Financial Inspection in the Public Sector Svilena Simeonova 1

1.Overview of the main features of the Financial Inspection function 2.Different views and models of Financial Inspection in the EU Member States 3.Common ground and differences between Financial Inspection, External Audit and Internal Audit 4.How to keep Financial Inspection compatible with modern PIC? 5.Development of Financial Inspection in Bulgaria 6.Relationship between Financial Inspection, External Audit and Internal Audit - good practices and challenges 7.Looking ahead CONTENTS 2

 Centralized independent institution: external to the inspected entity  Usually carries out compliance control for legality  Ex post activity  The main goals are to detect, investigate and penalize the responsible persons and institutions  Mainly operates on the basis of complaints or signal from the public, requests from public institutions 1. OVERVIEW OF THE MAIN FEATURES OF THE FINANCIAL INSPECTION FUNCTION 3

Financial Inspection (FI) exists in about half of the EU Member States.  In the majority of the 13 newest Member States – Bulgaria, Croatia, Hungary, Poland, Romania, Slovak Republic FI is established separately from Internal Audit. FI is deemed necessary until decentralized internal control and internal audit becomes fully embedded in administrative culture. FI usually reports to the Minister of Finance.  As well as in Belgium, France, Greece, Italy, Portugal and Spain Financial Inspection is an important part of the control system and employs many staff. Where the supreme audit institution is organized as a Court of Accounts with judicial powers, Financial Inspection also has to report any detected irregularities to that Court. 2. DIFFERENT VIEWS AND MODELS OF FINANCIAL INSPECTION IN THE EU MEMBER STATES 4

5 Specific characteristicsMember States No central Financial Inspection functionDenmark, Finland, Sweden, Estonia, Latvia, Lithuania, Austria, Germany and UK Financial Inspection and Internal Audit exist – but IA is clearly separated The majority of the 13 newest members of the EU Financial Inspection and Internal Audit are under one roof in one central institution, or the central unit for coordination of Internal Audit is a part of the Financial Inspection body Belgium, France, Spain, Portugal FI does not impose sanctions. That is a duty of the SAI – of the Court type France, Italy, Portugal and Spain

6 3. COMMON GROUND AND DIFFERENCES BETWEEN FINANCIAL INSPECTION AND NATIONAL AUDIT OFFICE (1) SIMILARITIES: From outside (External) Ex post activities Covers all public sector Sanctioning power (where exists) Mandate to fight fraud and corruption

7 DIFFERENCESFINANCIAL INSPECTIONNATIONAL AUDIT OFFICE Position in the state structures and reporting line Subordinated to the Minister of Finance. Reports to the Minister of Finance and to the Government Reports to the Parliament and to the public Initiation of the activity Acts on complaints and requests from citizens and other institutions Works according to the Annual plan and requests from the Parliament Aims and scope of work Focus on legalityLegality, but also Efficiency, Effectiveness and Economy. Also verification of the financial statements of the budget organizations 3. COMMON GROUND AND DIFFERENCES BETWEEN FINANCIAL INSPECTION AND NATIONAL AUDIT OFFICE (2)

8 DIFFERENCESFINANCIAL INSPECTIONNATIONAL AUDIT OFFICE Approach Investigations of particular cases of irregularities, legal violations, fraud and corruption - inspection Analysis of implementation of the government policy as intended Types of checks Inspection: legality checkFinancial, compliance and performance audits Consequences of the activities Imposing sanctions, referring cases of fraud to the prosecutor's office, giving mandatory instructions Recommendations for improvement Usually not (with exceptions) sanctions 3. COMMON GROUND AND DIFFERENCES BETWEEN FINANCIAL INSPECTION AND NATIONAL AUDIT OFFICE (3)

9 3. COMMON GROUND AND DIFFERENCES BETWEEN FINANCIAL INSPECTION AND INTERNAL AUDIT(4) SIMILARITIES: Generally ex post checks Independence Full access to information Competence to give recommendations as a result of engagement performed

10 DIFFERENCES:FINANCIAL INSPECTIONINTERNAL AUDIT Position and reporting Outside of the organization Reports to the Minister of Finance and the Government Inside of the organization Report to the Head of the organization and to Audit Committee Initiation/basis for the activities Complaints and requests from citizens and other institutions Risk-based annual plan Aims Detecting violations and corrective actions Assessing Internal Control system and recommending improvements Assurance and consulting function Scope Mostly financial transactions and procedures: legality All activities and aspects of the Internal Control System; legality and performance 3. COMMON GROUND AND DIFFERENCES BETWEEN FINANCIAL INSPECTION AND INTERNAL AUDIT (5)

11 DIFFERENCES:FINANCIAL INSPECTIONINTERNAL AUDIT Perspective Focused on individuals, conclusions on legal compliance Focused on the system Direction of the results To the past - to find the facts towards financial and budgetary discipline To the future - to help management to improve the system Responsibilities in dedicating and investigating fraud and corruption Detection, investigation, sanctioningPrevention, detection of indicators Methodological ground No generally accepted standardsInternational standards of the IIA 3. COMMON GROUNDS AND DIFFERENCES BETWEEN FINANCIAL INSPECTION AND INTERNAL AUDIT (6)

