Report No. 26839-RU Russian Federation Country Financial Accountability Assessment September 16, 2003 Operations Policy and Services Unit Europe and Central Asia Region Document of the World Bank CTJFtFtENCYEOUIVALENTS Unit of currency =Ruble EXCHANGE RATE US$ 1=31.825 Rubles (December30,2002) ACRONYMNS AND ABBREVIATIONS AC AccountsChamber PAC Public AccountsCommittee ASOSAI Asian Organizationof SupremeAudit PEIR Public Expenditure and Institutional Institutions Review CAS CountryAssistance Strategy PIU ProjectImplementationUnit CBR CentralBank of Russia PSC Public SectorCommittee COA Chart of Accounts RF Russian Federation CID Control and InspectionsDivision RFTA Regional Fiscal Technical Assistance CIFA Core IntegrativeFiduciaryAssessment ROSC Report on Observance of Standardsand Code CPI CorruptionPerceptionsIndex SAI SupremeAudit Institution CPPR CountryPortfolioPerformance Reviews SAL SectoralAdjustmentLoan DFID Department for InternationalDevelopment SNAO SwedishnationalAccounting Office (UK) ESW Economic and SectorWork SOE State-OwnedEnterprise EUROSAI European Organization of SupremeAudit su SpendingUnits Institutions FMI FinancialManagement Initiative TGL Treasury GeneralLedger FMIS FinancialManagement Information System TI Transparency International FSAP FinancialSectorAssessment Program TSA TreasurySingleAccount FT FederalTreasury USSR Union of the Soviet SocialistRepublics GAO General Accounting Office (USA) VPN VirtualPrivateNetwork GDP Gross DomesticProduct WBI World Bank Institute GFS GovernmentFinancialStatistics IAS InternationalAccounting Standards IASC InternationalAccounting Standards Committee IBRD InternationalBank for Reconstruction and Development IMF InternationalMonetary Fund IFAC InternationalFederationof Accountants IF1 InternationalFinancing Institutions INTOSAI InternationalOrganizationof SupremeAudit Institutions ISA International Standardson Auditing KRU Financial ControlDepartment MOD Ministry of Defense LAN LocalArea Network MOF Ministry of Finance MOEDT Ministry of EconomicDevelopment and Trade MPS MaterialProduct System NAO National AccountingOffice (UK) NGO Non-Governmental Organization OECD Organizationfor Economic Cooperationand Development Regional Vice-president: ShigeoKatsu, ECAVP CountryDirector: Julian Schweitzer, ECCUl SectorDirector: Alain Colliou, ECSPS SectorManager: John Hegarty, ECSPS Task TeamLeader: Roberto Tarallo,LCOAA Russian Federation: Countw Financial Accountabilitv Assessment I TABLEOFCONTENTS TABLE OF CONTENTS .................................................................................................. i PREFACE ........................................................................................................................... i EXECUTIVE SUMMARY ............................................................................................ IV ICOUNTRYCONTEXT . ................................................................................................ 1 Governing Structures................................................................................................................... 1 Strengthening Central Control., ................................................................................................... 2 Economic Prospects andPublic Sector Reform.......................................................................... 2 I1 PUBLIC SECTORBUDGET MANAGEMENT . ...................................................... 5 Budget Planning and Preparation................................................................................................ 6 Soviet Legacy and Progressto Date............................................................................................ 5 Budget Execution........................................................................................................................ 7 RevenueManagement ................................................................................................................. 9 10 Recommendations ..................................................................................................................... Monitoringand Evaluation........................................................................................................ 10 I11 TREASURY SYSTEM . ............................................................................................ 13 Treasury Operations in2001-2002 ............................................................................................ Soviet Legacy............................................................................................................................ 13 14 Treasury Single Account and Treasury DevelopmentProject .................................................. 15 Short-term Enhancements ......................................................................................................... 16 Inclusion of Ministry of Defense ........................................................................................... 17 Inclusion of CustomsRevenues............................................................................................. 17 Inclusion of Extra-budgetary Funds ..................................................................................... 17 18 Recommendations ..................................................................................................................... Closing of Off-budget Accounts ............................................................................................ 18 IV PUBLIC SECTOR ACCOUNTING AND FINANCIAL REPORTING . ............20 The Soviet Legacy..................................................................................................................... 20 21 Reporting.,................................................................................................................................. Accounting System.,.................................................................................................................. 21 Treasury Reporting.................................................................................................................... BudgetCode.............................................................................................................................. 22 Sub-national Governments ........................................................................................................ 22 23 Recent Developments................................................................................................................ 23 Recommendations ..................................................................................................................... 24 V INTERNAL CONTROLS AND INTERNAL AUDITING . .................................... 25 Government Ministries.............................................................................................................. 25 Federal Treasury........................................................................................................................ 26 MOF's Control and Revision Department................................................................................. Developing IntemalAudit Function.......................................................................................... 27 29 Recommendations ..................................................................................................................... 30 Russian Federation: Counfw Financial Accounfabiiifv Assessment ii V I EXTERNAL AUDIT . ................................................................................................ 33 Legal and Institutional Framework ........................................................................................... 33 Scope of Responsibilities .......................................................................................................... 35 Activities andProcedures.......................................................................................................... 36 Dissemination of Audit Findings............................................................................................... 38 Audit Standards......................................................................................................................... Staffing...................................................................................................................................... 39 39 Recommendations ..................................................................................................................... 40 Scope of Work ....................................................................................................................... 40 WorkProgram....................................................................................................................... 42 Enforcement Role.................................................................................................................. 42 Conformity with International Standards ............................................................................. 44 Complementarity of Internal and External Audit.................................................................. 44 Relationship with Local Governments.................................................................................. 45 Capacity Development .......................................................................................................... 46 46 VI1 PORTFOLIO FIDUCIARY CONSIDERATIONS .Quality Assurance ................................................................................................................. ............................................. 48 Recommendations ..................................................................................................................... 48 Audit ofBankProjects .............................................................................................................. Conditions for Moving towards Ministry-based Implementation............................................. 49 50 ANNEX I:CORRUPTIONAND GOVERNANCE INTHE RUSSIAN FEDERATION ................................................................................................................ 52 ANNEX 11:LIST OF COUNTERPARTSMET .......................................................... 53 ANNEX 111: BIBLIOGRAPHY AND REFERENCES ............................................... 55 ANNEX IV: MAP OF THE RUSSIANFEDERATION ............................................. 56 Russian Federation: Counfw Financial Accountabilifv Assessment i PREFACE This report was prepared on the basis o f the findings o f a World Bank mission to the Russian Federation from January 22 to February 6, 2001 by a Task Team comprised of Roberto Tarallo, Team Leader, Sr. Financial Management Specialist, and Clifford Isaak, Sr. Financial Management Specialist. The report i s based on the results of interviews with public institutions, at the federal level, as well as on detailed analysis o f the laws, documents and other information collected. Onthe part of the Government, the counterparts to the assessment lent their full and proactive support to the CFAA mission and engaged with the Bank's team in a comprehensive dialogue about the issues identified by the assessment. The Bank is grateful to the Government of the Russian Federation for this cooperation. The list o f counterparts met i s provided inAnnex 1. Documents reviewed are listedinAnnex 2. Scope of the Report This CFAA concentrates, by design, on federal-level public sector financial management. As part of the core diagnostic reports carried out by the Bank in all client countries, its results feed into the fiduciary discussion presented in the new Russian Federation Country Assistance Strategy (CAS), covering FY03-05; and into the Core Integrative Fiduciary Assessment (CIFA) which, upon the request formulated by the Country Director for the Russian Federation (RF), integrates the analyses o f the Country Procurement Assessment Report (CPAR) and various sectoral Public Expenditure Reviews (PER) that have been completed recently. In consideration o f the systemic importance o f the Russian Federation in the world's economy, the task o f assessing private sector accounting and auditing has been placed within the scope o f work undertaken, in2002, to prepare a Report on Observance o f Standards and Codes (ROSC) for the RussianFederationunder the joint IMFIWorld Bank Financial Sector Assessment Program (FSAP)'. The summary action plan stemming from the Russian Federation CFAA recommendations i s presented in the Core Integrative Fiduciary Assessment (CIFA); therefore, the two reports were presented to the authorities, and are to be examined, jointly. The draft C F M C I F A reports were discussed at a workshop, held inMoscow in July 2002, seeing the participation of the Bank teams, as well as representatives from the Ministry o f Finance, the Federal Treasury, and the Accounts Chamber. The final The RF Accounting and Auditing ROSC will summarize the extent to which internationally recognized accounting and auditing standards, and other associated standards recognized as useful for the operational work o f the IMFand the World Bank, are followed byprivate sector entities and the government agencies that deal with their activities. These include standards regarding data dissemination, monetary and financial policy transparency, fiscal transparency, banking supervision, securities, insurance, payments systems, corporate governance, accounting and auditing, and insolvency and creditor rights. Reports summarizing countries' observance o f these standards are prepared and published on a voluntary basis. They are used to helpsharpenpolicy discussions with nationalauthorities, byrating government agency performance andby assessing the level o f risk inprivate sector activities. C F M C I F A reports incorporate the views o f the counterparts to the two assessments, andthe suggestions received, at the July 2002 workshop. Purposeof the Report A CFAA considers the strength o f the public financial accountability framework o f a country. The aim is to assess whether the existing framework, as designed and as practiced, i s sufficient to ensure proper use o f funds, both the country's own resources as well as those provided by the Bank and other institutions. One o f its main purposes is to assist the Bank in assessing the risks which the financial accountability fiamework poses for the implementation o f Bank programs and the use o f Bank funds, and proposing suitable measures to manage these risks. It also supports dialogue with the borrower country and development partners on financial accountability matters, and assists inthe design o fprograms to build financial management capacity. The CFAA involves a diagnostic exercise covering the financial management systems o f a country. It i s not an audit, and it does not provide assurance that all funds are being used for intended purposes. However, it provides a well-informed and objective assessment o f the strengths and weaknesses o f financial management systems, a diagnosis o f problems and advice on their resolution, and an indication o f the level of financial accountability risk inthe country concerned. Each CFAA is expected to cover a minimumcore content-areas that must be covered in all CFAAs. Although financial accountability encompasses a wide range o f activities in the private and public sectors o f an economy, for the purpose o f the CFAA, the following are considered to be core: a Budgeting a Public Sector Accounting andFinancialReporting a Public Sector Internal Control System a Public Sector Auditing a Legislative Scrutiny o f the Public Sector Financial Management Inthe context of a country's overall governance environment, the executive arm of the government has an obligation to the public for safekeeping and proper use o f public resources entrusted by its constituents, and to provide a credible legalhegulatory framework to promote good financial governance inbothprivate and public sectors o fthe economy. The institutional and legalhegulatory regime that seeks to provide this assurance constitutes the public financial accountability framework ina count$. The Bank's interest in the CFAA primarily lies in providing inputs for managing fiduciary risks. The Bank's fiduciary responsibilities to its shareholders and the Inthe context ofthe private sector, highquality financialreportingandrobust audit infrastructure should provide reasonable assurance to interestedparties that financial operations are conducted properly and that investments are managed with due care and are protected from the risk of fraud and misuse; and to determine the developmental actions to support an enabling environment for private sector development. Russian Federation: CountrvFinancial Accountabilitv Assessment iii borrowing government's fiduciary responsibilities to its citizens are closely related. If the borrowing government meets its fiduciary responsibilities to the citizens, the Bank's fiduciary responsibilities are automatically met. It is therefore necessary for a country to develop a proper financial accountability framework, indesign as well as inpractice. The CFAA, therefore, needs not only to focus on the existing systemic weaknesses giving rise to fiduciary risks, but also to present advice on developmentalneeds. Acknowledgements The mission members wish to acknowledge the extensive cooperation and assistance received from officials and staff o f the public organizations, state agencies and other institutions interviewed. Mmes Lydia Petrashova and Anna Jouravleva, Financial Management Officers, and Ms. Julia Checkaljuk, Team Assistants inthe Bank's Moscow Office, provided support with fact-finding and documentation gathering activities, as well as logistic arrangements for the mission and, together with Ms. h i l a Kuka, Team Assistant, ECSCS, with report preparation. Messrs. John Hegarty, Regional Financial Management Adviser, Core Services Europe and Central Asia (ECA) and David Shand, Financial Management Adviser, OPCFM and Peer Reviewer, offered invaluable comments and provided other important inputs to the task. Ms. Suzanne Snell, Consultant, assisted with the editing and formatting ofthe report. Russian Federation CFAA: Executive Summarv iv EXECUTIVESUMMARY Country Context State Structure. The Russian Federation i s a federative democracy, adhering to the principles o f separation o f powers under a presidential system. The Constitution provides for a bicameral legislature (Federal Assembly, composed o f the Lower House, the State Duma; and the Upper House, the Federation Council) and for a strong executive. The 1992 Law on Judges established the independence o f the judiciary. The Constitution also provides for a multi-party system and fiee elections. Administrative Structure. The Russian Federation (RF) comprises three tiers o f government: (i) the central (federal level) government; (ii) second tier, consisting of the 89 Subjects (regional level)- oblasts, autonomous oblasts, republics, autonomous republics, ethnic republics, krais (regions) and okrugs (districts)- which, for the most part, have a unified budgetary relationship with the federal government; and (iii) a third tier (district level), containing rayons (municipalities and townships) that are subordinated to the second tier o f government. The great variation in the administrative regions' climate, endowment, and economic base, make effective fiscal and economic management at the national level quite complex. The recently launched strengthening of institutional development at the second and third tiers o f government, accompanied by reinforcement o f the governance process fiom the top down, should also be accompanied by reforms inthe regions that take into account the need for a balance o fpower between the center and the periphery and for harmonization o f regional and federal laws, along with reform at the local government level, especially in the area o f public financial management. In 2000, the country was reorganized into seven super-administrative districts by presidential ruling. These districts - created as an additional tier o f the federal government, with very limited rights and responsibilities - are regarded as part o f a strategy to reassert federal government control over the regional governments. The restoration o f a strong Russian state, including diminished influence o f the business oligarchy, emerged in the early phase o f economic transition, has the support o f the majority o fpublic opinion and is regarded by various observers as the only way out o f the difficulties o fthe post-Soviet era. Economic Prospects. Due to rapid economic growth, progress on tax collection, extremely high world oil prices, and relatively effective exchange rate policies, Russia's macroeconomic picture looks positive. Strengthening policy-making and budget management, including public sector financial management-accounting, financial