INTRODUCTION TO PUBLIC FINANCE MANAGEMENT Module 5 2
INTRODUCTION TO PUBLIC FINANCE MANAGEMENT Module 5. 2: External Audit & Oversight
Module Outline Ø What is External Audit? Ø What do external auditors do? Ø Independence of Supreme Audit Institution (SAI) Ø Audit & Oversight Process: Role of the Public Accounts Committee and Legislature 2
What is External Audit? Assurance to Parliament on: • Regularity and probity of financial transactions. • Soundness of internal financial controls. • The reliability of financial statements. 3
What is External Audit? The Accountability Cycle Parliament Sets Budget legislation on revenue and expenditure SAI Audits government reports to parliament Government Executes budget 4
What is External Audit? Legislature Budget document Annual Report Audit report audit Supreme Audit Institution (SAI) Executive Audit Committee Measures Information Management Service providers Audit report audit Internal auditor 5
What is External Audit? Models of Supreme Audit Institution (SAI) • Auditor General – • Reports to Parliament through a Public Accounts Committee (e. g. UK, New Zealand, Australia) • Audit Court – • Part of Judiciary (e. g. France, Italy, Portugal) • Audit Board – • Report to Parliament. Collegiate headed by a president (e. g. Germany, Japan) 6
What is External Audit? Ø The scope of External Audit (Supreme Audit Institutions - SAIs) only covers ex-post scrutiny of the executive by the legislature. 7
What is External Audit? Scope of the Supreme Audit Institution (SAI): • Public accounts of all public institutions including: • the courts • the Central Bank • subsidies • PPPs • the security agencies • foreign embassies • Accounts of any and all public corporations established by parliament & bodies receiving public funds. • Local governments. • SAI to have access to all documents, offices and staff necessary for audit work 8
Module Outline Ø What is External Audit? Ø What do external auditors do? Ø Independence of Supreme Audit Institution (SAI) Ø Audit & Oversight Process: Role of the Public Accounts Committee and legislature 9
What Do External Auditors Do? • Review transactions to ensure that: o The annual budget has been followed; o Financial Regulations have been complied with; o Adequate records have been maintained. • Certify the annual financial statements. • May provide view on efficiency, performance or value for money. 10
What Do External Auditors Do? Certification of Public Accounts? Audit opinions are typically classified as: • Clean – OK • Qualified – except for… – emphasis of matter • Adverse – not OK • Disclaimer – don’t know 11
What Do External Auditors Do? Audit opinion (1) Ø Traditional opinion: Subject to the observations contained in this report, the moneys expended were applied for the purposes for which they were appropriated by Parliament and the expenditure conformed to the authority that governed it… 12
What Do External Auditors Do? Audit opinion (2) Ø ‘Modern’ opinion: In my opinion the financial statements provide a true and fair view of the state of the Government’s financial affairs on 31 December 201 X and the transactions for the financial year then ending, subject to the observations contained in my audit report. . . 13
What Do External Auditors Do? LIMA (1977) Declaration of the International Organisation for Supreme Audit Organisations (INTOSAI) Two aspects of public sector audit of equal importance: 1. Traditional audit of legality and regularity of financial affairs is undisputed. 2. Audit of performance, effectiveness, economy and efficiency of public administration. Up to each SAI to determine their relative importance. 14
What Do External Auditors Do? International Audit Standards by INTOSAI • Fundamental Auditing Principles – series 100 to 400 covering Public Sector, Financial, Performance, and Compliance Auditing. • General Auditing Guidelines on Financial Audit – ISSAI 1000 -2999 series. • Specific Auditing Guidelines – ISSAI 5000 series covering a range of auditing topics e. g. Environment, IT, Privatisation, Debt etc. http: //www. intosai. org/issai-executive-summaries. html 15
What Do External Auditors Do? Value For Money (VFM) or Performance Audit • Pressure to undertake performance work, but different and sophisticated skills are required. • An approach which requires careful planning and a gradual build up of skills. • Priority is good probity, compliance and sound internal financial control. 16
What Do External Auditors Do? Challenges for Public Sector Audit • Independence from the executive. • Audit completed within 12 months of year end. • Annual audit report promptly made public. • SAI responsible for the whole of the public sector • Public Accounts (or Finance) Committee ensuring accountability & implementation of audit recommendations. 17
