1. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague1 SUPREME AUDIT OFFICE CZECH REPUBLIC Audit of state budget finances spent on the provision of investment incentives and investment aid

2. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague2 Introduction  Basic details of the audit Audit begun……..………………….2005 Audited funds …………..………….CZK 5.5 billion Number of auditors ………………..17 Number of auditees ……………….21 Shortcomings found ……………….CZK 1.5 billion Audit completed……………………. 2006

3. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague3 Subject of the audit  use of state budget finances spent on the provision of investment incentives awarded by the government and provided on the basis of a written Memorandum of Understanding Declaring a Common Intention (contract) Nature of the audit  ex post audit

4. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague4 Auditees  ministries (Ministry of Finance [MoF] and Ministry of Labour and Social Affairs [MoLSA]) providers of state budget finances spent on investment incentives public entities  commercial enterprises beneficiaries of state budget finances spent on investment incentives private entities

5. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague5 Investment incentives system MoLSA  appropriations for new job creation  appropriations for employee training (re-training) MoF  special-purpose appropriations and other special-purpose appropriations concerning legal persons’ income tax

6. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague6 Aims of the audit  The aim of the audit was determined by its subject and by the possibilities for scrutinising activities.  What could be checked? Use of state budget finances spent on the provision of investment incentives.  What could not be checked? The overall benefits stemming from the provision of investment incentives (it is less than 10 years since they were provided).

7. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague7 Scrutiny of audited activities During audit the Office scrutinises and appraises (Section 4 (1) of Act No. 166/1993 Coll., on the Supreme Audit Office) Efficiency Compliance with the law Effectiveness Some performance audit methods and elements used Audit Some performance audit methods and elements used Legal analysis of contract

8. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague8 Performance audit methods employed Preliminary study  Brainstorming used to generate new ideas and techniques and for subsequent selection of the most suitable method for appraising the economy, efficiency and effectiveness of the audited activities (3E)  Benchmarking defining individual audited activities and specifying standards for their monitoring, compiling standards  Modelling used to check the functionality of standards, empirical units, ascertainment methods and techniques and to fine-tune them modelling uses fictitious companies and the values measured in them for 3E appraisal of the expenditure of state budget finances on individual investment incentives

9. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague9 Performance audit methods employed Audit programme  Audit block diagrams guideline block diagrams used for scrutiny of efficiency and effectiveness, scrutiny of measures to eliminate found shortcomings and legality check  Productivity diagrams used to express the results of efficiency indicator measurement for the public expenditure under scrutiny  Value charts used to express the results of effectiveness indicator measurement for the public expenditure under scrutiny  Comparative analysis (benchmarking) depicts the volume of output generated by input sources and makes it possible to compare the efficiency and effectiveness of expenditure of state budget finances on the provided investment incentives using measured indicators

10. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague10  Previous audit  Preliminary study for the audit  Audit programme  Information obtained between the end of the previous audit and the start of this audit Sources used during the audit

11. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague11 Findings from the previous audit CZK 1,352 million spent on investment incentives – provided by government resolution not by act of parliament the investment incentives manual lacked the basic requisites for demonstrating its validity the provision of a tax-based investment incentive was not tied to a fixed minimum period of time for doing business in the Czech Republic and to fulfilment of the terms for the provision of other investment incentives  Response: CZK 12.5 million was returned to the state budget; in some cases the MoF had not reached a decision on the shortcomings by 31.12.2005.

12. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague12 Preparation of the audit  Preliminary study necessary to prevent errors in the audit programme brainstorming done in the preliminary study stage involved three direct participants/heads of audit groups modelling of the procedures contained in the preliminary study made it possible to compile a relatively precise audit programme and enabled auditors to work efficiently at the auditees

13. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague13 Audit input and output Audit conclusion Appeal against decisions on objections Objections to the audit protocol Audit protocols Previous audit, information obtained, preliminary study, audit programme Input Output Intended for the public Intended for auditors

14. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague14 Audit findings - I investments supported by investment incentives attained a value of over CZK 21 billion by the end of 2005 (CZK 12 billion more than in the contracts) 4,810 new jobs created (1,438 more than negotiated) 2,481 employees trained (by the end of 2005) by government resolution annexes are concluded to the contracts with commercial enterprises that enable the companies to apply for increased, additional special-purpose appropriations related to legal persons’ income tax – these increased state budget outlays do not widen the range of the companies’ obligations, however contract annexes - companies make bigger profits - the state merely incurs increased expenditure, with a risk of further increases

15. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague15 Audit findings – II under the signed contracts additional special-purpose appropriations were limited by the size of the appropriation disbursed in the first five years - the annexes removed this limitation - the sole criterion is thus the admissible intensity of state aid the state’s outlays will be greater than originally considered and cannot be precisely estimated; in five companies where a calculation could be made the expected increased expenditure amounts to at least CZK 801 million provision of investment aid to companies operating in the services sector - not regulated by law

16. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague16 Features of the audit the audit scrutinised - compliance with the law - effectiveness and achieved effects the audit - important for parliament and citizens - performed at the right time to maximise impacts - effective – benefits outweigh the cost of resources used in the audit (cost of CZK 7 million) elimination of risks represents savings in state budget expenditure of more than CZK 801 million; value added is at least CZK 794million eliminating the detected risks will enable better working of the public sector

17. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague17 Risks  under the contract annexes state budget finances are not put towards the achievement of a new goal – risk: the expenditure will bring no further benefits for the state  in the contracts the value of investments for calculating the admissible public aid intensity is not limited either by the size of investment or a deadline for investing (it is not possible to estimate the total state budget expenditure on appropriations) risk – all additional finances invested in fixed assets by companies make it possible to draw down larger additional special-purpose appropriations than previously envisaged

18. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague18  the provider relaxes the new job creation condition by allowing the companies to include employees taken on before the contract was signed  non-compliance with the terms for appraising fulfilment of the obligation to create jobs – risk of unjustified drawdown of state budget finances  non-existence of legislation governing the provision of appropriations to investors in the services sector - risk of the shortcomings found in the audit being repeated

19. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague19 Recommendations to government  when concluding annexes to contracts negotiate counter-performance from the commercial enterprises in return for the provided financing  draft legislation for the provision of investment aid in the services sector  ensure that MoLSA adheres to the precise wording of contractual provisions when performing control

20. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague20 www.nku.cz Thank you for your attention Vladimír Ruta vladimir.ruta@nku.cz Phone: +420476140724

21. VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague21 Questions Comments Discussion