reporting, internal and external audit-is an important element inkeeping public finances and debt on a stable, long-run course so that genuine, long-lasting stabilization can be achieved. Public Sector Reform. This CFAA took stock o fwork in2001-2002 at the federal level in public sector budget management and the treasury system . It focuses on public sector accounting and financial reporting, internal controls, and internal and external audit. Recommendations proposed in these areas, and in regard to portfolio fiduciary Russian Federation CFAA:Executive Summarv v considerations, are meant to be considered within the broader scope o f the implementation of the Expenditure Efficiency program developed by the Russian Ministry o fFinance, and other concomitant public sector reform efforts. Institutional reforms and capacity building in the public sector, and associated improvements in the governance structure, are at the core o f the Russian Federation's program o f economic transformation and development, launched in 2001. New policy approach, systems and procedures under discussion by the World Bank and the authorities would improve the MOF's ability to plan and control federal budget execution. The renewed emphasis and dialogue between the Russian authorities and the International Financing Institutions (IFIs) in these areas is demonstrated by the unprecedented volume o f economic and sector work being undertaken by the World Bank, covering public investment, federal budget management reform, and anti- corruption efforts, as well as the number o f large projects under preparation-treasury development, regional fiscal reform, tax administration modernization, and customs reform. BudgetManagement The decision to make the transition from a centrally planned to a democratic, market- oriented economy also involved a decision to radically transform the public sector, in particular the Ministry o f Finance, which has a central role in public finance management. In public sector budgeting, as in other areas, the Russian Federation has taken a gradual approach to reform. Progress was made during 2001-2002. First, the federal government has sharply curtailed the use o f offsets and, with the growth o f the revenue stream, the budgethas lately been better managed and, owing to the positive macroeconomic situation o f the country, presently remains in surplus. Secondly, expenditure control has been strengthened. Thirdly, the tracking of, andaccounting for, funds from the Federal Treasury have greatly improved. Lastly, the government has made progress in distinguishing general governmentoperations from those o fother functional uses. Planning and Preparation. Multi-year forecasting has been carried out within the Ministryo f Economic Development and Trade (MOEDT) and the MOF's Budget Policy Department for many years. As a result, a framework for medium-term aggregated forecasts and targets is inplace, together with the capacity to carry out short and medium- term forecast and macroeconomic analyses underlyingthe budget and to publishthem in the annual budget document. However, there were no mechanisms to ensure consistency with macroeconomic constraints through the budget preparation process. There were also some problems with budget classifications: Government Finance Statistics (GFS) economic classifications were yet to be fully implemented; and in the way the work o f the Accounting Methodology department within the MOF is organized, inparticular, how it interacts with the Federal Treasury. The budget preparation process in RF followed a top-down approach that was not completely grounded on detailed analyses o f programs or spending needs. Some o f the sectoral departments within the MOF (e.g. departmentfor sectoral financing) were pretty active during budget formulation stage, collecting and processing information from line Russian Federation CFAA: Executive Summaw vi ministries. However, some o f them (e.g. department for social policy) did not actively participate in annual budget formulation or execution oversight, but function only as the contact points between the M O F and the relevant line ministries. Funding allocations did not reflect sectoral policies and objectives, leading to a strong need to amend the budget at the execution stage. The resulting deficiencies in execution and wide gaps between plans and actual outcomes undermined the capacity to implement public policy. In particular, policy over-commitments and use o f the budget as a `control' device (forcing management within actual resources, rather than setting out hard budget constraints for all users) were the main determinants o f the extensive generation o f arrears that occurred until2002. Budget Execution in 2002. Steps were taken to increase expenditure accountability, including adoption o f a system o f contract registration and authorization, and a system o f commitment recording for tracking utility-related expenditures. Coverage o f the Treasury system was extended, including recording proceeds from off-budget accounts. Government has adopted the principle o f establishing a Treasury Single Account (TSA) for federal budget revenues and expenditures, and the new Budget Code requires all budgetary entities to open an account with the Treasury. Major remaining weaknesses in controlling expenditure commitments, reducing arrears and improving cash management should be resolved with the introduction o f the TSA, but this process will take time and interim improvements are required. While total arrears have dropped significantly in 2000 and 2001, there i s no complete tracking o f current or past arrears, symptomatic o f the focus on the current budget cycle alone. Accounting principles and reports for extra-budgetary funds are not yet compatible with those for regular budget funds (as defined in the Chart o f Accounts), and differences in the timeframe and approval process still leave extra-budgetary funds beyond the reach o f budget execution discipline. Revenue Management. Most taxes, bases, and rates were set by central government, and central government also prescribes revenue-sharing formulae. Taxpayers paid taxes where they had been registered (either as individuals or business entities), through the local level offices o f federal Ministry o f Finance and Treasury. The 1999 tax code provides a legal basis for all taxes and protection o f taxpayers' rights. There has been significant progress in improving tax collections in recent years, due to better enforcement o f tax laws. Strong disincentives for the regions to engage innon-cash offset settlements schemes o f tax bills, that have historically lowered cash receipts to be shared with central government, are embedded in the tax legislation as well as the Treasury's tax-sharing procedures. However, application o f the legislation at the regional level lacks consistency and, in spite o f the significant progress inimproving tax collections inrecent years, taxation remains a problem area. Monitoring and Evaluation. Historically, there has been a lack o f reporting on budget outputs. The objective o f the MOF's planned Expenditure Efficiency program was to improve budget efficiency by introducing performance budgeting through a quasi- contractual agreement between central and line agencies regardingperformance, as well as better monitoring and evaluation. Spending units would be held accountable for their Russian Federation CFAA: ExecutiveSummarv vii results, introducing greater focus on budget outputs, and creating mechanisms for competition for budget financing through program proposals. Recommendations. The first step is to achieve a stable policy consensus on budget formulation and the improvement of routine budget execution capacity; only then can the focus shift to performance. The CFAA recommends strengthening the strategy phase o f budget preparation in order to link within a single framework, macroeconomic resource constraints and sectoral and program targets, over a horizon extending beyond the immediate budget cycle; adoption o f a uniform, simplified budget coding structure hlly incorporating GFS hnctional and economic classifications; adoption o f a more participatory approach to budget planning and formulation, involving the MOF, central ministries and agencies, and second-line spending units, which should provide detailed spending plans as inputs to the budget process; introduction o f accounting principles by entities with extra-budgetary funds and preparation of reports that are compatible, and can be consolidated, with Treasury accounts and fiscal reporting; preparation o f a program o f institutional development for the MOF, including analysis of procedures now in use to plan and active application o f modem information technology; amendment o f the chart of accounts (COA) to filly reflect the budget classification, with the objective o f integrating the Register (records of transactions) into the Treasury accounting ledger; progressive extension o f the current partial system for commitment control to cover other type o f expenditures; and introduction o f complementary reforms evaluation and oversight o f budget performance outside the executive, specifically legislative scrutiny, external audit and the broader role of civil society, including publication o f budget reports and analysis. Treasury System Underthe Soviet system, the central bank, and more generally the whole banking sector, operated as the de facto treasury for the govemment. Since its creation in 1992 as a department o f the MOF, the Federal Treasury (FT) has implemented a system to manage the budget execution process. Some essential elements o f a modemtreasury system have already been implemented with respect to the payment system, flow o f funds, and cash management. The Central Bank of Russia (CBR) operates a clearing system consisting of regional clearing centers in each region and a national clearing center in Moscow. Manual clearing procedures are still used quite extensively, originating delays in Russian federation CFAA: Executive Summary viii payments. The CBR is planning to move towards a modern, real-time, gross settlement system, but there i s no specific timetable for this. In2001-2002, there was significant progress towards establishing amodemandefficient federal treasury system in RF. The systems were able to provide the minimum information support required for basic treasury functions, and short-term enhancements o f this system were underway. The next phase was the introduction o f full treasury functions, with an initial step taken with the January 2000 approval o f the concept o f a Treasury Single Account (TSA) for federal budget revenues and expenditures. The adoption of the TSA was an integral part o f the overall strategy for the further development o f the Treasury, setting new procedures for flows o f federal budget funds andaccounting rules. Treasury Development Project. The long-term process o f implementing a full range of treasury functions, including commitment recording, General Ledger, and comprehensive financial reporting, received support under a Treasury Development Project now being prepared by the M O F and the World Bank. The government is very committed to the project, as it realizes the vital importance o f a functioning Treasury to meet the needs of public financial administration in the context o f a market economy. The first phase of upgrading and increasing the coverage o f the basic systems was completed by the year 2002, by bringinginto the system the Ministry o f Defense (MOD), customs revenues, a number o f extra-budgetary funds and most o f off-budget accounts. The agencies and personnel had become thoroughly familiar with the workings o f the interim systems and associated changes in business processes, Treasury moved to a full-function system based on more advanced technology andprocedures. Recommendations. The development and implementation o f a full-function Treasury system will take several years and is not expected to become fully operational before 2004/05. Inthe interim, the CFAA recommends 0 immediate implementation o f an improved system of expenditure monitoring, including commitment control, replacement o f cash rationing with more orderly and effective cash-management systems; and introduction o f a sound accounting system for government operations; 0 extension o f Treasury control o f expenditure commitments to all items o f the economic expenditure classification, including contract monitoring; and 0 replacement o f weekly cash finding limits by monthly funding o f established expenditure commitments, inorder to reduce the incidence o f ad hoc discretionary budgetary adjustments conducted in a non-transparent manner during budget execution. AccountingandFinancialReporting The progressive setup o f the treasury system i s already allowing for greater timeliness and effectiveness o f accounting and reporting, and for fill ownership o f the MOF over these fundamental management tools. The M O F i s proceeding with improvements within the existing system, including preparation o f the federal budget execution balance sheet Russian Federation CFAA: Executive Summarv ix starting in 2000. There are plans to prepare quarterly and annual financial statements on federal budget execution. Ultimately, the MOF's Treasury Development Project would include development and deployment o f a Financial Management Information System (FMIS) that would provide the type o f information required for decision making, management control, and budget formulation insubsequent years. The new Budget Code, which requires recording o f all stages o f the payment process, provides a strong basis for comprehensive release o f information to the public (now a legal requirement). The Code became effective inJanuary 2000 butwas not hlly implementedbyDecember 2002. Accounting. Some practices represented in2001-2002 holdovers from the Soviet system, and government accounting relied heavily on reporting from the banking system. The Budget Department Accounting Unit summarized approved expenditure authorization reports that were presented to the M O F by the spending units and keeps reconciled financial records with the banking system. Reporting from the banking system is carried out in cash terms, and reflects the distribution o f budgetary funds rather than actual spending. Detailed accounting o f actual expenditures is made available to the MOF from ministries' reports on a monthly and quarterly basis, with a time lag o f several weeks. Accounting was oriented mostly to the recording o f transactions and not to providing information for fiscal management, the emphasis being mainly on cash flows. While accounting for the government as a whole was recorded in 2001-2002 and reported on a cash basis, some institutional budget records were maintained in an accrual-related form that is, however, not integratedwith the FederalTreasury accounts. Reporting. In 2001-2002 the M O F publishes aggregated budget information on the federal budget, showing monthly and year-to-date revenues, expenditure, and financing data in comparison with the same period inthe preceding year. The MOF also published data on domestic and external debt, but not on guaranteed debt, fiscal contingent liabilities, or quasi-fiscal activities. Data were published on the MOF website, and government finance statistics largely complied with international best practice (though the methodology is not available for public scrutiny). Coverage. The Federal Treasury coverage o f expenditures has expanded, enabling improved compilation o f government finance statistics. The Treasury is delivering its analytical statements and summary reports on budget execution ina more timely manner, and a considerable improvement in the quality o f data i s also observable. As a result, monthly data on revenues, expenditures and financing o f the federal and local governments are provided on a regular basis. For the first time, in 2000, the MOF prepared a quarterly report by agency and economic structure based on reports from the Federal Treasury. Treasury coverage continues to expand, but this reform will fully realize its positive effects only if accompanied by improvements inbudget reporting. Starting with the 2001 budget the three state extra-budgetary funds (Pension Fund, Social Insurance Fund and Medical Insurance Fund) have been incorporated into the Treasury Chart o f Accounts, but no instructions for implementing their inclusion have been issued. It is expected that the integral use, by the EBFs, of budget classifications as the budgetary organizations - enabling to achieve proper consolidation o f general government accounts in financial reporting - will take a few more years to be implemented. The bulk o f off-budget Russian Federation CFAA: Executive Summarv X revenues was included but some accounts, especially at the regional level, remained outside o f the Treasury system. Coverage o f Ministry o f Interior expenditure was incomplete, and little information was available on presidentialactivities financed outside the budget, which were also not subject to adequate financial control mechanisms. State secrecy laws also introduce some elements o f non-transparency and uncertainty into the fiscal account (for instance, changes in stock o f non-monetary precious metals). There were also coverage problems due to the delay in obtaining measure o f revenue and expenditure arrears in a cash basis system, and insufficient data on extra-budgetary and off-budget revenues at the local government level. Classification Systems. Also, two incompatible classification systems were used in 2001- 2002 : fiscal data follow one Chart o f Accounts reflecting functional distinctions, while budget follows the Government Finance Statistics (GFS) economic classification system. Recommendations. The CFAA's main recommendation i s to proceed with all due speed to implement government's plans to use a Treasury General Ledger (TGL), to compile summary reports o f records for control and analysis and produce fiscal reporting, and to complete the ongoing transfer of spending units' off-budget funds to Treasury accounts . Pendingcompletion ofthese plans, the CFAA recommends 0 review o f existing budget classifications and coding structures and design o f a revised structure and COA that conform with the IMFGFS classification methodology (both functional and economic) andthat are suitable for both project preparation and execution; 0 integration o fthe two existing coding systems (budget classifications and Chart of Accounts) and creation o f a single classification system and a single C O A for use by all spendingunits. InternalControlsandInternalAuditing Modem intemal audit functions exist only at the inception stage in the R??.The exercise o f internal and financial controls within the M O F was carried out in 2001-2002 by two bodies: (1) the Federal Treasury's Control and Inspections Division(CID), which performs ex-ante, transactional controls over expenditure authorizations, current controls over bookkeeping functions, and, to some extent, cash management (mostly inthe form o f cash rationing), and (2) the MOF's Financial Control Department (KRU), which performs ex-post verifications and inspections over budget execution. The CID covers central and sub-national treasury offices and i s an integral part o f the treasury system, ensuringthe integrity and consistency o f operations transiting through the Treasury. The KRUsuccessfully overcame the main problem o f its predecessor institution, which was the lack o f independence from the accounting and reporting functions o f its parent ministry. However, much is to be done in order to move away from the review o f individual transactions to an approach based on analyzing the quality o f the organization's management controls and procedures, so to act as a true internal audit body. Russian Federation CFAA: Executive Summarv xi Resource Limitations. Both CID and KRU also suffered from resource limitations. The Treasury is limited in the scope, number and effectiveness o f its control activities by insufficient human resources, office space, and information system infrastructure. While software i s used for data compilation, the actual control activity is reportedly done semi- manually using labor-intensive procedures and extensive paperwork. As Treasury coverage extends to MOD, off-budget, and extra-budgetary operations, the workload i s increasing. KRU's charter requires its controllers to review no less than 50 percent o f budget allocations for the previous year, through meticulous procedures tracing transactions back to primary documents. Since all records are paper-based, the process involves an enormous amount of voucher checking. Also, the bulk o f KRU's resources are absorbed by ad hoc inspections based on requests from state enforcement bodies such as the financial police. Developing Internal