© OECD UKRAINE GOVERNANCE ASSESSMENT 2006

© OECD Sigma Ukraine governance assessment Public Internal Financial Control

© OECD PIFC baselines questions Is there a coherent and comprehensive statutory base, defining systems, principles and functioning of financial control, in place? Are relevant management control systems and procedures in place? Is there a functionally independent internal audit/inspectorate mechanism with relevant remit and scope in place?

© OECD Is there a coherent and comprehensive statutory base in place? lThe Budget Code provides a good base for the establishment of a financial control system. However, poorly formulated and not elaborated in secondary PIFC legislation lControl functions in legislation of State Treasury of Ukraine (STU) and State Control and Revision Service ( KRU) lThe principle of managerial accountability is explicitly mentioned in article 26 para. 2 but not implemented in practice lThe concept paper for the development of PIFC is a step forward and include the three EU pillars of a PIFC system sound financial management control system, decentralised internal audit central harmonisation unit in the MoF

© OECD Are relevant management control systems and procedures in place? lSTU is a central actor in the execution of the budget lThe introduction of the treasury system has contributed certainly significantly to improve budget execution and to the accounting and fiscal reporting systems. lThe STU and the KRU are the central key players at all stages of the control process (ex ante, ongoing and ex post) lThe cash controls by STU do not guarantee good financial discipline. The breaches of financial and economic discipline are still considerable lKRU is last beacon for inspecting budget compliance

© OECD Is there a functionally independent internal audit with relevant remit and scope in place? lIn Ukraine the internal audit function, in both the private sector and the public sector, is in its early days. lA professional internal audit organisation does not exist. lSince 2001 the KRU has played an increasingly important role in the development of the internal audit function lThe KRU is well-organised institution with capable and determined people lThe main tasks of the KRU are to inspect budget compliance and, in the event of irregularities, to initiate procedures for applying penalties lThe KRU undertake also audits, but these cannot be qualified as internal audits.

© OECD Conclusion lA legal framework for PIFC does not exist in Ukraine at the moment lSound Financial Management and Control systems based on the principle of managerial accountability with ex-ante, ongoing and ex-post controls are partly in place. lDecentralised Internal Audit is in its early days lThe co-ordination of control in hands of the STU and the KRU. Thus lPIFC according to the EU model does not exist yet

© OECD Developments lThe Cabinet of Ministers of Ukraine has recently shown a determination in the development of PIFC with the drafting of the PIFC strategy and action plan, including the three pillars of the EU PIFC system

© OECD Assessment action plan In principle, the action plan is based on the EUPIFC model but contains some pitfalls lthe plan does not link to the Reform of the Public Finance project in the MoF, which relates to the quality of the foundation of PIFC: sound budget and accounting systems lThe plan does not reflect the concept of managerial accountability for establishing and implementing an FMC system and IA units lThe plan does not give indications of the future roles of STU and KRU in a decentralised control and internal audit setting lAnother pillar of the PIFC, the CHU, will be established in the MoF and the KRU. The double CHU role might cause conflicting situations in the future lResponsibility for the implementation of the plan is not defined: the MoF and the KRU are both responsible lGiven the above risks, the proposed time schedule seems to be overambitious and unrealistic. In the coming years the capability and capacity in the MoF to implement the strategy will be crucial

© OECD Recommendations On the short term lReconsider redefining the strategy paper lThe MoF to determine up to a required level the capacity for developing and implementing the FMC and IA lThe KRU to define a change management strategy lThe MoF and the KRU to seek peer assistance for supporting the implementation of the PIFC strategy and the change process within the KRU. lAnd in the medium term (within two years) to: lEstablish a sound accounting system in accordance with generally accepted accounting standards in the public sector (IPSA Standards); lDocument the main procedures for expenditure management, accounting management and reporting management in process approaches (audit trail); lThe MoF to seek co-operation with the international internal audit organisation (IIA) in setting up the training programme for public sector internal auditors in Ukraine.