Module Outline Ø What is External Audit? Ø What do external auditors do? Ø Independence of Supreme Audit Institution (SAI) Ø Audit & Oversight Process: Role of the Public Accounts Committee and legislature 18
Independence of the SAI Mexico Declaration, 2007 (1) • The existence of an appropriate and effective constitutional/statutory/legal framework and of de facto application provisions of this framework; • The independence of SAI heads and members (of collegial institutions), including security of tenure and legal immunity in the normal discharge of their duties; • A sufficiently broad mandate and full discretion, in the discharge of SAI functions; • Unrestricted access to information. 19
Independence of the SAI Mexico Declaration, 2007 (2) • The right and obligation to report on their work; • The freedom to decide the content and timing of audit reports and to publish and disseminate them; • The existence of effective follow-up mechanisms on SAI recommendations; • Financial and managerial/administrative autonomy and the availability of appropriate human, material, and monetary resources. 20
Independence of the SAI What can undermine independence? • The power to appoint or terminate the appointment of the Auditor General; • Scope and coverage of institutions; • Dependence upon a budget controlled by the Executive (Government); • Interference in the design and implementation of audit work plans; • Limitations on what is reported and how quickly. 21
Module Outline Ø What is External Audit? Ø What do external auditors do? Ø Independence of Supreme Audit Institution (SAI) Ø Audit & Oversight Process: Role of the Public Accounts Committee and legislature 22
Audit & Oversight Process Mo. F responds to PAC recommendations PAC submits findings to full Parliament Action taken Draft report to Agency & Final to Parliament Budget implemented and managed Audit undertaken SAI 23
Audit & Oversight Process Timeliness of Audit Reports • Audited financial statements and audit report to be submitted to parliament within 9 months (or before next budget passed to parliament) still challenging in some countries. • Audit report should be made public as soon as submitted to parliament. 24
Audit & Oversight Process Follow Up of Audit Reports • Audit work plans include follow up on previous audit findings. • Line Ministries provide evidence of follow up. • Sanctions are applied (by management) for failing to implement corrective measures. 25
Audit & Oversight Process Public Accounts Committee (PAC) or Finance Committee Frequently the SAI may do little more than send its annual report to parliament… there is commonly little communication about its contents, the lines of investigation to pursue or the means of following up the findings… Df. ID (2005) 26
Audit & Oversight Process Commonwealth good practice • Member of opposition chairs the PAC • Members have appropriate skills & training • Meetings are publicised and usually open • PAC recommendations implemented • Sanctions for defaulters are followed-up 27
Audit & Oversight Process Public Accounts Committee (PAC) or Finance Committee • Timely review of audit reports. • Questioning of accounting officers where there anomalies. • Follow up of recommendations made to the executive. 28
Audit & Oversight Process • INTOSAI – SAI Performance Measurement Framework (PMF) • SAI PMF is a tool for measuring, monitoring, managing and reporting the performance of a Supreme Audit Institution – designed and implemented by peers. . . Others SAIs. 29
SAI Performance Measurement Framework Structure SAI Capability 7 Domains C. Strategy for Organizational Development B. Independence and Legal Framework A. SAI Reporting D. Audit Standards and Methodology E. Managemen t & Support Structures F. Human Resources and Leadership Value and Benefits of Supreme Audit Institutions G. Communicati on and Stakeholder Management Country Context, Governance and Public Financial Management 30
Key messages PEFA Indicator 30 on External Audit Dimension 30. 1 assesses key elements of external audit in terms of the scope and coverage of audit, as well as adherence to auditing standards; Dimension 30. 2 assesses the timeliness of submission of the audit report(s) on budget execution to the legislature; Dimension 30. 3 assesses the extent to which effective and timely follow-up on external audit recommendations or observations is undertaken by the executive or audited entity; Dimension 30. 4 assesses the independence of the SAI from 31 the executive.
Key messages ü Effective audit is key to public financial management. ü Auditor General may provide good independent view of a government’s finances. ü Publication of accounts and Auditor General’s report within a year of period end is vital! ü Independence & Relationship with Public Accounts Committee (or Finance Committee) are key. ü INTOSAI provides standards and capacity building. 32
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