Audit Function. Although the work o f the two agencies complement each other, these checks and balances did not ensure a sufficiently controlled environment for public financial management. Despite KRU's recent progress in adopting a risk- and quality-based approached to its functions, the setup was not conducive to the exercise, by the MOF, o f proper internal audit functions, that was, objective and independent processes o f evaluating whether or not present control functions were carried out in accordance with sound financial management criteria. To that extent, the internal auditor needed to be completely independent from the people being audited. The internal audit function needs to be' separate and distinct from the CID's ex-ante and current controls that are a normal part of Treasury's general accounting functions, and from KRU's internal control procedures used to ensure oversight by the executive branch and assess the legality and propriety o f public expenditures. The further development o f Treasury functions, both interms o f coverage and increased operational effectiveness, served to institutionalize these control functions and make them more automatic and systematic @.e. embedded in the system). In particular, the establishment of the Treasury Single Account (TSA) will entail significant investment in information technology and training, supported in part by the forthcoming Treasury Development Project. Recommendations. The CFAA recommends the modernization o f government's internal and financial controls and the introduction o f sound internal audit functions, by puttinginplace both a new institutional framework and a capacity development program that covers staff training and upgrading o f methodology and information systems. Inthat respect, a new, organic regulation o f public sector internal controls and internal audit functions was under preparation that will, hopefully, lead to a more appropriate setup. The World Bank is available to review and comment on the proposed reform, and the Bank and other donors could also make resources available for internal audit capacity development, under a comprehensive civil service reform program - the desired outcome being the emergence of a civil service and organizational culture of closely following rules andprocedures embedded inthe government culture, especially spendingunits. Russian Federafion CFAA:Execufive Summarv xii The institutional choice at the federal level i s between a centralized or a decentralized intemal audit model. Each model has its advantages and risks. Whatever the new structure adopted, the CFAA recommends that internal audit be regarded primarily as an important management tool, and its recommendationsbe concretely implemented, to promote stricter enforcement o f policies andprocedures; the intemal audit model shift away from the old inquisitorial mentality and inspection-based approach to a new audit model, based on service orientation and performancehisk assessment; intemal audit hnctions be independent from other organizational and functional departments; intemal audit staff report directly to the heado f the organization; the intemal audit body's prerogatives, functions, and reporting lines be regulated by an audit charter andits activities laiddowninan annual work plan; audittasks be carried out bymulti-disciplinary teams with skills inhandling accounting and financial data, information technology, and the legal and procedural aspects o f government's operations and; intemal audit units have appropriate links with the Accounts Chamber, allowing extemal auditors to relyon the work o f internal auditors regarding the adequacy and correct functioning o f internal controls. ExternalAudit The establishment of the Accounts Chamber (AC) as the country's Supreme Audit Institution (SAI) in 1995 represented a significant step in institutionalizing the accountability o f the executive to the legislature. Inthat sense, the A C filled an important gap in the country's financial accountability fi-amework. Prior to its transition to the principle o f separation o fpowers and adoption o f a new constitutional setup, the Russian Federation hadno tradition of an independent, ex-post, extemal audit function for public financial management. The Constitution lays the foundation for the independence and neutrality o f the Accounts Chamber, containing explicit stipulations regarding the institution's powers and scope o f activities, and ensuring that these cannot be changed unscrupulously. Scope. The Accounts Chamber i s a member o f INTOSAI and o f European and Asian regional SA1organizations. Its decision-making body i s the Collegium, composed o f the chairman, the deputy chairman and the twelve auditors o f the Chamber. The Accounts Chamber's primary role i s to undertake extemal audit o f revenues, expenditures, and borrowings o f all central government agencies and government-invested organizations, including extra-budgetary funds, the use of state property (including post-privatization development of enterprises), and report on its findings to the legislature. It is also required to provide an independent expert opinion on the draft federal budget law and Russian Federation CFAA: Executive Summarv xiii may conduct ad hoc audits - upon request from the executive and the legislature - with the Collegium deciding which requests go into the annual work plan. Its access to offices, documents and information is extensive. The broad scope o f the AC's activities carries the risk that the Chamber becomes involved in matters of policy and administration that are rightly the prerogative o f the executive branch of government. The AC's broad prerogatives can be justified during transition period (when Treasury functions are being developed, and financial controls and internal audit functions are being strengthened), and the AC feels that it does not unduly interfere inmatters of governance. Nonetheless, the AC's exercise o fpreliminary budgetarycontrols - such as proving expert opinion on the draft federal budget law - may compromise its work as SAI. In due course, as proper internal audit functions and financial reporting capabilities are put inplace, certain o f the AC's prerogatives should be revisited and its attributions refocused on financial andperformance auditing, inline with INTOSAIstandards. Funding. The Accounts Chamber depends on annual budget allocations, which are determined by the executive and it has no revenue sources o f its own. In order to fully implement the constitutional requirement o f independence and neutrality ofthe Chamber, and protect the A C from expenditure cuts, alternative funding arrangements are to be sought, de-linked from executive powers control (for instance vesting the parliamentary Committees o f the two assemblies with the prerogative to determine funding for the A C activities). Technical Capacity. The Chamber conducts on average more than 400 audits every year, mostly by teams of three or four inspectors. About ten percent of its resources are absorbed by ad hoc requests, not included in the annual work plan. The Chamber uses a risk-adjusted sampling methodology to select spending units; audit activities are supported by computerized information systems, including a database designed to support auditing techniques. However, this system i s still unfolding its potential to allow for off-site, desk review of data. As a result, inspectors still mostly carry out on-site inspections. Regarding internal policies and procedures considerable progress has been made; the organizational structure o f the A C i s being revised and improved, and the chairman intends to increase the efficiency o f Chamber's operations by codifying audit methodology and associated processes. In 2000, internal regulations were modified to require greater interagency coordination and to adopt a risk-based approach to conduct more extensive audits o f the most significant entities. Coverage. The Accounts Chamber employs some 1,150 Moscow-based staff, o f whom the majority are professional staff involved in audit work, which enables it to give full examination to line ministries once a year. Authorities below this level (e.g. second-level spendingunits) are likely to receive attention less frequently. The Accounts Chamber has no authority to audit the execution o f regional or local entities' budgets. Regional and local governments are covered by local bodies o f external audit, similar to the Accounts Chamber, set up by the regional and local legislatures. In 2000, the Accounts Chamber did assist with the creation of anAssociation of Control andAudit Bodies and a Union o f Municipal Audit Bodies, important steps inthe institutionalization o fthe relationbetween the Chamber and its regional and local counterparts. Russian Federation CFAA: Executive Summaw xiv Standards. In 2001 the Chamber is elaborated its own auditing standards intended to conform with those presented in the Lima Declaration o f Guidelines on Auditing Precepts. Although the Chamber i s gradually moving towards the implementation of a fbll range of INTOSAI's Standards, its audit objectives remain legalistic in nature, reflecting the country's traditions and cultural attitudes towards state control functions as well as the Chamber's priorities in carrying out extemal audit. The Chamber carries out documentary reviews o f the executed budget that are, essentially, compliance-oriented and address a variety o f topics, including legal, organizational, administrative, and other non-financial aspects o f public financial management. Since in 2000 the Russian Federation began preparing an annual federal government balance sheet, it has become topical to perform financial audits, in the sense o f attestation o f public accounts. In this respect, the opinion issued by the Chamber on the government's budget execution report makes explicit reference to government financial statements. Follow-up and Dissemination of Results. The Accounts Chamber reports to the State Duma and the Federation Council. The Federal Assembly may pass a resolution on the findings presented inthe reports, but legislative audit resolutions do not necessarily lead to a response from the executive. The Chamber's final annual audit report must be approved by the Council, submitted to the State Duma, and then published. Individual reports to the legislature may be provided to the press on an informal basis, and those not covered by state secrecy or confidentiality clauses are summarized in the Accounts Chamber's periodic bulletin. The Chamber routinely issues press releases, gives conferences andmaintain its website, where a number o f reports are published. Recommendations. The CFAA strongly supports the Chambers' program o f institutional and methodological improvements, in particular its preparation of a long- term plan to assess public institutions' performance (value for money) inthe use o fpublic funds. The CFAAfurther recommendsthat 0 the Chamber enhance its financial audit capabilities and expand its financial audit activities to cover the annual financial statements of individual government entities; 0 the Chamber's role be mainly focused on ex-post auditing, inorder to avoid compromising the effectiveness and credibility o f its work. Responsibilityfor providing advice to the legislature on budget formulation, revenue and expenditure forecasts, andpolicy analysis remain with the Committees on Budget and Taxes, with the Chamber acting ina limitedadvisory capacity uponrequest; 0 the Chamber be freed from its involvement inbudget matters, its obligation to carry out work for the executive, and its obligation to accept ad hoc requests. Responsibilityfor reporting on the progress o fbudget execution remain solely with the executive branch, includingthe Treasury andthe MOF. The Chamber be given a free hand, under all circumstances, to rule on the merit o f adhoc requests coming from the legislature; 0 mechanisms be established for the executive to providean official response to the Chamber's findings and recommendations and respond to parliamentary Russian Federafion CFAA: Execufive Summaw xv recommendations for action, including formal processes to determine the extent o f administrative andjudicial action to be triggered bythe Chamber's findings. In particular, inthe absence o f a dedicated parliamentary audit committee, that the Council o f FederationCommittee for Coordination with the Accounts Chamber andthe Budget and Tax Committee o fthe State Dumadevote greater attentionto scrutinizing andpublicizing the Chamber's activities and following them up; 0 the Chamber work onthe implementationo fINTOSAIStandards onAuditing, with the objectives o f gradually aligning financial audits to international best practice, particularly inthe areas of evaluation o f internal controls and analysis o f financial statements; enhancing the internal quality assurance functions over its audit activities, particularly inthe areas o fplanning, execution andreporting; and establishing external quality assurancemechanisms through /external review by another SAI; 0 the work o fthe Accounts Chamber be reviewed, on a regular basis, by another SAI, includingstaff exchanges that provide exposure to internationalexperience; 0 legislation on regional and local audit bodies be considered, providing for specialization and adequate division o f labor betweenthe federal and sub-national audit bodies and a coordinatingrole by the federal Chamber; 0 a capacity development program bepreparedfor the Accounts Chamber to support the previous recommendations. PortfolioFiduciaryConsiderations The CFAA finds that the World Bank is adequately discharging its financial management fiduciary responsibilities with respect to its lending operations. The CFAA risk assessment concludes that thecurrent ring-fencing approach to project implementation arrangements should be maintained, recognizing that - based on the effective operationalization o f the reforms being introduced in public financial accountability - the present arrangements could indue course be subject to revision. In 1999, the Bank introduced front-end accountability requirements that continue to be justified in light o f the weak overall control environment inthe RussianFederation. Bank staff have been consistently implementing the project financial management arrangements mandated by the Financial Management Initiative (FMI) since 1998. The Bank's Moscow-based financial management team also took innovative steps, now regarded as best practice Bank-wide, to improve the audit quality o f Bank-financed projects by introducing a system o fpre-qualification o fprivate sector audit firms. The arrangements did pose some limitations on developmental impact, since they potentially detract from line ministries' ownership o f projects and might limit in-house capacity buildingat the line ministrylevel, as compared to establishing stand-along PIUS. However, these drawbacks were positively offset by cost-effectiveness and efficiency considerations. Russian Federation CFAA: Executive Summarv xvi Recommeizdations.Based on the CFAA's findings regarding existing weaknesses in the public sector financial accountability framework, the CFAA recommendsthat the current ring-fencing approach to institutional andimplementation arrangements be maintained for Bank-assisted projects inthe RussianFederation; the framework currently inplace for govemment oversight o f the Foundations be maintained; current arrangements for the annual audit o f Bank-assisted projects-audit by private sector audit firms competitively appointed among those pre-selected-be maintained; the work performedbythe Accounts Chamber, including its reports on Bank- financed projects, be reviewed by the Bank on a regular basis and taken into consideration inproject preparation and supervision; fiduciary functions (disbursement, procurement, accounting and reporting, and operational reviews) continue to be outsourced to specialized agencies, even in cases where partial project management may be vested insectoral ministries or agencies; the eventual establishment o f Special Accounts incommercial banksbe conditional on apositive reassessment o f the institutions' soundness, along with fit andproper ownership; the channeling o f loan funds through Treasury be regardedas a medium- to long- term objective dependent on the full adoption and smooth operation o f the Treasury SingleAccount, universal Treasury coverage, preparation o f a statement o f accounting policies, ability to deal with special purpose financial statements like those requiredbythe Bank; andintroduction o f sound internal auditing functions; a shift of loan funds to Treasury be a prerequisite to allowingthe transfer o f a full range o fproject implementation activities (including financial management) to ministries andgovernment agencies; and technical assistance continue to be provided by the World Bank and other donors to develop capacity within key state institutions (Ministry o f Finance, Federal Treasury, and Chamber o f Accounts) and to strengthen public financial accountability and financial management systems. Russian Federafion CFAA: Counfw Confexf 1 I.COUNTRYCONTEXT 1. The Russian Federation (RF) i s the largest country in the world, with a multiethnic population o f over 145 million. It i s composed o f more than seven dozen administrative regions, which vary greatly in their climate, endowment, and economic base, making effective fiscal and economic management at the national level quite complex. Without some degree o f re-centralization, the Russian Federation was facing the danger o f progressive fragmentation. The launched strengthening o f institutional development at the second and third tiers o f government, accompanied by reinforcement o f the governance process from the top down, should also be accompanied by reforms in the regions that take into account the need for a balance o fpower between the center and the periphery and for harmonization o f regional and federal laws, along with reform at the local government level, especially inthe area o f public financial management. Governing Structures 2. The Russian Federation i s a democratic, federative, rule-of-law state with a republican form o f government(Artic1e 1o f the Constitution (approved by referendum on presidential system. ." Article 3 o f the Constitution provides for free elections andArticle December 12, 1993), , adhering to the principles o f separation o f powers under a 13 guarantees a multi-party system3. The 1992 Law on Judges established the independence o f the judiciary. The Constitution provides for a bicameral legislature (Federal Assembly, composed o f the Lower House, the State Duma; and the Upper House, the Federation Council) and for a strong executive. The President i s given strong powers, including the right to issue legally binding decrees and directives, to appoint senior members o f the judicial and executive branches and, in certain circumstances, to dissolve the Duma. Presidential decrees and directives, like other laws, may be appealed to the Constitutional Court. The political situation has solidified; a more cooperative relationship between the Duma and the President has developed since Mr. Putin was sworn inas President inMay 2000. 3. The Russian Federation comprises three tiers o f government: (i) central the (federal level) government; (ii) the second tier, consisting o f 89 Subjects (regional level)- oblasts, autonomous oblasts, republics, autonomous republics, ethnic republics, krais (regions) and okrugs (districts)- which, for the most part, have a unified budgetary relationship with the federal government; and (iii) a third tier (district level), containing rayons (municipalities and townships) that are subordinated to the second tier o f government. Each Subject has its own legislature: republic presidents and krai and oblast governors are popularly elected, with electoral laws varying from region to region. 