4. FINANCIAL INSPECTION AND PIC CONCEPT Main pillars of the PIC model 12 Strengthening decentralized managerial accountability and internal control Establishment of independent Internal Audit within public sector organizations – different practices Establishment of Central Harmonization Unit(s) for Internal control and Internal Audit Financial Inspection (as fraud and corruption investigation function) in the most of the EU countries exists as central separate entity (institution) or together under the same head with Internal Control or Internal Audit coordination function

 Cuts across the managerial accountability of budget holders  Administrative burden on the entity under inspection/audit  Possible difference of conclusions and opinions on the subject matter  Additional resource cost to the public sector  Possible overlapping and duplication of tasks  Lack of mutual respect and mistrust based on lack of understanding of the roles and poor communication 4. FINANCIAL INSPECTION AND PIC CONCEPT (2) Challenges where centralized and separated Financial Inspection exists 13

In the case of separate functions and institutions it is important to ensure: GOOD COMUNICATION AND COOPERATION BY:  A clear mandate for each function and institution  Coordinating work programs and findings  Regular meetings and joint trainings  Systematic exchange of information 4. FINANCIAL INSPECTION AND THE PIC CONCEPT (3) 14

Until State Financial Control under the Minister of Finance Main characteristics: 1200 staff in central and local level; one and only institution for control and inspection (the NAO has been established in 1995, Internal Audit does not exist); close relations with the prosecution office; type of control – ex post inspection; rights to investigate and impose administrative and financial sanctions; sweeping powers over the central and local administration and the enterprises. 5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA 15

After 2000 – reforms in two stages:  2000 – 2006 : PIFC Policy Paper New legislation Introduction of PIFC concept (and COSO elements) and introduction of Internal Audit function – centralized Institutional changes – Public Internal Control Agency (as a model similar to French and Spanish system) Internal Audit function is mixed with imposing sanctions(fines) for law violation 5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA(2) The system through the time 16

 2006 – to present day Three new laws in force – Financial Management and Control in the Public Sector Act, Internal Audit in the Public Sector Act, State Financial Inspection Act Segregation of Internal Audit and Financial Inspection Decentralization of the Internal Audit function (Internal Control and Internal Audit goes close to the Anglo-Saxon model) Establishment of Central Harmonization Units for Internal Control and Internal Audit in the Ministry of Finance Development of national standards, based on the IIA Standards Training and certification system for internal auditors 5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (3) The system through the time

Establishment of State Financial Inspection Agency Legal framework - State Financial Inspection Act, Regulation for implementation of the law, Regulation for the structure of the Agency; Status – Agency subordinated to the Minister of Finance; Administrative capacity – 190 inspectors and administrative staff (for comparison -National Audit Office auditors and administrative staff, Internal auditors in the public sector in the 173 organizations); Scope of inspected entities – budget organizations – ministries; agencies; municipalities; state and municipal enterprises; other; Types of activities – ex post inspections, checks for compliance with the laws, focus on assets, expenditures, public procurement procedures; Variety of Inspection activities:  according Annual Plan – only public procurement procedures 5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (4) 18

 On the requests of the Council of Ministries, Minister of Finance, Prosecution Office and other public institutions  Complaints and signals from the citizens  Responsibility and powers  Written mandatory instructions  Recommendations to the competent bodies  Collecting evidence for the Prosecution Office  Administrative (fines) and civil sanctions/penalties (the penalized persons have a right to appeal the sanctions to the court)  Active communications with other institutions DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (5)

20 5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (6)

21 5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (7)

22 5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (8)

23 5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (9)

Other facts of the Financial inspection Activities in 2013  Total number of conducted inspections  Number of conducted procedures concerning public procurement – 2484, number of established violations  Number of other violations of the budget discipline  Number of acts engaging administrative liability – над 2000  Number of acts engaging civil liability – 18  Over 1800 findings sent to other competent authorities, a total of 63 written instructions served  170 reports sent to the prosecution office 5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (10) 24

 Good relationships are necessary for achieving cost-effective Public Control System as a whole;  The laws stipulate exchange of information; other types of communication are outlined in specific agreements or are informal;  The international standards for Internal and External Audit (IIA and INTOSAI) also set out models for coordination and using the work of the other auditors and assurance providers;  Important part of the communication is a common language and terminology;  Challenges – mistrust and even jealousy, immaturity of the systems, no appropriate methodology, lack of reforms, different opinion on the same cases, administrative burden on the organizations under control. 6. RELATIONSHIPS BETWEEN FINANCIAL INSPECTION, EXTERNAL AUDIT AND INTERNAL AUDIT - GOOD PRACTICES AND CHALLENGES 25

 Cooperation Agreement Parties of the agreement 2011 Objectives Contents Implementation  Common Activities Analysis of the State Budget execution 2014 Organization Performance Reporting 6. RELATIONSHIPS BETWEEN FINANCIAL INSPECTION, EXTERNAL AUDIT AND INTERNAL AUDIT - GOOD PRACTICES AND DIFFICULTIES(2) 26

 Continual improvement of the Public Sector inspection and audit systems; improving the methodology  More clear mandate for each function, written procedures for interaction  Active position of all parties  Transparency and publicity of the common activities and the results  Building a network for common understanding and language – regular meetings, trainings  Possibility for reliance to one another’s work and findings Coordinated, cost-effective and useful Audit and Inspection System in the Public Sector 7. CHALLENGES FOR FUTURE IMPROVEMENT 27

THANK YOU!!! 28