Using the Results of the Audit to Develop

Guidelines for Local Governments

05.10.2017

National Audit Office of Estonia

Using the Results of the Audit

• National Audit Office of Estonia (hereinafter NAOE) has

considered relevant that the audit results would not remain

unused or unforgotten.

• It is essential that LGs and ohter auditees implement NAOEs

recommendations in order to improve their functionality as a

result of audits of NAOE.

• I will present three examples of methods we use in order to

outline and emphasize problems discovered in the course of

audits.

Prevention of corruption in the

transactions of local

governments

What we investigated

• Have the restrictions imposed on officials by law been

adhered to in the transactions carried out by local

authorities?

• Do the internal control measures of local authorities reduce

the risk of restrictions being breached?

What activities we conducted

• The National Audit Office audited the economic transactions

performed by ten local authorities in 2010 and 2011 to ascertain

whether or not officials have abstained from taking part in

transactions and making decisions that are prohibited for them under

the Anti-corruption Act. This prohibition applies to transactions of local

authorities with officials, their families, and companies related to the

officials and their families. The law regards these prohibitions as

procedural restrictions.

• The National Audit Office also evaluated the adequacy of the internal

control measures of the audited local authorities, which have been

introduced to inspect officials’ performance of their obligations in the

case of such transactions. The obligation is imposed on the heads of

local government agencies as well as all other agencies by the Anti-

corruption Act.

What we found out 1

• The performance of the obligations established for prevention of

corruption is not a priority for local government leaders, which has

resulted in repeated breaches of the Anti-corruption Act.

• The National Audit Office found that officials in eight of the ten audited

local authorities had breached the restrictions established with the Anti-

corruption Act.

• The internal control measures in the audited municipalities were not

adequate to inspect adherence to restrictions. In order to check

adherence to restrictions successfully, it is necessary to know which

companies the officials are related to. But local authorities did not always

have an overview of all of the companies of their officials.

• The officials do not acknowledge the necessity of the restrictions as

much as they should. Awareness should be improved by local authorities

themselves and also by the state that established the restrictions and

should make sure that they are adhered to.

What we found out 2

• The state will also have to start paying more attention to all these

problems in order to put an end to this.

• The Ministry of Justice must also help guarantee that internal controls

in local authorities are adequate for the prevention of corruption by

developing guidelines on how to inspect adherence to restrictions.

Instructing local authorities would be part of the Ministry of Justice’s

role.

• The Ministry of Justice should also help find better solutions to

disclosing transactions performed with officials and their companies.

Disclosure of transactions and transparency of activities are important

measures in the prevention of corruption, but it has not yet been

regulated with such a goal. Transactions with companies related to

officials had been performed in all of the audited local authorities.

What activities NAOE carried out to increase

the impact of audit results• NAOE published the audit report with recommendations to the

Minister of Justice and the audited local authorities

file:///C:/Users/inesk/Downloads/RKTR_2269_2-1.4_2036_003-

1.pdf

• NAOE helped the Ministry of Justice to create a webpage about

identifying and preventing corruption

(http://www.korruptsioon.ee/en);

• NAOE compiled ‘The Handbook of Conflicts of Interests’ for

municipal councils

(http://www.korruptsioon.ee/sites/www.korruptsioon.ee/files/elfinder/

dokumendid/kasiraamat.pdf);

• NAOE held several seminars in municipalities to introduce the

handbook.

A webpage about corruption 1

http://www.korruptsioon.ee/en

A webpage about corruption 2

http://www.korruptsioon.ee/en

Webpage includes:

• Defining and describing forms of corruption;

• Statistics and surveys about corruption in Estonia;

• Conflicts of interests (cases and solutions);

• Fighting corruptsion incl. Anti-corruption Strategy 2013-2020;

• Managing corruption risks in business (E-training for public

enterprises, private sector corruption and instructions for

Entreprenurs, information about seminars);

• International assessment of Estonia.

The handbook of

conflicts of interests 1

• The preparation of the booklet was guided by

the wish to increase the awareness of

Municipal Councils and Governments about

situations involving a conflict of interests.

