim to assess the legality purposefulness and timeliness of use of budgetary funds with a view to establishing violations fraud andor irregularities that have or may have a negative impact on the budget This section seeks information on any possible role that a financial inspection service may have in relation to your internal control system with particular reference to the 363 positioning and role of any kind of central institution within the public administration that is responsible for fighting fraud andor irregularities through financial inspections Please describe who may initiate inspections by any such financial inspection body for example requests from Cabinet of Ministers Ministry of Finance line ministries Ombudsman third parties any other party annual investigation programmes etc to what extent this body can undertake inspections on an ex ante basis ex post basis or both and what systems or rules exist for coordination of activities between the financial inspection body internal auditors as defined above and other internal control staff B5 Ongoing andor future reforms Please provide information on ongoing or planned reforms in the public administration reforms public finance management or public internal control areas and if appropriate the reasoning behind these reforms 364 APPENDIX 2 List of contact persons Austria Mr Hannes Schuh Chief Audit Executive Ministry of Finance Vienna Tel 43151433501260 Email hannesschuhbmfgvat Belgium Ms Katleen Seeuws Management Support Federal Service Budget and Control Brussels Tel 3222123735 Email katleenseeuwsbudgetfedbe Bulgaria Ms Svilena Simeonova Director Internal Control Directorate Ministry of Finance Sofia Tel 359298592350 Email sssimeonovaminfinbg Croatia Ms Marela Knecevic Head of CHU Ministry of Finance Zagreb Tel 38514585901 Email marelaknezevicmfinhr Cyprus Mr Demetris Mavrommatis Accountant Treasury of the Republic Nicosia Tel 35722602398 Email dmavrommatistreasurygovcy Czech Republic Mr Lukáš Pečeňa Chief coordinator for financial management and control and audit Ministry of Finance Prague Tel 420604271735 Email lukaspecenagmailcom Denmark Mr Jesper Bojsen Agency for Modernization of Public Administration Ministry of Finance Kopenhagen Tel 4533923333 Email jbnmodstdk Estonia Mr Kaur Siruli Head of the Financial Control Department Ministry of Finance Tallinn Tel 3726113449 Email kaursirulifinee Finland Mr Mikko Helkiö Special Advisor Ministry of Finance Helsinki Tel 358295530278 Email mikkohelkiovmfi France Mr Stéphan Roudil Inspecteur des Finances General Inspecton of Finances Paris Tel 33153183084 Email stephanroudil igffinancesgouvfr Germany Mr Thomas Rutten Internal Auditor BVA Federal Ministry of the Interior Berlin Tel 49228993581914 Email thomasruetten bvabundde Greece Ms Yolanda Tountipoulou Head of Support Communication Direction Ministry of Finance Athens Tel 302106987709 Email gtountopoulouglkgr Hungary Ms Edit Németh Head of CHU for Public Internal Control Ministry for National Economy Budapest Tel 3617951941 Email editnemethngmgovhu Ireland Ms Judith Brady Government Accounting Dept Public Exp and Reform Ministry of Finance Dublin Tel 35316045691 Email judithbrady financegovie Italy Mr Fabrizio Mocavini Head of Unit Ministry of Economy and Finance Treasury Rome Tel 390647614698 Email fabriziomocavinitesoroit Latvia Ms Vija Gurkovska Head of Unit Ministry of Finance Riga Tel 37167083856 Email vijagurkovskafmgovlv Lithuania Mr Darius Matusevicius Director CHU Ministry of Finance Vilnius Tel 37052390147 Email dmatuseviciusfinminlt Luxembourg Mr JeanMarie Haensel Premier Inspecteur des Finances General Inspection of Finances Luxembourg Tel 35224782760 Email jeanmariehaenseligfetatlu 365 Malta Mr Kenneth Farruggia Director General Internal Audit and Investigations Department Valletta Tel 35621237737 Email kennethafarrugiagovmt The Netherlands Mr Martin Dees Direction Budget affairs Ministry of Finance The Hague Tel 31611925010 Email mdeesminfinnl Poland Ms Agnieszka Giebel Deputy Director Ministry of Finance Warsaw Tel 48226943093 Email agnieszkagiebelmofnetgovpl Portugal Mr José António Viegas Ribeiro Deputy General Inspector General Inspection of Finances Lisbon Tel 351218113508 Email viegasribeiroigfmin financaspt Romania Ms Margareta Anton Chief Financial Controller Deputy Ministry of Public Finance Bucharest Tel 40213199727 Email MargaretaAntonmfinantero Slovakia Ms Kamila Obrancová Audit and Control Section Ministry of Finance Bratislava Tel 421259583120 Email kamilaobrancovamfsrsk Slovenia Ms Natasa Prah Director Budget Supervison Office Ministry of Finance Ljubljana Tel 38613696904 Email natasaprahmfrssi Spain Ms Pilar Seisdedos Espinosa Head General Coordination Intervención General de la Administración del Estado Madrid Tel 34915367046 Email pseisdedosigaemehes Sweden Mr Tomas Kjerf National Financial Management Authority Stockholm Tel 4686904457 Email tomaskjerfesvse UK Mr Stephen Treece Lead Audit and Assurance Policy Advisor HM Treasury London Tel 442072705792 Email stephentreece hmtreasurygsigovuk EC DG Budget Mr Robert Gielisse Head of PIC Department DG Budget European Commission Brussels Tel 3222959649 Email robertgielisseeceuropaeu SIGMA Ms Bianca Brétéché SIGMA OECD Paris Tel 33145248265 Email biancabretecheoecdorg 366 HOW TO OBTAIN EU PUBLICATIONS Free publications one copy via EU Bookshop httpbookshopeuropaeu more than one copy or 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