INTRODUCTION TO PUBLIC FINANCE MANAGEMENT Module 5.2: External Audit & Oversight

Module Outline What is External Audit? What do external auditors do? Importance of independence of the Supreme Audit Institution (SAI) Audit & Oversight Process: Role of the Public Accounts Committee and legislature

What is External Audit? Assurance to Parliament on: Regularity and probity of financial transactions. Soundness of internal financial controls. The reliability of financial statements.

The Accountability Cycle What is External Audit? The Accountability Cycle Parliament Sets Budget legislation on revenue and expenditure S A I Audits government reports to parliament Government Executes budget

Supreme Audit Institution (SAI) What is External Audit? Legislature Budget document Annual Report Audit report audit Supreme Audit Institution (SAI) Executive Audit Committee Management Information Measures Audit report Internal auditor Service providers audit Public Expenditure Analysis and Management Course Zimbabwe 2014

What is External Audit? Models of Supreme Audit Institution (SAI) Auditor General – Officers of parliament-reports to Parliament through a Public Accounts Committee (UK) – Public Finance Accountants Audit Court – Part of Judiciary (France) – Public Finance Lawyers Audit Board – members of college headed by a president, consensus rather than individual opinions (Germany & Japan)

What is External Audit? SCOPE of External Audit: External Audit (Supreme Audit Institutions - SAIs) only covers ex-post scrutiny of the executive to the legislature.

What is External Audit? Scope of the Supreme Audit Institution (SAI): Public accounts of all public institutions including: 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 the courts the Central Bank subsidies PPPs the security agencies foreign embassies

Module Outline What is External Audit? What do external auditors do? Importance of independence of the Supreme Audit Institution (SAI) Audit & Oversight Process: Role of the Public Accounts Committee and legislature

What Do External Auditors Do? Review transactions to ensure that: The annual budget has been followed; Financial Regulations have been complied with; Adequate records have been maintained. Certify the annual financial statements. May provide view on efficiency, performance or value for money.

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

What Do External Auditors Do? Audit opinion (1) 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…

What Do External Auditors Do? Audit opinion (2) ‘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...

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: Traditional audit of legality and regularity of financial affairs is undisputed. Audit of performance, effectiveness, economy and efficiency of public administration. Up to each SAI to determine their relative importance.

What Do External Auditors Do? International Audit Standards Auditing Standards (1992 and Code of Ethics - 1998) produced by INTOSAI. 2002 - INTOSAI Auditing Standards Committee to develop financial audit guidelines. Practice Notes on the application of private sector International Standards on Auditing or separate guidelines.

What Do External Auditors Do? Problems with VFM (Value For Money) audit 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.

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 helps to ensure accountability & implementation of audit recommendations.

Module Outline What is External Audit? What do external auditors do? Importance of independence of the Supreme Audit Institution (SAI) Audit & Oversight Process: Role of the Public Accounts Committee and legislature

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.

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.

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.

Module Outline What is External Audit? What do external auditors do? Importance of independence of the Supreme Audit Institution (SAI) Audit & Oversight Process: Role of the Public Accounts Committee and legislature

Audit & Oversight Process Treasury responds to PAC recommendations Action taken Budget implemented and managed Audit undertaken SAI Draft report to Agency & Final to Parliament PAC submits findings to full Parliament

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.

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.

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… DfID (2005)

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

Audit & Oversight Process Public Accounts Committee (PAC) or Finance Committee Timely review of audit reports. Questioning of accounting officers where there are anomalies. Follow up of recommendations made to the executive.

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.

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

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 the executive.

Key messages 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.