4. Although the system inherited after the disintegration of the Union of the Soviet Socialist Republics (USSR) i s formally federative, inpractice, formal relations between Inthe Russiansystem, voters cast two votes intheir federalDumaelection: one for a candidate inthe local electoral district and one for a political party or alliance. Half o f the 450 seats are filled through direct voting and the other halfby parties and alliances that meet a 5-percent threshold inproportional voting. While voter participation inboth the 2000 presidential and the 1999parliamentary elections topped 60 percent, actual membership inpolitical parties i s very low. Personalities play a major role inthe political arena, and many parties are formed around a single individual or group o f individuals. Russian Federation CFAA: Country Contexi 2 the three levels o f government have continued to be more like those based on a highly centralized, unitary government. According to Article 5 o f the Constitution, all 89 Subjects are equal in status; however, a series o f bilateral power-sharing treaties signed by the Federation with many o f its 89 Subjects introduced significant practical distinctions ininstitutional and administrative terms. StrengtheningCentralControl 5. In2000, the country was reorganized into seven super-administrative districts by Presidential ruling. The reform involved the creation of a new State Council, whose decisional body i s a presidium whose seven members represent the new federal districts and are personally appointed by the President. This reorganization process (the new districts were created as an additional tier o f the federal government, but with very limitedrightsandresponsibilities) is regarded aspart o fMr.Putin's strategy to strengthen the state as a way for the federal govemment to reassert its control over the regional governments. Historically, weak central control has tended to perpetuate the dominance of the governors' and local elites' power structures. 6. The restoration o f a strong Russian state has the support o f the majority o f public opinion and is regarded by various observers as the only way out o f the difficulties o f the post-Soviet era4. Inparticular, the reassertion o f central control is viewed as necessary to continued success in the Kremlin's power struggle with the oligarchs, powerfill businessmen who exercise great direct economic power and great indirect political influence, who emerged from earlier phases o f the transition, and who are perceived as one o f the main obstacles to further democratization inRussia. EconomicProspectsandPublic Sector Reform 7. Due to rapid Gross Domestic Product (GDP) growth, progress on tax collection, extremely highworld oil prices, and relatively effective exchange rate policies, Russia's macroeconomic picture looks positive. Under the current situation, the govemment should ensure that public finances anddebt are placed on a stable, long-run course so that genuine, long-lasting stabilization can be achieved. This will require, among other steps, strengthening policy-making and budget management, including public sector financial management-accounting, financial reporting, and internal and extemal audit. 8. This CFAA, whose scope i s limited to the federal level, takes stock o f work inin public sector budget management, accounting and financial reporting, the treasury system, internal controls, internal and extemal audit. Recommendationsproposedinthese areas and in regard to portfolio fiduciary considerations are meant to be considered within the broader scope o f the implementation o f the Expenditure Efficiency program This era has been characterizedby varying degrees o fpolitical commitment to reform, including often contradictory economic policies and measures; inadequately developed legal and public finance management systems; large non-payment system across the public/private sector, with highincidence o f non-transparent operations (offsets and barter transactions); decline inforeign investments; prevalence o f wage and pension arrears; a large informal economy; an unstable and inefficient banking system; and widespread corruption throughout virtually all sectors o f the economy (see also Box on Govemance and Corruption). Russian Federafion CFAA: Country Confexf 3 developed by the Russian Ministry o f Finance, and other concomitant public sector reform efforts. 9. The Country Assistance Strategy (CAS), presented in 1999, and the 2001 CAS progress report, gave considerable emphasis to public sector management, govemance and accountability, recognizing that institutional barriers and capacity limitations in key public sector institutions represented factors that inhibit growth and economic transformation. Inparticular, the CAS progress report stressedthe importance attached by the World Bank to the government's 10-year economic development program, "Basic Trends in Social and Economic Development o f the Russian Federation Over the Long Term", generally called the Gref Report after the name o f the Minister o f Economic Development and Trade. 10. Reforms to promote greater transparency and accountability infiscal management require, in fact, progress in the achievement o f fbll budget coverage and control, accompanied by robust accounting and auditing systems. The government i s committed to improving fiscal management by strengthening the Federal Treasury's role. Further investment and efforts will be needed to complete the process of bringing public expenditures within the accounting and reporting framework of the treasury system, in order to facilitate consistent accounting and fiscal reporting within the government sector as a whole. The RussianFederationhas inplace a strong budget executionprocess, which needs to be complemented by enhanced policy and budget formulation, monitoring and evaluation procedures, and effective external audit and legislative oversight. 11. At the same time, broad civil service reform is needed to overcome problems of overlap and duplication o f fbnctions within Russia's public administration, to bringorder to the chaotic policy environment confronted by many investors, and to bring coherence to Russia's underlyinglegal and regulatory structures. The Bank's April 2000 qualitative assessment of Russianpublic administration found that the public sector was overstaffed, illogically organized, and lacking in quality staff, service orientation andpolicy analysis. In 1991, the Government created the Main Administration for Civil Service Cadres Training (Roskadry), a special organization for the selection and grooming of fast-track civil servants. Yet there remained an acute shortage o f efficient civil servants at all levels o f government. 12. Government's M a y 2000 Program for State Reform recognizes the need to foster a service-delivery mentality and to enhance the personal accountability and productivity of civil servants through performance-based, meritocratic human resource management. The law now bars civil servants from holding office in federal or local governments, and prospective civil servants must report income and property holdings. But a 1991 law prohibiting civil servants from engaging inprivate business is largely ignored. Low pay i s one reason that competent individuals avoid public administration jobs. 13. Institutional reforms and capacity building in the public sector, and associated improvements in the governance structure, are at the core o f the Russian Federation's program of economic transformation and development, presented inthe GrefReport and launched in 2001. In 2002 the government has expressed interest in receiving assistance from the World Bank in the areas o f budget formulation and budget execution. New Russian Federation CFAA: Countrv Context 4 systems and procedures under discussion by the World Bank and the authorities improved in the beginning o f 2001the MOF's ability to plan and control federal budget execution. The renewed emphasis and dialogue between the Russian authorities and the International Financing Institutions (IFIs) in these areas was demonstrated by the unprecedented volume o f economic and sector work being undertaken by the World Bank, covering public investment, federal budget management reform, and anti- corruption efforts, and the number o f large projects under preparation-treasury development, regional fiscal reform, tax administration modernization, and customs reform. Russian Federation CFAA:Public SectorBudaet Manaaemenf 5 11.PUBLIC SECTOR BUDGETMANAGEMENT 14. In public sector budgeting, accounting and reporting, as in other areas, the Russian Federation has taken a gradual approach to reform. The decision to make the transition from a centrally planned to a democratic, market-oriented economy also involved a decision to radically transform the public sector, inparticular the Ministryof Finance, which has a central role inpublic finance management. A public sector modeled on the needs o f central planning, it was recognized, was ill-suited to the demands o f a market economy, and important institutional reforms were required. In the process of economic and political transformation, public finance management systems shed some o f their previous functions and took on new tasks inorder to become an efficient instrument o f economic management. Soviet Legacy and Progress to Date 15. Under the Soviet Union, the budget was a subset o f national planning, and allocations were made largely in physical terms, rather than on a monetary basis5. Normative standards were developed for the conduct o f government programs, and these formed the basis on which the budgetwas constructed. The economic system's transition forced the government to develop new procedures and tools for preparing, executing and evaluating the budget. This long process of economic transformation and institutional adaptation involved the gradual elimination o f many practices and mechanisms characteristic o f an economic system based essentially on barter. The widespread non- collection o f taxes and use o f offset mechanisms-forgiveness o f taxation in exchange for goods and services-contributed to an environment o f unrealistic budgeting and an inadequate framework for accountability in the operations o f the enlarged public sector (including state-owned enterprises). 16. In 2000-2002 progress was made. . First, the federal government has sharply curtailed the use o f offsets and, with the growth o f the revenue stream, the budget has lately been better managed and, owing to the positive macroeconomic situation o f the country, presently remains in surplus. Secondly, expenditure control has been strengthened. Thirdly, the tracking of, and accounting for, funds from the Federal Treasury have greatly improved. Lastly, the government has made progress in distinguishing general government operations from those o f other economic sectors6. Despite the government's continuing improvement o f fiscal management systems and processes, many relationshipsneed further clarification and more complete information i s required on fiscal activity. The available information still does not provide a sufficient base to support transparent, accountable and efficient government operations, particularly with regard to defense spending and full inclusion o f off-budget revenues, especially at the sub-national level. 17. Keyissues remaining inpublic sector budgetmanagement are: Physicalplanning was done using a Material Product System (MPS) that utilized full-count surveys and cumulative data reportingprocedures to monitor performance under annual plan targets. InAugust 2001, the MOFcompleted a registero fentities that receive budgetary funds. The next step would be removing from the register, firms and other entities that are not hlfillingan appropriate function. inadequate framework for budget preparation, approval, implementation and monitoring; weaknesses inthe macroeconomic framework neededfor planningand elaboration o f revenue and expenditure projections; inappropriate budget classifications, which do not allow meaningful budget execution monitoring andreporting; lack o f administrative capacity to adjust the budgetinresponse to changing circumstances; lack o f reliable, comprehensive and timely accounting information; underdevelopeddebt and cash management operations that are not linkedto overall budget management; and dispersion of budgetresources inmany spendingunit accounts, leading to unnecessarily highcash balances within the public sector andundermining the government's ability to efficiently manage aggregate cash flows andminimize public sector borrowing. BudgetPlanningandPreparation 18. With regard to financial planning, multi-year forecasting has been carried out within the Ministry o f Economic Development and Trade (MOEDT) and the MOF's Budget Policy Department for many years. As a result, a framework for medium-term aggregated forecasts and targets is in place, together with the capacity to carry out short and medium-term forecast and macroeconomic analyses underlying the budget and to publish them in the annual budget document. However, there are no mechanisms to ensure consistency with macroeconomic constraints through the budget preparation process. There are also some problems with budget classifications and in the way the work of the department is organized, in particular, how it interacts with the Federal Treasury. 19. Conceming budget classifications, the budget i s prepared, discussed and approved following functional formats and classifications rather than the Government Finance Statistics (GFS) full economic classifications7. The Duma approves the budget at the level o f categories (razdel) and sub-categories (podrazdel) o f budget expenditures on the basis of functional classifications. The Government then approves quarterly breakdown o fbudgetexpenditures. 20. The budget preparation process in RF follows a top-down approach that is not grounded on detailed analyses o f programs or spending needs. Based on a set o f parameters, such as macroeconomic forecasts and projected changes inpayroll, the MOF Budget Department sets expenditure financing limits (the resource envelope) for the Withinthe Budget Department there is a division of methodology ofbudget classifications, createdin 1998. Russian Federation CFAA:Public SectorBuduet Manauement 7 spending units. The units in tum formulate their expenditure breakdowns based on these assigned ceilings. This process applies to all civilianministries but not to the Ministryo f Defense (MOD), which is presently not covered by the Federal Treasury and remains under the direct supervisionofthe President. Some ofthe sectoral departments within the MOF (e.g. department for sectoral financing) are pretty active duringbudget formulation stage, collecting andprocessing information from line ministries. However, some o fthem (e.g. department for social policy) do not actively participate in annual budget formulation or execution oversight, but function only as the contact points between the MOF and the relevant line ministries. Thus, the consultative process required to set funding allocationsthat reflect sectoral policies andobjectives is poorlydeveloped. 21, Following the same approach, line ministries and other state agencies prepared an aggregate budget plan within the established overall ceiling for the spending units under their authority. Such indirect or second-line spending units might number in the thousands and may operate with little coordination from the parent ministry, as in the case o f schools and other educational institutions that form spending units within the Ministry o f Education. Financing needs not coveredbythe established limit are listed ina special form that is then attached to the aggregate budget plan. As a result o f these practices, a strong need emerged to amend the budget at the execution stage. Spending units prepared their budget plans at the implementation stage. Each quarter, spending ministries file detailed spending plans with the Treasury, which used these as a basis for controlling commitments and payments. Thus deficiencies in budget planning led to deficiencies inexecution andwide gaps betweenplans and actual outcomes, undermining capacity to implement public policy. In particular, policy over-commitments and use o f the budget as a `control' device (forcing management within actual resources, rather than setting out hard budget constraints for all users) were the main determinants of the extensive generation o f arrears that occurred untilrecently. 22. The role o f the legislature in annual budget formulation i s assigned to the Finance and Taxes Committee o f the State Duma. The committee i s charged with: (i) providing advice on budget formulation to the government; (ii) reviewing the draft budget proposal and estimating the budget impacts o f amendments and new legislation; (iii) monitoring the budget outtum during the year, advising the legislature on revisions, blockage and sequesters; and (iv) reviewing the budget execution reports. The committee's core budget staff provide budget data and analysis, review the macroeconomic assumptions underlyingthe budget, and selectively evaluate programs and report to the legislature on how their performance might be improved. However, there i s a lack o f clarity in the respective roles o f the executive and the legislature inbudget formulation. BudgetExecution 23. In budget execution, major weaknesses include the lack of means to control expenditure commitments and, until recently, the consequent frequent generation of arrears; the lack o f effective and efficient cash management arising from the incomplete coverage o f the treasury system; and the absence o f comprehensive reporting on budget outputs. The introduction of the Treasury Single Account (TSA) with the Central Bank o f Russia should solve most o f these problems but this process i s still underway, and in the interim,hrtherclarification o fbudget executionprocedures is required. Russian Federation CFAA: Public Sector Budaet Manaqement 8 24. At the beginning o f the year, following the annual budget law approval, the ministries are informed o f their annual allocations, broken down inquarterly and monthly payments (in purely mathematical terms). As a result o f the ongoing inventory and categorization o f budget recipients conducted by the MOF, the distinction between regular budget organizations and entities that receive government grants has been clarified and, for the 2001 budget, only budget organizations received line items appropriations, whereas other budget recipients will receive transfers in the form of grants. 25. There i s no tracking o f current or past arrears, symptomatic o f the focus on the current budget cycle alone. Ifan item i s overspent (cash request in excess o f the relevant appropriation), the Treasury implements a cash-rationing system and exercises its prerogative to stop all payments. The unpaidrequests are carried over to the next period, creating arrears that are, however, not recorded as such. While a precise quantification of the arrears generated by this practice i s not available, total arrears have dropped significantly in2000 and 20018. 26. The Federal Treasury adopted inFebruary 2001 a system o f contract registration for budgetary institutions as a significant step forward inthe area o f commitment control. Starting with the 2000 budget, a system o f "commitment re~ording"~was introduced for tracking utility-related expenditures (heating, natural gas, fuel, electric power and water supply). Spending units contracting with suppliers for an amount above 20,000 rubles are required to submit a copy o f the contract to the Federal Treasury for registration. The Treasury checks for consistency with the relevant budgetary allocation and confirms that the unit has not exceeded the authorized level o f their commitment limit. Without the Treasury's registration stamp, spendingunits are forbidden to use budget funds to pay for their contracts. 27. Starting with the 2001 budget, proceeds from off-budget accounts have been recorded inthe Treasury system (they are retained as separate nominal accounts with the treasury system). However, spending units are continuing to use off-budgetary funds to cover current expenditures, although the MOF recommended that off-budgetrevenues be usedto cover capital expenditure". Accounting principles andreports for extra-budgetary h d s are not yet compatible with those for regular budget funds, and differences in the timeframe and approval process still leave extra-budgetary funds beyond the reach of budget execution discipline. 28. Government directive No. 107 o f January 23, 2000, approved the concept o f the Treasury Single Account (TSA) for federal budget revenues and expenditures. The adoption o f the TSA is an integral part o f the overall strategy for the further development o f the Treasury, setting new procedures for flows o f federal budget funds and accounting * Wage andpensions arrears at the federal level are negligible inamount and mostly due to technical reasons, such as submission o f inaccurate informationto the Treasury and transactions delays inprocessing funds transfers to recipients' accounts. Instituted by Order N-806 dated July 15, 1999. lo The analyses relating to capital and investment budgeting are presented inthe study preparedby the Poverty Reduction and Economic Management Unito f the Europe and Central Asia Region (ECSPE) o f the World Bank "Russia: Towards Improving the Efficiency o f Public Investment Expenditures", September 18,200 1. Russian Federation CFAA: Public Sector Buduet Manauemenf 9 rules. Under the new Budget Code, all budgetary entities are required to open an account with the Treasury. But the greatest challenge is inthe implementation ofthe Budget Code provisions, which will require better definition o fbudget execution procedures. Revenue Management 29. With the passing o f the new Tax Code Part I,which came into effect on January 1,1999, a legal basis now exist for all taxes, and taxpayers are provided legal assurance of administrative andjudicial protection of their rights. This information is opportunely conveyed to the public, and the Tax Code Part I and I1documents are both available on a government website. However, application and enforcement o f the legislation is another matter. Inspite o f the significant progress in improving tax collections in recent years, taxation remains a problem area. 30. In2001 the Russian government derived only about 15 percent of its annual revenues from income taxes, a far smaller proportion than in most OECD countries. Payment o f taxes was made through commercial banks (using payment orders and a specific coding system), with the Central Bank o f Russia functioned as clearing-house. Cash and related payment orders were received by the Treasury, which tracked payment and performs the associated accounting and reporting functions. Treasury revenue data covered (i) taxes, (ii) revenue, and (iii) non-tax revenues o fbudgetaryfunds. 