1. Reform of inspection functions in the context of internal audit development: Ukraine experience Sergey Chernutsky State Financial Inspection, Ukraine

2. Since Soviet Time Control and Revision Administration within the MoF Ukraine 1993 State Control and Revision Service (CRS) set up 2000 Main CRS – central public administration authority Since 2004 Implementation of new forms of control (audit, inspection of purchases) 2010 Main CRS is reorganized into State Financial Inspection Since 2005 Number of supervised institutions expands (enterprises of public and utilities sector) STAGES OF DEVELOPMENT of State Financial Inspection in Ukraine Since 2005 Beginning of the PIFC reform Слайд 1

3. STATUS of the State Financial Inspection Central public administration authority, coordinated in its activities by the Cabinet of Ministers of Ukraine through the Ministry of Finance Defining priorities for the State Financial Inspection and approving Action Plans Cabinet of Ministers of Ukraine Ministry of Finance of Ukraine Discussing draft procedures developed by the State Financial Inspection and submitting them for consideration to the Cabinet of Ministers Making recommendations to the Prime-Minister on appointment of the Chair of the State Financial Inspection and its deputies Approving structure and negotiating the organigram and budget of the State Financial Inspection State Financial Inspection Coordinated by means of Defining the procedures for exchange of information between the State Financial Inspection and the Ukraine MoF; receiving reports on performance of the Service Issuing orders and assignments on matters within the scope of the State Financial Inspection Слайд 2

4. STRUCTURE State Financial Inspection in the Autonomous Republic of Crimea State Financial Inspections in 24 Oblasts State Financial Inspection in Kiev State Financial Inspection in Sevastopol Regional subdivisions in districts and cities, or interregional integrated State Financial Inspections in districts and cities STATE FINANCIAL INSPECTION OF UKRAINE Слайд 3

5. SUPERVISED INSTITUTIONS Ministries and other central and local public administration authorities, budgetary institutions, public funds, enterprises and organizations that receive funds from budgets of all levels and public funds Economic entities in public sector, enterprises and organizations that use public assets or utilities (since 2005) Funds of compulsory public social insurance, as well as enterprises, institutions and organizations receiving means from these funds (since 2011) Слайд 4

6. INSPECTION STATE AUDIT In form of revisions 2004 – audit of implementation of budget programs 2009 – audit of individual economic operations run by monopolist enterprises MONITORING OF PUBLIC PURCHASE consists in operative monitoring and analysis of tender procedures 2007 – audit of implementation of local budgets AUDIT OF PUBLIC PURCHASE consists in analysis of compliance with the law on public purchase AUDITS IN WORK GROUPS upon a Government decision, by employees of central public administration authorities INVOLVEMENT OF SPECIALISTS FROM THE INSPECTION IN CHECKS RUN BY THE LAW ENFORCEMENT AGENCIES PARTICIPATION IN REVISION COMMISSIONS of entities with over 50% of state share in their chartered capital 2006 – financial audit of activities of public enterprises and utilities TYPES AND FORMS OF PUBLIC FINANCIAL CONTROL EXERCISED BY THE STATE FINANCIAL INSPECTION Since 2006 Since 2004 Слайд 5

7. BEGINNING OF THE REFORMS 2005 The Government approves the Concept of development of public internal financial control in Ukraine State Financial Inspection is in charge of reform in the field of internal control and internal audit Слайд 6

8. PREMISES FOR MODERNIZATION OF INSPECTION Introduction of public internal financial control in Ukraine (reform began in 2005) Low performance of revisions (improved financial discipline in the state) Unjustifiable planning of controls and revisions based on regularity principle (once in 2-3 years) Large labor costs associated with revisions (number of entities reaching about 90,000, while the number of inspectors reaches about 8,000) Revealing insignificant infringements and deficiencies that do not lead to a loss in resources and are primarily caused by accounting errors Слайд 7

9. , WAYS FOR MODERNISATION OF THE INSPECTION Making the inspection a tool to reveal substantial infringements and financial frauds by means of: 1.Organizational and structural changes. 2.Transition to risk-oriented planning and inspection. 3.Aiming to reveal substantial infringements and abuses. 4.Development of procedures, making corrections to competences of the State Financial Inspection. 5.Respective training for the inspectors. Слайд 8

10. State Financial InspectionMain Control and Revision Administration reorganized into Reorientation of functions of the Inspection 64 units of institutional control eliminated in all ministries and other central public administration authorities (about 1,500 persons) Слайд 9

11. REDUCTION Number of regional units (at district level)Number of public employees State Financial Inspection agencies Public Control and Revision Service agencies State Financial Inspection agencies Public Control and Revision Service agencies 165 483 59938192 - 65,8 % - 26,8 % 6.6 integrated divisions per oblast on average 19.3 divisions per oblast on average Reorientation of functions of the Inspection Слайд 10