• The purpose is to help local governments solve

situations involving a conflict of interests. The

booklet was prepared, taking into account

restrictions set out in the legislation and the

wider notion of values characteristic of public

services.

The handbook of

conflicts of interests 2

• Includes explanations who are officials and

related person, what is the conflict of interests

and how the situation may lead to corruption and

what are the procedural restrictions in economic

transactions to avoid it;

• Includes 13 possible situations involving a

conflict of interests that Estonian local

governments have encountered with explanation

how to act in the case of that particular type of

conflict of interests.

• Unlike the formal solutions set out in the Anti-

corruption Act, the solutions provided in the

booklet are recommendatory, not binding rules of

conduct.

Seminars in municipalities (identifying and

preventing corruption in local governments).

• First part involved basic remindings of who are officials and

people related to them and what kind of restrictions apply to

them in making economic transactions.

• The biggest part included real life situations involving a conflict

of interests that Estonian local governments have encountered.

In every case-study there were detailed explanations given of

how to act in the case of that particular type of conflict of

interests and wheather this situation is corruption or not.

• A lot of questions were asked and answered.

An overview of problems

with the audit of the annual

reports of local authorities

What we investigated and what activities

conducted 1

The purpose of overview :

• To find out does the annual audit meets its goal to improve the

quality of LG´s financial information and make the information more

trustworthy for its users?

• To investigate which are the needs of the main users of the

financial information and to which extent their needs have been

taken into account in the mandatory audit of the annual reports.

What we investigated and what activities

conducted 2

• A survey was sent to all the LG´s and private auditors who

audited LG´s in 2014–2015;

• A discussion was organised with the representatives of the

revision committees;

• Main users of the financial information of LGs, e.g. the Ministry

of Finance and Statistics Estonia, were interviewed;

• The most important areas associated with the specifics of the

public sector were determined;

• Results of quality control carried out by the Board of Auditors

were analysed.

In the course of the overview National Audit Office of Estonia did not look at the

auditors workpapers and didn´t assess the quality of their work.

What we found out

• More than half of the auditors who audited LGs (59%) do not cover all

the important areas associated with the specifics of the LG (e.g.

compliance with the financial discipline, budget execution,

transactions with associated parties etc.);

• The auditor exchanges little information with the LG´s government,

council and the revision committee although 85% of auditors consider

these three to be the main users of the annual reports, 23% of

auditors mentioned there is a lack of interest from LG´s side as well

while carring out audits;

• The current short form of the auditor’s report does not provide

information that the users require (what was audited in important

areas, how it was audited and what result was derived);

• Many auditors consider the preparation and instruction of auditors

unsufficient.

What activities we carried out to increase the

impact of the overview 1

• As a result of NAOE´s overview and recommendations to compile the

instructions for auditing local goverments the Board of Auditors worked

out guidelines for LG specific questions in annual report audit process

to enhance the quality of audits

https://audiitorkogu.ee/uploads/Metodoloogiakomisjoni%20juhendid%2

0ja%20vormid%20alates%202017/2017-02-

03%20met.kom%20KOV%20auditi%20erip%C3%A4rad.pdf

The Board of Auditors is a public-private network of 150+ audit firms, standing

for a reliable business environment in Estonia and contributes to the development

of the financial regulatory and legal framework by organizing trainings for

professionals, exchanging information, networking, and overseeing of the

audit profession.

The Ministry of Finance is responsible for the development of auditing and for a

legal environment (development of legislation, exercising supervision over auditors

as well as launching the new system of professional examinations, assigning

qualifications, recognition of equivalence and keeping the auditing register.

• In cooperation with the Board of Auditors and the Ministry of

Finance a seminar for private auditors was organized. In the

seminar we introduced shortcomings and problems in auditing LG´s

annual reports by private auditors in depth.

• A more detailed form of the auditor’s report that wasn´t compulsory

in auditing local governments annual reports before will be put in

the practise that provides information what was audited in important

areas, how it was audited by privat auditor and what result was

derived.

What activities we carried out to increase the

impact ot the overview 2

A seminar for private auditors about problems

in auditing local governments annual reports

• As annual reports of LG´s are

audited by private auditors the

NAOE organized a seminar for

private auditors.