31. A tax-sharing arrangement between the center and the regions is in place. Tax payers pay taxes where they are registered (either as individuals or business entities), through the local level offices o f federal Ministry o f Finance and Treasury. The RF's 89 Subjects o f the Federation (or Regions) have only limitedrights to set tax bases and tax rates, determined mostly by central government. The central government also prescribes the split o f revenue from the value-added tax (VAT) and the corporate tax. The problem i s concrete interpretation o f rules and regulations and differences in practices among the regional Tax Inspectorates (for instance, inthe registration o f taxpayers for tax purposes). These interpretations sometimes constitute flagrant violations o f the legislation. Differences in interpretation also undoubtedly affect the accuracy and completeness o f tax base assessment and may represent a window o f opportunity for corruption o f state officials' '. 32. Before year 2000 there was a strong incentive for the regions to collect taxes in non-cash (offset) form, since this would mean fewer cash receipts to share with central government. Since 2001 the federal share has been calculated as a percentage o f total tax revenueincluding offsets, andthis procedure shouldprovide a strong disincentive for the regions to engage in non-cash settlements resulting in non-payments. As a result o f the new provisions, the regions will retain the share o f cash to which they are entitled, but only after the value o f non-cash offsets has been deducted. And according to the Budget Code, the mutual write-down o f liabilities that creates offsets is not applicable to transactions involving tax payments. l1For instance inthe form of discretionary arrangements (less frequent off-site checks and inspections from the tax authority) andor mutually beneficial negotiations o f tax liabilities - the fmal result being to reduce financial resources available for public use. Russian federation CFAA:Public Sector Budset Management 10 33. Roles, responsibilities and powers in the area o f enforcement are divided among the Ministryo f Taxes andDuties (MTD), the Tax Inspectorate, the Federal Treasury, and the Financial Police. The MTDprimarily sets bases and rates. The Tax Inspectorate and its organization varies somewhat from the state administrative classification. It receives tax documentary receipts and conducts taxpayer audits covering up to three prior years, aimed at verifying the reasonableness and fairness o f tax returns and tax payments. The Federal Treasury's role is limited to determining whether there are tax arrears during its revenue tracking. The Financial Police mainly conducts investigations on criminal actions before the government's prosecutor. MonitoringandEvaluation 34. As o f December 2002 interms o f budget monitoring and evaluation, historically there was a lack of reporting on budget outputs. The MOF's Expenditure Efficiency program placed strong emphasis on assessing budget performance, holding spending units accountable for their results, introducing greater focus on budget outputs, and creating mechanisms for competition for budget financing on the basis of programs. The Expenditure Efficiency concept included ambitious and wide-ranging proposals on budget management reform. International experience indicates that the effective implementation o f this kind o f performance budgeting i s achieved through long-term programs of institutional strengthening, initiated by a significant preliminary phase of strategy formulation and design. 35. The objective o f the Expenditure Efficiency program i s to improve budget efficiency by introducing performance budgeting through a quasi-contractual agreement between central and line agencies regarding performance. Performance budgeting i s not purelya budget execution issue but also involves settingobjectives, priorities, andtargets during the financial planningphases. Therefore, budget formulation and implementation will also need to be improved by developing more effective budget control over execution and upgrading MOF's information collection capacity. The introduction o f the necessary balance between control and performance will be crucial to the achievement of performance budgeting. At the same time, spending units must be involved inthe design process and accept the performance approach as a better way for managing their resources, rather than an MOF-imposed system. The involvement o f other key stakeholders, including the Duma Budget Committee and civil society, should also be considered. Recommendations 36. The first step i s to achieve a stable policy consensus on budget formulation and the improvement o f routine budget execution capacity; only then can the focus shift to performance. Inbudget formulation, core problems include the absence o f mechanisms to ensure consistency with macroeconomic constraints throughout the budget preparation process; poorly developed consultative and collaborative processes for defining funds allocations; fragmentation arising from the prevalence o f extra-budgetary fimds and use o f off-budget resources; and lack of clarity inthe respective roles o f the executive andthe legislature in budget formulation. It will therefore be crucial to strengthen the strategy phase o f budget preparation, linking within a single framework, (I) overall resource the constraint deriving from the macroeconomic scenario; (ii) sectoral policies, objectives andperformance targets; (iii) proposedbudget allocations onbroad sectoral/program and level, over a horizon extendingbeyond the immediate budget cycle. 37. The CFAA recommendsthat the presentbudget classification, based mainly on the Government Financial Statistics (GFS) system, be improved with respect to the separation o f functional and economic classifications, the effective use o f the latter in budget formulation, and adoption of a uniform, simplifiedcoding structure to be used for all budget items. This would improve the quality o f financial information and all aspects of public sector management, especially at the sub-national level'*. 38. The CFAA recommendsthat budget planning and formulation evolve towards a more participatory, collaborative approach involving the MOF and central ministries and agencies. Second-line, or indirect, spending units, should also be integrated into the decisional approach, which would make results more predictable and avoid the need for extensive modifications duringbudget execution. Spending units should provide detailed spending plans as inputs to the budget process, rather than preparing them at the implementation stage as i s now the practice. 39. Entities with extra-budgetary funds should be required to introduce accounting principles and prepare reports that are compatible, and can be consolidated with, Treasury accounts and fiscal reporting. The budget for extra-budgetary funds should follow the same timeframe as the state budget, and the approval process should be coordinated with the approval o f the state budget to the fullest extent possible, to ensure that the government's budget execution discipline can be consistently applied. 40. In budget execution, the biggest challenge ahead is the improvement of management tools and techniques, including meaningful reporting for decision-making purposes, and strengthening o f the control environment. The CFAA recommends preparation o f a program of institutional development for the MOF, including analysis o f procedures now in use to plan and control federal budget execution and implementation o f measures for enhanced efficiency of the budget process, including changes in the organizational structure and administrativehnternal procedures and active application of modem information te~hnology'~. 41. The CFAA recommendsthat the chart o f accounts (COA) be amended to fully reflect the budget classification and to provide a consistent basis for recording and reporting financial transactions, with flows separated from stocks into different sections. Nominal accounts should be eliminated, additional control features adopted and tracking o f all bank accounts strengthened, by incorporating these accounts into the ledger. The final objective would be the integration o f the Register (which records the full l2Through the World Bank Regional Fiscal Technical Assistance (RFTA) project. One o f the components o f the project relates to assistance to sub-national governments for budgeting and accounting, including the development of a Code o f Good Practice for regional financial management. l3Recently the World Bank initiated the State Statistical System Project that aims to improve the quality of the government's financial statistics and compilation of General Government Accounts inthe National Accounts system. Russian federation CFAA: Public Sector Budget Manaqement 12 classification o f transactions) into the Treasury accounting ledger, so that the integrity andaccuracy of fiscal reports are ensured. 42. The CFAA recommends that the current partial system for commitment control be progressively extended to cover all types o f expenditures. Ideally, all contracts, regardless o f their amount, should be registered with the Treasury, since the relevance to fall below the control threshold^'^. Improved commitment recording would promote and effectiveness o f commitment control could be circumvented by subdividingcontracts improved cash management and related controls, and enhance the coverage and reliability o f financial accounting and reporting functions. 43. Once a stable policy consensus on budget formulation and the improvement o f routine budget execution capacity has been achieved, it would be possible to consider measures to improve performance- holding spending units accountable for their results, introducing greater focus on budget outputs, and creating mechanisms for competition for budget financing. Strengthening the link between budgets and performance will be highly dependent on prior action to strengthen the connection between budgets andactual expenditure. 44. In view of strengthening the overall budgetary system, the CFAA recommends that the reforms to be carried out by the M O F and central agencies inthe area o f budget formulation and execution be accompanied by reforms in the areas o f evaluation and oversight o f budget performance outside the executive, specifically legislative scrutiny, external audit and the broader role o f civil society. Bringing more actors into the oversight process would involve (i) establishment o f effective independent financial the audits by the Chamber o f Accounts (discussed in Section V of the CFAA), (ii) the establishment of consultative mechanisms with key stakeholders (inter alia, representatives o f industrial, banking and labor associations, the media, NGOs, F I s and the donor community), and (iii) publication of regular budget reports and analysis in an easily understandable format made available to the general public. 45. Extendingthe budgethorizonwould involveimplementation o fthe Expenditure Efficiency program, which includes further development o f basic budget management processes and implementation of the treasury system within the framework o f the Budget Code. The Bank was asked to provide assistance and advice on issues in budget management, and they are covered in the World Bank document, "Issues in Budget Management Reform." The document outlines the major steps and actions required: (i) integration of expenditure review functions into the process o f budget preparation in the next budget cycle; (ii)addressing existing over-commitments in the budget and establishing a baseline for expenditure policy commitments within the budget process; (iii) classification o fbudget institutions inthe ongoing review of spending ministries; and (iv) sequencing o f budget management reform within the broader plan for the implementationof the Expenditure Efficiency concept. l4Extendingcommitment control to all contracts is the long-term vision for the Treasury system; however this is beyond current capabilities and, even conceived as a medium-term achlevement, this would take resources away from the systemic improvements being sought through the expansion of the Treasury system. Furthermore it may require changes inthe budgeticivil legislationwhich may be problematic. Russianfederaation CFAA: Treasurv Svstem 13 111.TREASURY SYSTEM 46. In2001-2002 there was significant progress towards establishing a modern and efficient federal treasury system in RF. Systems are able to provide the minimum information support required for basic treasury functions, and short-term enhancements o f this system are underway now. The next phase i s introduction o f full treasury functions, with an initial step taken with the January 2000 approval o f the concept o f a Treasury Single Account (TSA) for federal budget revenues andexpenditures. 47. The importance o f development o f the Treasury was emphasized in earlier Bank Economic and Sectoral Work (ESW), especially the 1996 report, "Fiscal Management in Russia," which provided a broad review o f priorities inpublic financial management and the key role o f a modem treasury system withinthe required overall reform program. The International Monetary Fund (IMF) Fiscal Affairs Department completed a review o f financial management (Government Financial Management: Key Issues and Options for Improvement, Feb. 1998) that included detailed recommendations on treasury systems, and these recommendations have been drawn on substantially in the Federal Treasury development to date. The IMF also has had a resident Treasury Advisor in place. The Bank's 1998 fiscal policy note on budget management recommended that priority be given to the development o f the Treasury, noting the need for enhancement o f information systems and a broad program o f trainingand staff development. 48. Implementing a full range of treasury functions, such as commitment recording, General Ledger, and comprehensive reporting, is a long-term process that will receive support under a Treasury Development Project prepared by the MOF and the World Bank. The Treasury Development Project supports key institutional and operational reforms that will bring about the desired improvements inpublic financial management, primarily structural administrative transparency. The government i s very committed to the project, as it realizes the vital importance o f a functioningTreasury to meet the needs of public financial administration in the context o f a market economy. The government also intends for development of the treasury system to be completed inclose consultation with the Chamber o f Accounts, the Supreme Audit Institution, in order to ensure compatible development of the Chamber's own information systems and staff expertise. Soviet Legacy 49. Under the Soviet system, the central bank (Gosbank), and more generally the whole banking sector, operated as the de facto treasury for the government. The distribution o f expenditure authorizations followed a detailed spending plan called the smeta, which typically authorized departments to spend a certain amount within a given time period for specified goods and services. To finance the expenditures, quarterly allocations o f funds were placed in a bank account at the disposal o f the budgetary spending unit (one o f the state banks specialized in carrying out these payments). The payment process was initiated by a payment order from the budgetary unit, which had to identify in detail the purpose and nature o f expenditure by the appropriate codes o f the budgetary classifications. Whether this passed through the specialized banks or the central bank, the payment order's conformity with the smeta was checked and the payment was made either in cash or by transfer to another bank account. This link,which Russian Federation CFAA: TreasurvSvstem 14 was instrumental under a centrally planned economy by reason o f its peculiar system o f allocation and use o f economic and financial resources, ceasedto exist in 1992,when the cash execution of the budget, for the first time, linked expenditure payments to actual cash collections. Treasury Operationsin 2001-2002 50. Since its creation in 1992 as a department o f the MOF, the Federal Treasury (FT) has implemented a system to manage the budget execution process. The treasury system i s organized according to a vertical structure with the Treasury Headquarters inMoscow; 89 branches at the regional level (oblasts), and about 2,150 offices at the local government level (rayons). The Federal Treasury (FT) provides key intermediate services to public sector agencies, while also carrying out key control functions. In respect to the payment system, flow o f funds, and cash management, some o f the essential elements o f a moderntreasury system have already been implemented. Inparticular: 0 Budget appropriations for ministries and other spending units are recorded inthe treasury system; 0 Spending limits are sanctioned, bythe M O F for ministries, andby the parent ministry for indirect spending units (SUs); 0 Expendituretransactions for a significant portion o f spendingunits funded from the federal budget are routed through the appropriate branch o f the Treasury, which then forwards them to a branch o fthe Central Bank o f Russia (CBR) if these transactions take place at the oblast level, or to a local branch o f Sberbank, the largest state-owned bankwith a dense network oflocal coverage, if transactions occur at a level where there are no branches o f the CBR; 0 The CBR and Sberbank have opened treasury "personal accounts" at their various branches for the SUs; 0 Prior to forwarding the expenditure transactions for payment to the relevant CBWSberbank branches, the FT ensures that the expenditure is inaccordance with the budget appropriations and sanctioned limits for the SUs; 0 Revenue transactions from taxpayers are deposited inthe appropriate account at the CBR, which informs the Treasury o fthe receipts. The Treasury advises the State Tax Administration (STA) on the amounts o frevenue received from various types o ftaxpayers (sources). 51. The Treasury i s currently using a number o f custom-developed application software packages to assist it inperforming its functions. Inthe middle o f 2002, all oblast and more than 90 percent o f rayon Treasury offices have implemented a basic set of computerized information systems. These packages are used to (a) record data on cost estimates received from ministriedother spending units; (b) record and process knd allocation transactions from the MOF to the ministries and from ministries to their subordinated units; and (c) process payment requests received from spending units at the local Treasury offices. The essential control in the system, however, i s on the amount o f Russian Federation CFAA: Treasurv Svstem 15 finds allocated by the MOF to the spending units for a given economic category: the system checks for the availability o f finds andthenprocesses a payment order against the Treasury accounts held at the local branch o f the CBWSberbank. All Treasury offices use the same codification and classifications andreport back to the Federal Treasury level. 