12. Risk-oriented approach to planning There is an independent unit for monitoring of risk operations created within the State Financial Inspection Methodology for accumulation and assessment of risks was developed within the World Bank project “Modernization of public finances” Concept for risk-oriented selection of audited entities was approved while planning control and revision activities An electronic database is built which accumulates information on activities of audited entities received from different sources Analysis of database for presence of most risky entities and economic operations An internal disposition of the State Financial Inspection provides that only those entities shall be selected for audit who show some risks of infringements, which can lead to losses of public resources Reporting on performance of the State Financial Inspection agencies and approaches to assessment of their activities have been amended Слайд 11

13. Amount of budget allocations (appropriations) Cash expenditures on capital repairs, reconstruction and restoring Cash expenditures on capital construction (purchase) Public purchase from one actor / economic entities – private individuals Primary cost of fixed assets (houses and buildings, machinery and equipment, transport vehicles) Growth in stocks (materials and food stuff, little-value and wearing articles, and other stocks) compared to the previous year Risks for budgetary institutions, part І Слайд 12

14. Risks for budgetary institutions, part 2 Lower cost of non-negotiable assets (sold, transmitted free of charge, discarded as useless, etc.) Accounts payable / receivable Own revenues (payment for services offered) Information from law enforcement agencies on the amount of supposed material damage (loss) or interactions with seemingly fictitious economic entities Information from other external sources on amount of supposed material damage (loss) Information from structural units of the State Financial Inspection on the amount of supposed material damage (loss) Слайд 13

15. Risks for economic entities (non- budgetary institutions) Income (proceeds) from marketing of products (goods, works, services) Net loss Primary cost of fixed assets Lower cost of assets due to their loss, elimination, reappraisal, losses from lower utility, other changes Ratio of other operational incomes (i.e. from activities other than main ones) within the total amount of incomes from operational activities Capital investments (capital construction, capital repairs, purchase (manufacturing) of fixed assets, etc.) Long-term financial investments Ratio of reserve of doubtful debts in the total amount of receivables Public purchase from one actor or from economic entities – private individuals Слайд 14

16. RiskInformation sourceRisk criteriaDegree of riskScore Cash expenses on capital repairs, reconstruction and restoring Report on inflow and use of resources from the general fund (form no. 2д) The indicator is defined as a total for 3 years Over 5 mln HryvnaHigh5 1 - 5 mln HryvnaMiddle0.50.5 Less than 1 mln Hryvna Low0.05 Cash expenses on capital construction (purchase) Report on inflow and use of resources from the general fund (form no. 2д) The indicator is defined as a total for 3 years Over 10 mln HryvnaHigh5 3 - 10 mln HryvnaMiddle0.50.5 Less than 3 mln Hryvna Low0.05 When the amount of scores is the same, the priority for inclusion in the plan is given to that institution where the number of high risks is the biggest Public purchase from one actorBulletin of public purchase The indicator is defined as a total for 3 years Over 3 mln HryvnaHigh5 500,000 - 3 mln Hryvna Middle0.50.5 Less than 500,000 Hryvna Low0.05 Table of risks Слайд 15

17. Sources of information on risks of probable financial infringements Letters from citizens  Databases of public administration authorities  Information from law enforcement and other agencies  Hot-line  Analysis of previous audits  Laws and procedures concerning financial or licensing matters  Mass Media  internet  Reports from the institutions  Слайд 16

18. Most information is collected and analyzed by hand. This process is not automated. There is an established form of query for information from a supervised institution (for budgetary and non-budgetary institutions and revisions of local budgets), which defines a typical list of documents to be used while planning control and revision activities HOW TO ACCUMULATE INFORMATION ON RISKS Слайд 17

19. OPPORTUNITIES FOR ANALYSIS OF ADDITIONAL RISKS Provided that the process is automated, one could use the following risks: Presence of precious assets on the books, which are not connected with the main activities of an institution (or not used) Complex regulations for inflow and outflow of resources Involvement in state programs and programs financed from other financial sources Presence of foreign economic activities Benefitting from direct state support, means from the central or local budgets The institution either benefits from a monopolist status, or is on a strategic list important for the state Слайд 18

20. USE OF INFORMATION OF INTERNAL CONTROL AND AUDIT CHU information on quality assessment of internal audit units Information on reliability of internal control system Low quality of IA activities, unreliable IC Risk for an inspection Слайд 19

21. Уменьшение количества контрольных мероприятий RESULT OF RISK-ORIENTED SYSTEM Слайд 20

22. Within the World Bank project “Modernization of state finances”, to create an automated data base to accumulate risks of probable infringements To make amendments to the legislation in order to eliminate current restrictions, according to which an unscheduled revision can only take place subject to a court award FURTHER STEPS Слайд 21

23. Sergey Chernutsky chornutskiy@dkrs.gov.ua