1. 1 INTERNAL AUDIT IN BULGARIA – DEVELOPMENTS AND CHALLENGES PEM PAL IA CoP Sofia, Bulgaria April 17-20, 2012

2. 2 CONTENT Reform of the national PIFC system Reform of the national PIFC system Current Internal Audit system Current Internal Audit system Setting-up and development of CHU Setting-up and development of CHU Problems and challenges Problems and challenges

3. 3 SOME HISTORY … Factors caused the changes : Engagements taken under Chapter 28 Financial Control Engagements taken under Chapter 28 Financial Control SIGMA peer reviews on the PIFC system recommendations SIGMA peer reviews on the PIFC system recommendations Twinning projects with France, Spain and Germany Twinning projects with France, Spain and Germany

4. 4 FIRST STAGE OF THE REFORM : 2001-2006 TRANSITIONAL PERIOD FROM INSPECTION TO INTERNAL AUDIT Policy paper Policy paper New Law New Law Trainings Trainings Manual Manual Key problems: Key problems: - Centralized IA system - Internal Audit was merged with Inspection – internal auditors impose sanctions

5. 5 Inspection Internal Auditing Inspection Internal Auditing ex post checks - mainly yes/no - for law compliance ex post checks - mainly yes/no - for law compliance from outside (MoF) from outside (MoF) of financial activities of financial activities focused on individuals focused on individuals aim: detecting violations and imposing sanctions aim: detecting violations and imposing sanctions reviewing for the past to assure financial and budgetary discipline reviewing for the past to assure financial and budgetary discipline ex post checks for assurance, but also consulting ex post checks for assurance, but also consulting from inside from inside of all activities of all activities focused on systems focused on systems aim: assessing internal control systems and recommending improvements aim: assessing internal control systems and recommending improvements reviewing for the future to help management reviewing for the future to help management

6. 6 SECOND STAGE OF THE REFORM Three new Laws: Three new Laws: - FMC PS Act - IA PC Act - PFI Act New Policy Paper, Strategies, Ordinance, etc. New Policy Paper, Strategies, Ordinance, etc.

7. 7 Main tasks of the second stage of the reform Strengthening managerial accountability and financial management and control (FMC) Establishment of internal audit units (IAU) within public sector organizations Establishment of Central Harmonization Units for FMC and IA Separation of internal audit and financial inspection Transformation of the Public Internal Financial Control Agency (PIFCA) into a Public Financial Inspection Agency (PFIA)

8. 8 CURRENT INTERNAL AUDIT SYSTEM MAIN CHARACTERISTICS Internal Auditors work in compliance with National IA Standards, Code of Ethics, Methodology, issued by Minister of Finance Internal Auditors work in compliance with National IA Standards, Code of Ethics, Methodology, issued by Minister of Finance Mandatory setting up of IAU in Ministries; Larger Municipalities; Other state organizations Mandatory setting up of IAU in Ministries; Larger Municipalities; Other state organizations Minister of Finance is responsible for IA coordination and harmonization-CHU Minister of Finance is responsible for IA coordination and harmonization-CHU

9. 9 CURRENT INTERNAL AUDIT SYSTEM Statistics.... Total number of internal audit units – 211 Total number of internal audit units – 211 In Ministries and central administration – 15 / 29 In Ministries and central administration – 15 / 29 In Municipalities – 167 from 264 total In Municipalities – 167 from 264 total Average number of internal auditors in Ministries - 7 Average number of internal auditors in Ministries - 7

10. 10 CURRENT INTERNAL AUDIT SYSTEM Statistics.... Average number of internal auditors in municipalities – 1-2 Average number of internal auditors in municipalities – 1-2 Annual average number of assurance audit engagements Annual average number of assurance audit engagements in Ministries – 18 in Municipalities – 6 Annual average number of consultancy audit engagements Annual average number of consultancy audit engagements in Ministries – 15 in Municipalities - 2

11. 11 CHU IA and CHU FMC Structure and Status Divisions of Internal Control Directorate Divisions of Internal Control Directorate Basic ICD role: provides assistance to the Minister of Finance in respect to the coordination and harmonization of FMC and IA in the public sector Basic ICD role: provides assistance to the Minister of Finance in respect to the coordination and harmonization of FMC and IA in the public sector Subordinated to the Minister of Finance Subordinated to the Minister of Finance

12. 12  CHU IA AND CHU FMC MAIN ACTIVITIES(1): Development of methodology  CHU IA AND CHU FMC MAIN ACTIVITIES(1): Development of methodology FMC FMC -Guidelines on the FMC components -Instructions on the implementation of the managerial accountability -Instruction of the performance of ex-ante control -Guidelines on the implementation of the risk management process IA IA IA MANUAL: - Management of the internal audit activity (vol. I) - Audit engagement (vol. ІІ) - Audit tools and instruments (vol. ІІІ) Short methodology for external quality assessment

13. 13 MAIN ACTIVITIES(2): Training FMC FMC - FMC -main requirements, annual reporting - Risk Management in the public sector IA IA - Training for the IA Certificate - External quality assessment of the IA activity - Cases on assurance engagements and consultancy engagements

14. 14 MAIN ACTIVITIES(3): Exam “Internal Auditor in the Public Sector Certificate” Ordinance of the Minister of Finance Ordinance of the Minister of Finance IC Directorate is responsible for: IC Directorate is responsible for: - Organization of the exam - Carrying out the exam

15. 15 CHU IA AND CHU FMC MAIN ACTIVITIES(4): Annual reporting FMC FMC Questionnaires of the condition of the FMC system (incl. self asssessment) and annual reports- prepared by PS organization CHU FMC prepares annual report on the condition of the financial management and control in the public sector CONSOLIDATED ANNUAL REPORT CONSOLIDATED ANNUAL REPORT IA IA Questionnaire of the of the IA activity and annual report-prepared by IA Units of PS CHU IA prepares annual report on the IA activity in the public sector FOR THE INTERNAL CONTROL

16. 16 MAIN ACTIVITIES(5): System monitoring WHAT : On the spot monitoring on the implementation of the FMC PS Act, IA PS Act and other secondary regulations WHY: Updating of the methodology WHERE: Ministries and Municipalities MAIN ACTIVITIES(5): System monitoring WHAT : On the spot monitoring on the implementation of the FMC PS Act, IA PS Act and other secondary regulations WHY: Updating of the methodology WHERE: Ministries and Municipalities FMC FMC Monitoring on the implementation of the FMC PS Act and other secondary regulations IA IA NOT? Monitoring on the implementation of the IA PS Act and other secondary regulations

17. 17 MAIN ACTIVITIES(6): NEW(2012) : External quality assessment of the IA activity Ordinance of the Minister of Finance Ordinance of the Minister of Finance Short methodology Short methodology 4 reports (3 Ministries and 1 Agency) 4 reports (3 Ministries and 1 Agency) 3 new assessments (2 Ministries and 1 Agency) 3 new assessments (2 Ministries and 1 Agency)

18. 18 MAIN PROBLEMS IN THE CURRENT SYSTEM Not sufficient IA staff Not sufficient IA staff Head of IAU position is vacant in some organizations Head of IAU position is vacant in some organizations Commissioning of untypical audit tasks Commissioning of untypical audit tasks Too huge “audit universe” Too huge “audit universe”

19. 19 CHALLENGES Sustainable development Sustainable development Improvement the capacity Improvement the capacity Enhance professional competence of IA Enhance professional competence of IA Attract young people to the IA profession Attract young people to the IA profession Improve the understanding of the heads of organizations Improve the understanding of the heads of organizations

20. 20 THANK YOU FOR YOUR ATTENTION !