52. The system has the capacity to receive payment requests and cost estimates from spending units in electronic form, but this is in general not implemented, since spending units do not have the necessary facilities to produce these documents in electronic formats that can be read by the system. The links between the Treasury units to the cash settlement center within the CBR, used for transmittal o f payment instructions to the CBR, are mostly computerized. In such cases the CBR regards the Treasury as just another client bank in its payment system, and the corresponding Treasury office uses a special workstation and software provided by the CBR to allow electronic signature and secure data transmission. Inareas where these facilities are not available, transactions are carried to the bank in hardcopy format. On the revenue side, a computerized system i s also inuse to process receipt transactions from the CBR oblast branches and maintain the necessary data. 53. The CBR operates a clearing system consisting o f regional clearing centers in each region and a national clearing center in Moscow. Manual clearing procedures are still usedquite extensively, originating delays inpayments. The CBR is planningto move towards a modern, real-time, gross settlement system, but there i s no specific timetable for this. The Central Bank is also working on improving the capacity o f the banking system to handle electronic payments, including recognition o f electronic signatures, which are not acceptable under current legislation. Treasury Single Account and Treasury Development Project 54. In its 1998 review, the IMF recommended the implementation of a centralized treasury system, in which all government funds are placed in a Treasury Single Account (TSA) at the CBR, with sub-accounts maintained at the sub-national branches o f the CBR. Spending units' bank accounts would be closed and all receipts and payments would be processed by the Treasury, which would control the TSA and would ensure that expenditures are in accordance with budget appropriations. The adoption o f the TSA i s an integral part of the overall strategy for the further development o f the Treasury, setting new procedures for flows o f federal budget funds and accounting rules. On January 23, 2000, the concept o f TSA was approved for federal budget revenues and expenditures (Government Directive No. 107), and its full implementation would receive support under the MOF's Treasury DevelopmentProject, receiving World Bank financing. 55. The centralized model was designed to address the main problems o f a system under which the MOF would periodically distribute funds to spending units' bank accounts and these units would directly process payment transactions against their accounts. This arrangement resulted in a situation where, on the one hand, sizable idle balances could build up in spending units' bank accounts and, on the other, the government could be in deficit in overall terms, causing additional borrowing and/or causing arrears in payments. In addition, the M O F could not exercise any control to ensure that public expenditures incurred by spending units were in accordance with Russian Federation CFAA: Treasuw System 16 budget appropriations and did not receive timely information on receipts and expenditures to allow it to perform its fiscal managementfunctions properly. 56. The Treasury Development Project would support the development o f suitable institutional and organizational arrangements for Treasury operations and provide technical assistance, computer equipment, software and training to enable the government to design, develop, test and implement systems, procedures and processes, related regulations and training programs for budget execution, Treasury operations and cash management. From a system architecture stand-point, the project envisages the installation o f distributed applications so that processing capacity would be available at all major nodes o f the network: i.e. the oblast and rayon Treasury offices. These offices would process receipt and expenditure transactions and pass on information to the next higher level. As the telecommunication infrastructure improves, the treasury system could move to a more centralized approach in which processing capacity is located at fewer nodes that are accessible via dedicated telecommunication lines or via Virtual PrivateNetwork (VPN). 57. It was decided to adopt a phased approach, starting by upgrading and increasing the coverage o f the basic systems 2001-2002 in use within the Treasury (which encompass only part o f the functionalities required for a full treasury system); and then move on to a full-function system based on more advanced technology and procedures, after the agencies and personnel involved in budget execution have become thoroughly familiar with the workings of the interim systems and associated changes in business processes. The main steps would be (a) to improve coverage and capacity with present application software and additional hardware; (b) to conduct an institutional review o f the Federal Treasury; (c) to design full-function treasury systems and associated procedures; (d) to procure/develop new application software; (e) to implement system at pilot sites; and (f) replicate systems countrywide. Systems could become fully operational by 2004/05 at the earliest. 58. The key remaining issues in the development o f the treasury system can, therefore, be divided in two groups: (i)extension of Treasury coverage, and (ii) improvements in Treasury systems, functions and procedures. However, the program entails a significant broadening of the scope o f Treasury operations, to which there are considerable capacity constraints, interms o f the size and complexity o f the investments required, technological and procedural changes, associated accounting and reporting matters, development o f technical skills, and high standards o f service delivery. These capacity constraints would be addressed under the Treasury project. Short-termEnhancements 59. Current systems are able to provide the minimum information support required for basic treasury functions. However, establishingthe full range o ftreasury functions, all addressed under the MOF's Treasury Development Project, will take some time. Inorder to provide reasonable support to the Federal Treasury, even in a short-term perspective, current systems need enhancements in functionality, such as improved fiscal reporting and consolidation, enforcement o f spending limits, and basic ledger functions, Russian Federation CFAA: TreasurvSvstem 17 accompanied by an improvement o f operationalprocedures relating to the systems inuse, untila full-function treasury system canbedesigned, developed andimplemented. 60. The main objectives o f short-term enhancements in functionality were to bring into the system (i) Ministry o f Defense (MOD), (ii) the Customs revenues, (iii) extra- budgetary funds, and (v) off-budget accounts. These developments are discussed below. State-owned enterprises (SOE) activities would remain outside the treasury system. InclusionofMinistryofDefense 61. The MOD and the FT have concludedpilot projects for processing MOD payment orders through the treasury system, under special requirements for confidentiality, dedicated LANs, secure telecommunication channels, and special banking arrangements. The MOD has been transferred to the system intwo phases. The first involved the setup o f an account inthe central FT for release o fbudget appropriations to lower level units. It also included extending the treasury system to centralized procurement and other centrally made expenditures o f the MOD (first level operations) from an account opened inthe FT department of Moscow City, anda gradual extension oftreasury coverage to all payments at the next tier o f units (second level operations). The second phase, involving extending treasury operations to a substantial number o f units operating at third and lower levels nationwide (this could involve an additional 5,000 SUs with about 15,000 accounts) was completed in 2001. Starting with the 2002 budget cycle, all MOD spending units are under the Treasury, which has taken over MOD budget execution. Information system support would need to be enhanced to ensure security o f information transfer between SUs and the FT, and between the FT and CBR branches. The additional transaction load may require upgrading the hardware installed at the Treasury offices responsible for processing these transactions. Inclusionof CustomsRevenues 62. On the revenue side of the budget, the accounts o f the Customs Committee (includingthose inwhich advance duty deposits are made by traders) have been moved, since end-2000, under the Treasury. Accredited commercial banks are involved only to the extent they provide payment guarantees or letters o f credit to foreign trade companies for customs duty payment. The payroll taxes are now collected by the tax service, although there are some coordination problems in the implementation o f this reform betweenthe tax authorities and the social insurance policy agencies. Inclusionof Extra-budgetaryFunds 63. The Russiangovernment has taken steps to bring the majority o f extra-budgetary fimds into the budget and to halt the earmarking o f revenues to others15. The budget coverage o f extra-budgetary funds has been progressively expanded and most EBFs have been eliminated or incorporated into the budget, such as Employment Fund and state Road Fund (although at the regional level it would still remain an extra-budgetary fund). l5The 2001budgetenvisagedthe elimination ofearmarking for the Ecological Fund, Fundfor the Federal Tax Police, StateAnti-Crime fund, ProspectingFund, Fundfor Support ofMilitaryReform, Biological ResourcesFund, Aqueous Resources Fund,andthe Fund for MOFAudit Divisions. Russian Federation CFAA: Treasurv Svstem 18 Their funding is now shown as regular line items under the relevant budget classification, Only three EBFs exist at present - the Pension Fund, the Social Insurance Fund and the Medical Insurance Fund- and, given their specialized nature and role, there i s no plan to integrate the three remaining state EBFs in the budget and put them under the Treasury control. However, as part o f the Chart o f Accounts reform, state EBFs will use the same budget classifications as the budgetary organizations, thus enabling to achieve a proper consolidation o f general government accounts in financial reporting - which is likely to be achieved around 2005. Closingof Off-budgetAccounts 64. Many budget organizations supplement their financial resources through commercial and other revenue-generating practices, which originate off-budget revenues. Whereas formal extra-budgetary hnds are set up under specific legislation, off-budget revenues are set up under broad Civil Code provisions. Budget organizations are required to report commercial incomes on a quarterly basis, and all off-budget accounts o f federal budgetary organizations have been progressively moved under the Treasury where, however, they remain separated from budget accounts. Reportedly, there are some off- budget accounts still remaining outside the Treasury system, but this represents a violation o f the law and sooner or later they will be closed. 65. The closing o f off-budget accounts has several legal and institutional implications. Some agencies have statutory rights to conduct off-budget activities, and the MOF is preparing a proposal for amendments in the relevant legislation. Since the Treasury experienced problems, for the accounts which are not yet under its purview, in obtaining reports o f off-budget accounts from banks (because they feel they could be breaching bank confidentiality regulations), amendments to the banking law were prepared to facilitate such reporting at the end o f 2001. One possible solution that was explored involved organizing off-budget activities as a separate business entity or some type o f commercial operation. Developments in this area are also relevant for the off- budget activities o f sub-national governments16. Treasury information systems is being upgraded to accommodate the additional transactions resulting from the inclusion o f off- budgetaccounts. Recommendations 66. The development and implementation o f a full-function Treasury system will take several years and i s not expected to become fully operational before 2004/05. Pending the achievement o f the broader scope o f initiatives and reforms, both institutional and technical, entailed bythe World Bank-assisted Treasury project, the CFAA recommends that government take immediate steps to implement an improved system o f expenditure monitoring comprising the following elements: (i)control over commitments; (ii) replacement of cash rationing with more orderly and effective cash-management systems; l6Resolution no. 1001recommended that member regions o f the Russian Federation apply similar measures to the ones required for federal agencies, and the 2001 budget law contains the corresponding recommendations. The city government o f St. Petersburg has already integrated its off-budget accounts into its regular treasury procedures. Russian Federation CFAA: Treasurv Svstem 19 and (iii) introduction o f a sound accounting system for govemment operations. At the same time, the Treasury should expand its coverage and comprehensiveness. 67. The CFAA recommendsthat Treasury control of expenditure commitments be extended to all items o f the economic expenditure classification and should entail monitoring items and contracts above the established thresholds. Current weekly cash funding limits should be replaced by funding o f the established monthly limits of expenditure commitments, based on projectedmoney resources. The combined impact o f these measures would be to substantially improve cash management and reduce the incidence o f ad hoc discretionary budgetary adjustments conducted in a non-transparent manner duringbudget execution. 68. An important achievement will be the improvement o fthe control framework that enables the treasury system to properly manage public money and property. Required controls include (i)financial controls over revenue management (e.g. collection and custody, including the banking arrangements), and (ii) expenditure execution procedures inthe form of (a) budgetary ex-ante controls (e.g. warrant control andlinkages ofclaims with budget appropriations for both capital and recurrent expenditures), and (b) ex-post control processes (e.g. verification o f goodshervices receipts). Some o f these checks and balances will eventually be embedded in the treasury system (e.g. reliance on electronic transfers rather than movements o f cash and registration o f contracts and indication of payment title/stage). However, some o f the required new management controls- especially those relating to the independent verification o f adequacy o f procedures, reliability o f information technology, soundness and propriety o f overall administrative arrangements, and safeguards of financial andphysical assets within spending units-will require the development o f modem, risk-based intemal audit hnctions within the M O F and other central govemment agencies, especially the Ministry o f Taxes and Revenues andCustoms Commission (see section V o fthe CFAA). Russian Federation CFAA: Public Sector Accounting and Financial Repoi?inq 20 IV. PUBLIC SECTOR ACCOUNTINGAND FINANCIAL REPORTING 69. The provision o f accurate fiscal reporting on current and previous years' actuals i s regarded as a necessary tool to provide M O F management with the type o f information required for decision making and management control and for budget formulation in subsequent years. The MOF's Treasury Development Project would include development and deployment o f a Financial Management Information System (FMIS) that would provide such information. The progressive setup o f the treasury system i s already allowing for greater timeliness and effectiveness o f accounting and reporting, and for full ownership o f the MOF over these fundamental management tools. The M O F is proceeding with improvements within the existing system, including preparation o f the first federal budget execution balance sheet in 2000, and plans to prepare quarterly and annual financial statements on federal budget execution. 70. At the same time, the provision o f more timely and reliable data on budget outcomes, and the availability o f financial data for public scrutiny-including their attestation following appropriate external audit procedures-would increase transparency and accountability, laying a strong foundation for realistic public financial management and stronger incentives for responsiveness to public interests. At present, the only mandatory document presentedby the executive to the parliament is the annual report on budget execution. The final account is presented to the legislature within 12 months of the year's end and i s audited by the Chamber o f Accounts. Once it is fully implemented, the Budget Code will provide a stronger basis for comprehensive release o f information on public financial operations to the public, as it requires that the consolidated budget be presented to the Duma with the federal budget law for the forthcoming year. The Soviet Legacy 71. Under the Soviet Union, the banking system was very instrumental for maintaining public sector accounts. The system, through its regional network, was in fact relied upon not only for funds disbursement but also for government accounting, with accounting and record-keeping systems parallel to those maintained by the government ministries. An advantage o f the old system was that the banks had a vested interest in carefully checking the claims for spending and rapidly reporting to the center (Gosbank), so that they could be compensated for the free financing they were extending to the government. Under this system, the central bank compiled monthly reports on budgetary operations classifiedby chapters and featuring the most detailedbreakdown. 72. Some practices used in 2001-2002 represent holdovers from the old system, and government accounting still relies heavily on reporting from the banking system. The Budget Department Accounting Unit summarizes approved expenditure authorization reports that are presented to the MOF by the spending units and keeps reconciled financial records with the banking system. Reporting from the banking system is carried out in cash terms, and reflects the distribution o f budgetary funds rather than actual spending. Detailed accounting o f actual expenditures i s made available to the MOF from ministries' reports on a monthly and quarterly basis. However, there is a time lag o f several weeks. Russian Federation CFAA: Public SectorAccounfinu and Financial Reportinu 21 AccountingSystem 73. Accounting i s based on the budget classifications and thus is oriented mostly to the recording o f data and not to providing information for fiscal management, the emphasis being mainly on cash flows. Accounting methodology for budgetary organizations at the federal and sub-national level i s issued by the MOF's Accounting Methodology department, but there i s a lack o f consistency in the basis o f accounting. While accounting for the government as a whole was recorded andreported in2001-2002 on a cash basis, some institutional budget records were maintained in an accrual-related form that was, however, not integrated with the Federal Treasury accounts. The annual report on budget execution submitted by the executive to the parliament did not include a statement o f accounting policies. 74. The MOF has received a proposal of assistance from the UK Department for International Development (DFID) to translate into Russian, accounting standards issued by the Public Sector Committee (PSC) o f the Intemational Federation o f Accountants (IFAC). The adoption of IFAC-PSC Exposure Draft 9, "Financial Reporting Under the Cash Basis o f Accounting,'' should be considered directly applicable to current practice. Reporting 75. The Ministry o f Finance (MOF) i s responsible for reporting central government operations and central government debt. Data are published on the MOF website. The MOF publishes aggregate budget information on the federal budget, showing monthly and year-to-date revenues, expenditure, and financing data in comparison with the same period inthe preceding year. The MOF also publishes data on domestic and external debt. Data on guaranteed debt are not published nor are fiscal contingent liabilities or quasi- fiscal activities disclosed. The Budget Code does, however, require that the annual budget law place an upper limit on the provision o f public guarantees and that such guarantees be included as a type o f debt obligation in the sovereign internal debt o f the RussianFederation. 76. Fiscal data were compiled in accordance with the annual law on the Federal Budget, which makes no provision for the compilation o f govemment finance statistics (GFS) or dissemination o f the data to the public. However, starting in 1998, for the preparation of the 1999 annual budget17, the budget classifications were changed to incorporate the GFS classification system. As a result, general government operations and central government debt did not fully comply with the GFS Manual concepts, although government finance statistics largely complied with international best practice, even ifthe methodology was available for public scrutiny. 