INTRODUCTION TO PUBLIC FINANCE MANAGEMENT Module 5.1: External Scrutiny and Oversight 1

What is External Audit? What do external auditors do? Importance of independence of Auditor General Role of the Public Accounts Committee and legislature Module Outline 2

What is External Audit? What do external auditors do? Importance of independence of Auditor General Role of the Public Accounts Committee and legislature Module Outline 3

Assurance to Parliament (and/or President) on: regularity and probity of financial transactions soundness of internal financial controls. Independent and objective review of financial transactions and financial reporting Certify the annual financial statements May provide view on efficiency, performance or value for money What is External Audit? 4

Accountability cycle 5 Audit of budget implementation

Parliament External audit Internal audit Internal control management political External audit is independent from the executive

Legislature Annual Report Budget document Supreme Audit Institution (SAI) Audit report Executive Management Audit Committee Audit report Internal auditor Service providers Informatiion Measures audit

Audit & oversight process 8 Treasury responds to PAC recommendations Budget implemented & managed Audit undertaken SAI Draft report to agency & final to Parliament PAC submits findings to full Parliament Action taken These may be the weak links or Finance Committee

External Audit (SAI’s) only covers ex-post scrutiny of the executive to the legislature, (the Parliament also scrutinizes the budget proposal, see module 2.1 SCOPE of External Audit 9

What is External Audit? What external auditors do Importance of independence of Auditor General Role of the Public Accounts Committee and legislature Module Outline 10

What is External Audit? What do external auditors do? Importance of independence of Auditor General Role of the Public Accounts Committee and legislature Module Outline 11

Review transactions (all?) to ensure that: the annual budget has been followed Financial Regulations have been complied with adequate records have been maintained Improving the approach: Audit sampling? Problems found – solutions provided? What Do External Auditors Do? 12

Two aspects of public sector audit of equal importance: Traditional audit of legality and regularity of financial affairs is undisputed Audit of performance, effectiveness, economy and efficiency of public administration Up to each Auditor-General to determine their relative importance LIMA declaration of INTOSAI (1977) 13

Auditing Standards (1992 and Code of Ethics ) produced by INTOSAI INTOSAI Auditing Standards Committee to develop financial audit guidelines Practice Notes on the application of private sector International Standards on Auditing or separate guidelines International Audit Standards 14

Pressure to undertake performance work, but different skills are required An approach which requires careful planning and a gradual build up of skills. Priority is good probity, compliance and sound internal financial control Problems with VFM (Value For Money) audit 15

Independence from the executive Audit completed within 12 months of year end Annual audit report promptly made public Auditor-General responsible for the whole of the public sector Public Accounts Committee helps to ensure accountability & implementation of audit recommendations Challenges for public sector audit 16

What is External Audit? What external auditors do Importance of independence of Auditor General Role of the Public Accounts Committee and legislature Module Outline 17

What is External Audit? What do external auditors do? Importance of independence of Auditor General Role of the Public Accounts Committee and legislature Module Outline 18

The existence of an appropriate and effective constitutional/statutory/legal framework and of de facto application provisions of this framework The independence of SAI heads and members (of collegial institutions), including security of tenure and legal immunity in the normal discharge of their duties A sufficiently broad mandate and full discretion, in the discharge of SAI functions Unrestricted access to information Mexico Declaration (2007)

The right and obligation to report on their work The freedom to decide the content and timing of audit reports and to publish and disseminate them The existence of effective follow-up mechanisms on SAI recommendations Financial and managerial/administrative autonomy and the availability of appropriate human, material, and monetary resources Mexico Declaration (2007)

The power of the President to appoint or terminate the appointment of the Auditor General Scop and coverage of institutions Dependence upon a budget controlled by the Executive Branch of Government Interference as to the design and implementation of audit work plans Limitations on what reported and how quickly What Undermines SAI Independence? 21

Auditor General – reports to Parliament through a Public Accounts Committee (UK) Audit Court– discharge for public accountants (France) Audit Board – members of college headed by a president, consensus rather than individual opinions (Germany & Japan) State Inspector General – appointed and reports to the state president (French sub-Saharan Africa) Models of Supreme Audit Institution 22

Public accounts of all public institutions including: Accounts of any and all public corporations established by parliament & bodies receiving public funds Local governments Auditor General to have access to all documents, offices and staff necessary for audit work Scope of the Auditor General 23 the courts the Central Bank subsidies PPPs the security agencies foreign embassies

Audit opinions are typically classified as: Clean – OK Qualified – except for… - emphasis of matter - Adverse - not OK - Disclaimer – don’t know Certification of Public Accounts? 24

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

‘Modern’ opinion: In my opinion the financial statements provide a true and fair view of the state of the Government’s financial affairs on 31 December 201X and the transactions for the financial year then ending, subject to the observations contained in my audit report. 26 Audit opinion - 2

Introduction to various kinds of audit (financial, performance, etc.) External audit function and legislature Importance of independence of Auditor General Role of the Public Accounts Committee and legislature Module Outline 27

Audited financial statements and audit report to be submitted to parliament within 12 months Nine months (or before next budget passed to parliament) still challenging in some countries Audit report should be made public as soon as submitted to parliament Timeliness of Audit Reports 28

Audit work plans include follow up on previous audit findings Line Ministries provide evidence of follow up Sanctions are applied (by management) for failing to implement corrective measures Follow Up of Audit Reports 29

Frequently the SAI may do little more than send its annual report to parliament… there is commonly little communication about its contents, the lines of investigation to pursue or the means of following up the findings DfID (2005) Public Accounts Committee – or Finance Committee 30

Member of opposition chairs the PAC Members have appropriate skills & training Meetings are publicised and usually open PAC recommendations implemented Sanctions for defaulters are followed-up Commonwealth good practice 31

Timely review of audit reports Questioning of accounting officers where there are anomalies Follow up of recommendations made to the executive Public Accounts Committee – or Finance Committee 32

- PI-27 (= 2011 PI-24) and PI-28 (=2011 PI-25) on timeliness of (in-year) and (annual) reports, respectively. - PI -9 (=2011 PI-10) on audited annual financial report being public within 12 months - PI-29 (substantially changed from PI-26) on SAI Independence. Period of focus – expanded to 3 years New: independence of SAI - PI-30 (substantially changed from 2011 PI-28) on legislative scrutiny of external reports. Focus on legislature’s follow up actions and New: transparency of legislative scrutiny function. PEFA and External Audit 33

SAI PMF is a tool for measuring, monitoring, managing and reporting the performance of a Supreme Audit Institution. INTOSAI – SAI Performance Measurement Framework 34

Purpose of a SAI PMF Assessment Identify strengths and weaknesses Introduce / strengthen internal performance management and accountability Enable external (annual) reporting to stakeholders Demonstrate progress in capability and performance Demonstrate the value and benefits of the SAI to citizens Support ISSAI implementation / improve audit standards & quality Obtain & maintain external support for capacity development

SAI Performance Measurement Framework B. Independence and Legal Framework A.SAI Reporting Value and Benefits of Supreme Audit Institutions SAI Capability Country Context, Governance and Public Financial Management D. Audit Standards and Methodology E. Management & Support Structures F. Human Resources and Leadership G. Communication and Stakeholder Management C. Strategy for Organizational Development 7 Domains Structure

Effective audit is key to public financial management Auditor General may provide good independent view of a government’s finances Publication of accounts and Auditor General’s report within a year of period end is VITAL Independence & relationship with Public Accounts Committee (or Finance Committee) are key INTOSAI provides standards and capacity building Key messages 37