• In the seminar we introduced

shortcomings and problems in

auditing LG´s annual reports

by private auditors in depth.

• To begin with we emphasized

who are the main users of

financial data and who rely on

private auditors work the most

and what are they needs.

A seminar for private auditors about

problems in auditing local governments

• The most

important areas

associated with

the specifics of

the local

government/

public sector

were determined.

• Findings that the audit does not meet the needs of the main users in

the course of this mandatory audit of the LG´s annual reports were

pointed out and illustrated with statistics.

• The guidlines and instructions were given and questions answered.

Organisation of the activities

of internal control system

in local governments

What we investigated and what activities we

carried out

The purpose of the audit:

• Are internal audits conducted in rural municipalities and cities and do

these audits work?

• Whether or not local councils have organised the activities of revision

committees;

• Whether or not local governments have conducted supervisory control

according to the requirements stipulated by legislation;

• If a local government employed an internal auditor or financial

controller, how their work had been organized, whether or not such

audits help to ensure that the local government performs all its tasks

lawfully and expediently and uses its assets appropriately.

What we found out 1

• There is no systematic control of the activities of local governments

and the results they achieve. Use of the control options granted to

local governments by law does not help to ensure that local

governments perform all their tasks well.

• Revision committees have basically not started to work, which

means that political control as the guarantor of the lawfulness and

expedience of the activities of local governments is also not

working.

• Only a few local governments have conducted supervisory control,

the supervisory control of the lawfulness and expediency of the

activities of local government institutions and their directors has not

usually performed.

• Only a few local governments have hired a financial controller or

internal auditor.

What we found out 2

• The state don´t have a systematic action plan for creating the

preconditions that allow the financial controllers and internal

auditors of local governments to transfer to common activity

principles this purpose.

• The internal control options of local governments must be critically

reviewed. Since local governments themselves do not have the

initiative required for the changes, the officials of the Ministry of

Finance and the Ministry of the Interior should sit down together

and try to come up with a solution. The state should also focus on

supporting the manners of controls which local governments can

and are prepared to develop.

What activities we carried out to increase

the impact of the audit results

• After mapping the current situation and biggest shortcomings NAOE

suggested several changes in legislation - the revision committee´s

rights to assess lawfulness were supplemented with the rights to

assess purposefulness and productivity of the local government´s

activities; the bases for internal audit system and internal audit were

added.

• NAOE carried out a training session for all Estonian municipality

council revision committees to strengthen the internal control

systems and the capability of revision committees. The training

outlined the key points of how the controls of committees should be

planned and carried out in order to provide local residents with

information of LG´s activities, results, effectiveness, etc.

What activities we carried out to increase the

impact of audit results

• NAOE cooperates with local authorities in order to improve the internal

control and internal audit systems of LG´s. NAOE is monitoring and

observing internal auditors/controllers subject matter of the controls,

inspection- or audit reports, activity reports on an ongoing basis.

• NAOE has arranged focus group discussions for internal auditors and

controllers and other specialists in order to promote contacts and

sharing experiences includin in collaboration with EKOSAL.

EKOSAL – The Estonian LG´s Internal Auditors Association – a

non-profit private legal entity that unites people who are

interested in the internal audit of local governments. EKOSAL´s

objectives are development of professional skills and contacts in

the field of internal audit. The organisation is based on voluntary

membership.

The effect of using audit results to develop

out guidelines to local goverments in 2017

• NAOE has been contributing to improving LG´s internal control

systems so that new larger LG´s would understand the added value of

internal auditors and because of stronger internal control system LGs

would become better functioning in fulfilling their objectives;

• By giving input into improving revision committee´s role and

controlling skills NAOE believes new revision committees will be more

capable and will execute better political supervision;

• The officials, management and publicity have become more aware of

identifying conflicts of interest, transactions prohibited and risks for

corruption that is one of the;

• NAOE has been taking steps on an ongoing bases to improve the

quality of LG´s financial information in order to make the financial

information more trustworthy and transparent for it´s users.

Thank you!