77. Fiscal data were compiled on a cash basis and, owing to the delay in obtaining measures o f revenue and expenditure arrears (for civilian but not military sectors), these data did not provide complete coverage o f government operations. l8Coverage problems '*Themethodology l7Inthe 1998budget executionreport abreakdown ofexpenditures byeconomic classification is missing. for the compilation o f fiscal data i s based on the classification system(Chart o f Accounts, COA) definedinthe federal laws" The Russian FederationBudget Classification" no.115 o f Russian Federation CFAA: Public SectorAccountingand Financial Reoorfina 22 with regard to data on arrears and local government activities precluded accurate estimation o f cash revenues collected at the general government level. A complete economic classification o f government finance statistics was not published and the consistency incompilation procedures is not known. 78. With regardto local governments, full information on extra-budgetary funds, off- budget revenues, and offsets was not available in 2001-2002. This lack o f data precludes accurate estimation o f cash revenues collected at the general government level. The World Bank is proposing a Fiscal Federalism and Regional Fiscal Reform Loan (a sectoral adjustment loan, SAL) aimed at assisting the government in strengthening the overall framework o f fiscal federalism and in improving fiscal management at the regional level, introducing greater transparency and accountability mechanisms. The loan would support government's efforts to introduce at the regional level, and have consistently applied, standards for budget management, financial control, information disclosure, andaudits. BudgetCode 79. In terms of reporting, the fiscal management system is govemed by the Budget Code, which requires recording o f all stages o f the payment proces~.'~The Budget Code provides a strong basis for comprehensive release o f information to the public (public reporting o f public financial operations is a legal requirement), but it i s not fully implemented. The Code requires that the consolidated budget o f the Russian Federation (including federal and sub-national governments, but excluding extra-budgetary funds) be presented to the State Duma with the federal budget law for the forthcoming year. Budgeting and reporting for the four extra-budgetary funds is carried out independently, with quarterly reports and annual budgets available to the public. 80. In 2001-2002 incomplete coverage was the key weakness of budget reporting. The bulk o f off-budget revenues, which involved substantial expenditures, were not included (although this i s a larger problem at the regional than the federal level) and coverage o f Ministryo f Defense and Ministry o f Interior expenditures was incomplete. Little information was available on presidential activities financed outside the budget, which are also not subject to adequate financial control mechanisms. State secrecy laws also introduced some elements o f non-transparency and uncertainty into the fiscal account (for instance, changes in stock o fnon-monetary gold and other precious metals). TreasuryReporting 81. The Federal Treasury coverage o f expenditures has expanded, enabling improved compilation o f government finance statistics.20 The Treasury is delivering its analytical ~~ August 15,1996 and on "The RussianFederation 1999 Budget" no. 36 o f February 22, 1999, and M e r revisions. l9Inprinciple, itis also inconformity withthe eventualadoptiono faccrual-based accounting andreporting although practical implementation o f these principles is not currently feasible. *'See section I1above o n Budget. For example, starting with the 2001 budget, the Road Fundis included in the Treasury system and the Treasury COA incorporates the three main social extra-budgetary funds (Social Insurance Fund, Medical Insurance Fund, Pension Fund). However, since instructions have not beenprepared by the FT, the system is not actually inuse. Russian Federation CFAA:Public SecforAccounfinu and Financial Rewltinu 23 statements and summary reports on budget execution in a more timely manner, and a considerable improvement in the quality o f data is also observable. As a result, monthly data on revenues, expenditures and financing o f the federal and local governments are provided on a regular basis. For the first time, in 2000, the MOF prepared a quarterly report by agency and economic structure based on reports from the Federal Treasury. 82. Improved and more widespread use o f Treasury information would require users of its reports to be involved in the definition o f the type o f financial information they need, However, the mindset offers considerable resistance to this kind o f thinking. Spending units maintain their own financial records and prepare their own financial statements, in accordance with the prescribed classifications and formats issued by the MOF. But the type o f information produced by the spending units (based on administrative and functional classifications) is hdamentally different from that required by line ministries and MOF (based on economic classifications, i.e. composition o f expenditure). Sub-national Governments 83. In2000-2001 at the sub-nationalgovernment level, all 89 regional andthe almost 2,300 local Treasury offices followed the same COA, capturing all transactions at the receipt and payment stage by full budget classification. However, this detailed transactional information was recorded in a separate accounting register, and it was aggregated before being posted in the accounting ledger that uses the present COA. Detailed transaction data, including economic classification data, was not available to the regional and central offices o f the Treasury throughthe general ledger. 84. Reports are submitted to the Federal Treasury on a monthly basis for consolidation. The monthly fiscal reports now produced are by functions. Reports by composition o f expenditure (economic categories) and institutions, which are needed for receipts and expenditure monitoring, are done only at the end o f each quarter, after reconciliation with similar reports submitted by the line ministries. The fiscal reports produced with the same periodicity by the spending units are reconciled by the Federal Treasury with its own records. However, this is mostly compilation work, since the ability, and the authority, to analyze the data ina more meaningful fashion are lacking. 85. The preparation o f monthly budget execution reports by full budget classification is hampered by the limitations o f the existing application software. At the same time, the need for reconciliation against financing limits is the main reason for the present delay in generating reports by full economic classification. Another complication derives from the fact that sub-national Treasury offices have not yet implemented a database o f all spending units.Thus, the extent o f the coverage o f the sub-national government revenues and expenditures remains uncertain. Recent Developments 86. The preparation of interim and annual financial statements, as published by the governments of many OECD countries, i s a new accomplishment in the Russian Federation. Government Resolution No. 695 o f September 15, 2000, contains provisions on submission, by the M O F to the government, o f quarterly and annual statements on Russian federafion CFAA: Public SectorAccounfina and financial Reportins 24 federal budget execution. The following financial statements and documents are to be submitted on a quarterlybasis: (i) Report on federal budget execution; (ii) budget Federal executionbalance sheet; and (iii) Explanatory notes. 87. For the first time in 2000, a federal budget execution balance sheet for the Russian Federation has beenprepared.21The balance sheet contains data for the reporting period and the previous year based on the balances of accounts following the Single Chart o f Accounts for budget execution22.Also for the first time in 2000, interimreports showing the budget flows and net financial position have been prepared by the MOF and circulatedwithin the government, to supplement the annual report on budget execution. Recommendations 88. The CFAA recommends that a Treasury General Ledger (TGL), be used to compile summaryreports o f records for control and analysis and produce fiscal reporting. This will be a major step forward in the establishment o f complete, meaningful and timely fiscal reporting. Among the problems that the TGL would solve is that of ineffective and non-timely reconciliation o f accounts with budget appropriations andwith bank accounts (the accounts classifications usedby the Central Bank o f Russianot being wholly compatible with those used by the Treasury). The lack o f consistency inthe basis o f accounting (cash basis vs. accrual basis) also needs to be addressed. 89. As an intermediate step in developing the fiscal reporting system o f Treasury prior to the establishment o f the TGL, the CFAA recommends that existing budget classifications and coding structures be reviewed and a revised structure and COA be developed that conforms with the IMF GFS classification methodology (both functional and economic) and that i s suitable for both project preparation and execution. The two coding systems (budget classifications and Chart o f Accounts) should be integrated, and all spending units should be brought under a single classification system and a single COA. 90. Coordination of operations between the Federal Treasury and the CBR call for the opening o f Treasury accounts to register spending units' off-budget funds. Pending the full merger of off-budget funds into government accounts, the CFAA recommends clear tracking o f off-budget funds, so that the information (already collected by the MOF) i s compiled and consolidated in order to allow more meaningful and complete reporting and better control. "ThepreparationoffederalbudgetexecutionfinalaccountisregulatedbytheprovisionsoftheMOF Order no. 15102.17.2000 (Instructions OnAccounting of Budget Execution) and MOFOrder no. 296/10.30.2000(On Inventory o fAccounting Objects inthe Russian Federation). 22Forcapitalexpenditure, the StateMinistryofPropertyestablishes the accountingrules for the whole country. Russian Federation CFAA: Internal Controls and lnfernal Auditinu 25 v.INTERNALCONTROLSAND INTERNAL,AUDITING 91. Under the Soviet Union, budgetary controls were many and varied, including (i) checks andbalances within each ministry, (ii) verifications exercised by the Central Bank and the rest o f the state banking apparatus, which was in charge o f disbursement and transfer o f funds23,(iii) inspections exercised by the Directorate o f Financial Control and Audit within the Ministry o f Finance, and (iv) ultimately, ad hoc controls by the Party, The Ministry o f Interior also had an autonomous Inspection Board. Control activities monitored conformance with decisions made at higher levels on the allocation o f financial resources and the direction of physical operations under the economic plan. 92. As a result, state audit functions inherited from the Soviet era consisted, during the initial phases of transition, of many different (and often uncoordinated) inspections andbudget control functions. These quasi-audit functions, mainly concentrated withinthe Ministryo f Finance, covered central and local government^^^, government agencies and state-owned enterprises. During the transitional period, the institutions that had been responsible for control and investigationpractices inthe USSR were weakened, since the old procedures did not relate to the new political and governance arrangements or to new procedures and practices for public financial management in a market economy. As programs and practices became obsolete, the disappearance o f the old, strict control and sanction regime created a sense o f breakdown in professional discipline among civil servants. The result was less control over the destination and purpose o f disbursements andover the activities o f spending units.What was neededin2001-2002 was atransition to a new professional orientation focusing on service provision and diagnostics rather than investigations and sanctions. This would, inturn, help to develop a civil service and organizational culture of closely following rules and procedures, embedded in the government culture, especially spending units. GovernmentMinistries 93. The Budget Code o f the RussianFederation (passed by the Duma in July 1998 and promulgated inJuly 1999 to take effect from January 2000) is vague with respect to internal controls and internal audit functions. The exercise o f internal and financial controls within the M O F i s carried out by two bodies: 0 the Federal Treasury's Control and Inspections Division (CID), which performs ex-ante, transactional controls over expenditure authorizations and, to some extent, cash management, along with current controls over bookkeeping functions; and 0 the MOF's Financial Control Department(KRU), which perfoms ex-post verifications and inspections over the execution o f the budget. 94. These checks and balances, although complementing each other, still do not ensure a sufficiently controlled environment for public financial management. The CID 23Until 1992,Central Bank controls consisted inan exact matching o f disbursements with appropriations in the budget, itemby item. 24Regional Ministryof Finance staff reported bothto the regional authorities and to the FederalMOF. Russian Federation CFAA: lnfernal Controls and lnfernal Audifinq 26 operates in coordination with the institutions in charge o f ex-post financial controls (JCRU)and external audit functions (Accounts Chamber). The CID oversees the regional and local treasury offices and carries out special tasks. For example, in case o f multi- regional, large-scale inspections, MOF intemal by-laws prescribe that joint C I D K R U teams be associated with other sectoral departments' control bodies. The results o f these inspections are communicated to the MOF and, depending upon the importance o f the findings, to the government. 95. There are admittedly legal andpractical difficulties inintegrating the work o f the CID, the KRU and the Accounts Chamber that often result in duplication and/or lack o f coverage. These overlapping functions should be rationalized and reallocated among the existing bodies. On the one hand, within the line ministries and state agencies, intemal and financial controls are needed primarily to check the legality o f disbursements and correctness o f accounting transactions. All ministries and state agencies with a network o f subordinate units (Le., indirect spending units) are required to have internal control bodies and each chief o f administration i s obliged by law to exercise internal control, but compliance with these provisions is problematic and their effectiveness dubious. Even when these bodies are in place, their recommendations often are not concretely implemented, underminingconsistent enforcement o f policies andprocedures. 96. Since it is common knowledge that internal controls are defective in many institutions, it would be a major accomplishment to fully develop modem intemal audit hnctions that, at present, exist only at the inception stage. Only recently did KRU (guided by capacity building initiatives financed by the Swedish government) begin to implement basic intemal audit functions, trying to move away from the review of individual transactions to an approach based on analyzing the quality o f the organization's management controls and procedures. Internal audit finctions should, in fact, be aimed at detecting systematic weaknesses and assessing the adequacy of the control framework ofministries and state agencies. FederalTreasury 97. The establishment o f the Federal Treasury contributed to the development o f a more disciplined public financial management system in the Russian Federation, supported by the activities carried out by the Federal Treasury's Control and Inspections Department (CID), which covers central and sub-national governments' treasury offices. Its activities are mainly geared to assess compliance with the budget law provisions, and detect cases o f inappropriate use o f funds (for instance, funds allocatedto salaries that are used for another purpose), including recourse to on-site inspections. In this sense, the CID i s an integral part o f the treasury system, ensuring the integrity and consistency o f operations transiting through the treasury. 98. Amendments to the Budget Code were prepared in 2001 to legitimatize the Federal Treasury's control fimctions., From 1999 to 2002 in fact, greater consensus was achieved on the need for the development o f a law-based environment for public sector management. However, much remains to be done before the Federal Treasury is in a position to assume an enforcement role, including imposition o f sanctions based on law. In the interim-pending the required amendments o f the Budget Code-the M O F has Russian Federation CFAA:lnfemal Controls and lnfernal Auditing 27 enacted intemal orders regulating relations between the Federal Treasury and the KRU anddetailing the different control functions and associated responsibilities relatingto the budget executionprocess. 99. Two types o f control procedures are inplace within the Treasury, ex-ante controls and current controls. Ex-ante controls are compliance-type verifications aimed at checking that expenditure requests conform to previously approved budget appropriations and that budget execution conforms to the general financial rules. Specifically, the control is geared towards assessing whether budget recipients are spending according to the prescribed budget classifications. Each account is subject to specific control procedures to check that spending does not exceed budget commitment limits approved by a higher authority for each financial year. During the year, the spending units' administrators approve expenditures, assigning each a budget code, and the Treasury compares these claims with the right to use funds for that particular type o f expenditure based on the current year's budget law appropriations. When expenditures are incurred (for instance, a contract i s entered into), the Treasury monitors the consistency between these undertakings and the specified budget limits, assuring that obligations do not exceed approved commitments. The Treasury i s also responsible for checking collections of all central and local level revenues, including customs payments. 100. Current controls consist o f procedural controls exercised by checking payments documents submitted by the spending units. At this stage, the Treasury checks that documents are correctly filled in (according to the prescribed formalities); that they containreferences to the underlying contract (for instance, the payment is an advance or a final one); and that the cash payment is within the approvedlimits. 101. However, the Treasury is limited in the scope, number and effectiveness o f its control activities by insufficient human, office space and information system infrastructure, and this is a major problem. While software developed in-house is used to compile all data for the central, regional and local Treasury offices in order to report to the MOF on the control work done, the actual control activity is reportedly done semi- manually, following excessively labor-intensive procedures and involving extensive paperwork. At the same time, the workload is increasing. For example, the Ministryo f Defense and spending units' off-budget activities, both o f which previously operated outside the Treasury, are graduallybeingbrought inside the system. MOF's Control and RevisionDepartment 102. The Control andRevision Department (KRU) is an administrative unit within the MOF incharge o f ex-post controls and quasi-audit h n c t i o n ~As . ~ ~its name suggests, the KRU performs financial control and inspection functions. Its scope is the control of federal budget resources, mostly funding-related, and its activities consist o f various controls over budgetary entities' financial activities conducted on a routine basis which, in some cases, extend beyond the line ministries to the public sector's productive and commercial activities (state-owned enterprises). Federal institutions are under the jurisdiction of the federal KRUin Moscow; at the sub-national level, there i s a network 25KRU's other important function is licensing auditors (both individuals and firms). Russian Federation CFAA: lnfernal Controls and lnternal Audifins 28 o f regional organizations corresponding to the sub-national Finance departments. In fact, each Subject o f the RF has a local KRU office charged with oversight o f regional and municipal budgets. 103. Although its establishment was approved by a Government resolution dated August 6, 1998, the traditions o f the KRUdate back almost 80 years. The KRUcan, in fact, be seen as a reorganization o f the former Directorate o f Financial Control and Audit o f the MOF, since its initial resource endowment consisted o f office space, equipment and staff brought in from the legacy institution. In terms o f its institutional setup, the KRUhas overcomethemainproblem ofitspredecessor institution, which was the lack of independence from the accounting and reporting functions o f its parent ministry, inwhich it participated as a substantial contributor. However, in operational terms, ad hoc inspections based on requests from various enforcement bodies (for instance, the financial police), still absorb the bulk o f KRU resources, undermining the hll development o fproper internal audit functions. 104. The ex-post controls carried out by the KRUare explicitly aimed at increasing the efficiency o f budget expenditure. To that extent, the KRUmust follow up on violations identified in the work carried out by the Treasury. KRU's reporting responsibilities are limited to the preparation o f a documentary audit once every two years. The control methodology followed encompasses three stages (as described inexecutive orders): 0 preparation o fthe audit, inwhich the Treasury provides the KRUwith documentationrelating to the flow o f funds and other selected data; 0 the audit process per se, comprising the analysis o f documents and spending units' financialreports, independentlycarried out byKRUstaff; and 0 follow-up actions on the audit findings, currently still a prerogative o f the Treasury. 105. Currently, KRU employs almost 7,000 staff over the entire territory o f the Russian Federation. Entry requirements for controllers are: (i)higher education in economics (or equivalent education); and (ii) relevant professional experience. Thus, young graduates are rarely hired and, when they are, they are provided with on-the-job induction and internal training programs, mostly with the Academy o f Budget and Treasury, a continuing professional education institution that provides training each year to eight to ten groups of 25 people each. These hiringpractices provide little scope for the institution to benefit from external expertise and to renew and enrich its capabilities with exposure to innovative methods and different backgrounds. The criteria for the selection and training o f new staff have reportedly been changed recently to relate more to skills and less to experience. With the decentralization o f administrative functions, regional offices now have their own education facilities outside the M O F system. 106. KRU activities are based on an annual work plan approved by MOF senior management. Ideally, the plan should be approved prior to the commencement o f the financial year. But the required coordination with other institutions involves time- consuming consultations and negotiations that inevitably lead to delays. As a result, the consolidated plan is not normally approved until early March o f the current year. KRU Russian Federafion CFAA: lnfernal Controls and lnfernal Audifina 29 activities are regulated by a charter: based on their terms o f reference, controllers must review no less than 50 percent of budget allocations for the previous year. Their reviews consist o f meticulous inspections tracing transactions back to primary (source) documents. Since records are all paper-based, the substantive testing process involves an enormous amount o f voucher checking. Numerous ad-hoc reviews are also conducted uponrequest o f state enforcement bodies, such as the financial police. 107. Internal control functions at the sub-national level are conducted by regional and local KRUs, which prepare their inspectionsplans independently o fthe federal KRU.The regional and local KRUs are branches o f the local Finance departments, which are autonomous legal entities, separate from the federal MOF. The activities o f the regional and local KRUs are regulated by the Budget Code and departmental orders. When violations and/or fraudulent use o f funds are identified, the relevant information i s submitted to the Treasury and the money returned to the budget. At the same time, sanctions are directly applied: a common sanction i s the right to close the spending unit's account, which has proved effective instopping unapproved or non-controlled disposition o f funds. However, since the treasury system does not cover all transactions, in many cases it is the federal MOF's Budget Department that reduces the funds allocated to the sub-national govemments. Incase of criminal violations, information is submittedto the prosecutor. DevelopingInternalAudit Function 108. As o f December 2002 the Ministry o f Finance does not have in place a proper internal audit department. Internal audit should be an objective and independent process of monitoring and providing technical advice to the administrative units, with the aim of adding value by reviewing the design and operation o f internal control systems, procedures and requirements, improving, inthis way, the functioning o f the organization concerned26.MOF procedures were limitedin2001 and inthe beginning2002 to internal control procedures used to ensure oversight by the executive branch over the integrityof fiscal operations. Ex-ante and current controls were part o f Treasury's general accounting functions. The Treasury gave an approval stamp authorizing an expenditure, and performed selective controls over revenues. Ex-post functions carried out by the Control and Revision Department (KRU) represented financial control functions, mainly geared at assessing expenditures' legality andpropriety. 109. Adding internal auditing functions to the MOF's traditional internal and financial control procedures (alongside the authorizing officer and the financial controller) would make the entire control system more effective, since the focus would be to evaluate whether or not present control functions are carried out in accordance with sound financial management criteria. The internal auditor would then, in fact, be completely independent from the organizational unit being audited. A full range o f internal audit functions would, inter alia, include verification that: govemment resources and assets are 26 InJune 1999the BoardofDirectors ofthe Institute ofInternalAuditors approved the following ,definition o f internal auditing: "Internal auditing i s an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes." Russian Federation CFAA:lnfernai Controls and lnfernai Auditin0 30 safeguarded; duties are appropriately segregated; govemment agencies' activities are carried out on the basis o fwritten instructions andjob descriptions; and disaster recovery andphysical securities measures are inplace. 110. The further development o f Treasury functions, both in terms o f coverage and increased operational effectiveness, will serve to institutionalize these control functions and make them more automatic and systematic (i.e. embedded in the system). In particular, the establishment o f the Treasury Single Account (TSA) will entail significant investment in information technology and training, funded in part by the forthcoming Treasury Development Project. Recommendations 111. The CFAA recommends the modemization o f govemment's internal and financial controls as well as the introduction o f sound intemal audit fictions, in order to strengthen executive oversight o f budgetary organizations, enhance the accountability and transparency o f public financial management processes, and minimize inherent risk factors, including weak controls over possible waste and misuse o f resources. The two mainsteps required are to putinplace: 0 a new institutional framework, accompanied byreform o fthe relevant institutions along the lines discussed above; and 0 a capacity development program, involving humanresources (staff training and development), methodology and information systems upgrade. 112. Regarding institutional restructuring and reform, organic regulation o f public sector internal controls and internal audit functions was under preparation in 2001-2002 that will, hopefully, assists to a more appropriate setup. The World Bank i s available to review and comment on the proposed reform, advising the government on the most appropriate organizational and functional design for the new internal audit functions. Regarding capacity development, various resources could be made available (from the World Bank and bilateral donors) under a comprehensive civil service reformprogram. 113. The institutional choice at the federal level i s between a centralized or a decentralized intemal audit model. A centralized model would involve the creation o f a specialized intemal audit function within the MOF (serving line ministries and other state agencies) in order to separate ex-post financial control functions (to be retained within the KRU) and internal audit functions, which are more o f a preventive nature and risk- based. This reform could be achieved through a spin-off o f some KRU staff and resources to create new intemal audit units exclusively devoted to the new tasks. The risk associated with a centralized model is that it could revive, in a different form, the old state controls that existed in the Soviet Union. Prior to the establishment o f the KRU, federal inspectors from the Directorate o f Financial Control andAudit o f the MOF, with branches inall the line ministries and local governments, used in fact to perform controls inall areas, vertically andhorizontally. 114. Should a centralized system be adopted, the internal audit department within the MOF would report directly to the Minister o f Finance (and, possibly, the Prime Minister) Russian Federation CFAA: lntemal Controls and Infernal Auditina 31 and would be responsible for verifying compliance with rules and procedures o f all the federal ministries and agencies. In the Russian Federation, the MOF would be hierarchically in a position to audit other ministries. It must be noted that the KRU already exercises these functions since, in the absence o f internal audit units within line ministries, KRUcontrollers check the propriety o f internal controls withinthese spending units. 115. A decentralized model would imply the delegation o f internal audit functions to specialized structures across the various budgetary institutions, involving the creation o f small internal audit units within the line ministries and other first-level budgetary institutions. At the federal level, it is recommended that a small internal audit unit be established within each line ministry, with a "dotted-line" (Le. functional link) to the federal-level internal audit department within the MOF. Such internal audit units would be organizationally and administratively part o f the individual ministry/agency (i.e. answerable to the Minister, or the head o f administration), but functionally would also report to the federal-level internal audit department. Such decentralized internal audit functions should, in fact, be always subject to independent monitoring and quality assurance functions carried out by a central body, to ensure uniformity o f approach and consistency o f results. The internal audit department within the MOF would thus assume a central role, being investedwith coordination, qualitycontrol and monitoring functions. This model describes the arrangements required for decentralization to work without problems within the federal-level institutions. However, given the increased autonomy o f sub-national governments, it would not be automatic for a body o f the central executive branch to be involved inthe internal audit functions o f an autonomous local government. Therefore, the regional and local KRUs should undergo a similar evolution to that described for the federal level. 116. Should a decentralized model be considered for the federal government, internal audit units would be established in all government institutions: ministries (including the MOF for review o f its own operations and general oversight), and state agencies. The units would directly report to the head o f the entity and be responsible to perform compliance and operational audits over the activity o f the entity. At the same time, these units would be subject to quality controls initiatives led by the MOF internal audit department. The risk associated with the decentralized model i s that the internal audit units could not be ensured to have sufficient autonomy or access to adequate financial andhumanresources. 117. Regardless o f the model adopted, the CFAA recommends a change o f mentality and approach toward internal audit, at all levels o f government. The MOF should move away from the old inquisitorial control and on-site inspection-based model to a new audit model based on service orientation. Internal auditors would broaden their focus beyond individual transactions to concentrate rather on the efficiency, economy, and effectiveness of operations, and the reliability o f the administrative systems and overall control environment within which transactions take place. Internal auditors would continue to carry out compliance tests o f procedures as well as substantive tests of Russian Federafion CFAA: lnternal Controls and lnfernai Auditing 32 transactions and submit recommendations for remedial actions, but within a more systematic and structured framework (for instance, adopting the COSO based approach to a systemic, risk-based model o f management controls . The internal 118. This change in mentality would go hand-in-hand with the shift from a control- audit function would, in fact, primarily represent an important management tool, to independently oversee financial management practices within an agency, minimizing risks and improving performance. The introduction o f a modem model o f internal audit would greatly contribute to the government's efforts to improve budget management and, more broadly, public financial management systems. 119. Whether centralized or decentralized, internal audit functions should be independent from other organizational and functional departments and internal audit staff should report directly to the head o f the organization. The internal audit body's prerogatives, functions and reporting lines should be regulatedby an audit charter andits activities laid down in an annual work plan. Audit tasks should be carried out by multi- disciplinary teams with skills in handling accounting and financial data, information technology, and the legal and procedural aspects o f government's operations. The internal audit units would have appropriate links with the Accounts Chamber, allowing external auditors to rely on the spending units' own control framework, and the work o f internal auditors regarding the adequacy and correct functioning o f internal controls. ''The committee o f sponsoring organizations (COSO) issued its publication which discusses the important role the internal control environment plays incorporate governance, and included a framework for documenting and evaluating an entity's internal control environment (generally referredto as COSO). COSO i s a framework used to evaluate an organization's control policies and standards, and which emphasizes a comprehensive approach to evaluating controls inthe "whole" institution, and emphasizes the level o f ownership o f controls inthe units that are responsible for them. Russian Federafion CFAA: Exfemal Audit 33 VI. EXTERNAL AUDIT 120. The establishment o f the Accounts Chamber (AC) as the country's Supreme Audit Institution (SAI) in 1995 represented a significant step in institutionalizing the accountability o f the executive to the legislature. Inthat sense, the A C filled an important gap in the country's financial accountability framework. Prior to its transition to the principle o f separation o f powers and adoption o f a new constitutional setup, the Russian Federation had no tradition o f an independent, ex-post, external audit hnction for public financial management. After the breakup of the Soviet Union and untilthe dissolution o f the Supreme Soviet in 1993, there was an Audit Commission o f the Supreme Soviet, which could be regarded as an embryonic external audit authority. However, the Commission's few staff and inadequate resources meant that it had to rely on the Directorate o f Financial Control and Audit for most o f its information needs. The new Constitution eventually provided for an independent SAI, responding exclusively to the Federal Assembly. Legal and Institutional Framework 121. The Accounts Chamber is a constitutional body. The Constitution lays the foundation for the independence and neutrality of the Accounts Chamber, containing explicit stipulations regarding the institution's powers and scope o f activities, and ensuring that these cannot be changed unscrupulousl?'. The Law On the Accounts Chamber o fthe RussianFederation, which came into force inJanuary 1995, reiterates the independence o f the Chamber from the executive branch o f the government and clearly states the principles o f legality, neutrality and objectivity. The Chamber is the "body o f state financial control established by the Federal Assembly o f the RussianFederation and accountable to it;" it "shall exercise control over the execution of the federal budget based on the principal of legality, regularity, objectivity, independence and openness." However, the broad scope o f its activities - including expressing an expert opinion on the draft budget law for a budget whose execution it then must audit -carries the risk that the Chamber becomes involved inmatters o fpolicy that are rightly the prerogative o f the executive brancho f government. 122. Inthe current situationwith a newly introducedtreasury system, where financial controls remain weak andproper internal audit functions within the executive are lacking, the broad range o f activities carried out by the Accounts Chamber (in obedience to its legal mandate) are justifiable and probably warranted In particular, the Chamber's "operational controls" date from the period o f the Chamber's establishment when, inthe absence o f treasury functions as currently implemented, "the budget used to be executed through authorized banks with numerous delays, losses as well as abuses as the fimds flowed from the Central Bank accounts to the accounts o fthe budget recipient^"^^. As the 28 "For the purpose o f exercising control over fulfillment o f the federal budget, the Federation Council and the State Duma establish the Accounts Chamber of the Russian Federation, the compositionand the order o f the activities of which are determined by the Federal Law." The Constitutionofthe RussianFederation (article 101, paragraph 5). 29 Source: The Accounts Chamber o f the RussianFederation - Opinion o n the World Bank documents "Russian Federation. Country FinancialAccountability Assessment" and RussianFederation. Core " Integrative Fiduciary Assessment -An Analysis o f Public Financial Management". Russian Federation CFAA: External Audif 34 Treasury system o f budget execution was later put inplace, those controls "were replaced with the tasks of controlling the timeliness o f disbursement of funds by the Treasury and their legality"30. As stated inthe Lima Declaration o f Guidelines on Auditing Precepts, in fact, "the legal situation and the conditions and requirements o f each country determine whether a Supreme Audit Institution carries out pre-a~dits"~ * . 123. In order to respond to these requirements, the Chamber has elaborated a comprehensive methodology covering all the stages o f the budget process. The Accounts Chamber, based on its experience, deems the above prerogatives to be necessary and extremely important32.Although the Chamber feels that they do not interfere in political and other governance matters, functions carried out inthe context o f preliminary, ex-ante controls, such as providing an expert opinion on the draft federal budget law, may however compromise the effectiveness and credibility o f the work of the SAI; and current controls may unduly delay government financial operations and/or result in overlapping and duplicative activities. In due course, based on the development o f proper internal audit functions and the further development o f government financial reporting capabilities, certain prerogatives of the Accounts Chamber could be revisited in order to concentrate on ex-post, extemal audit functions. This recommendation i s not intended to limit the authority and/or restrict the scope o f Accounts Chamber work, but rather to re- focus its functional and operational attributions, in line with developments taking place elsewhere (e.g. Treasury functions and reform o f the KRU) and the increasingimportance o f financial audits that involve attestation o f government financial statements. 124. The Accounts Chamber is headed by a chairman, who exercises overall control over the activities o f the Chamber and represents the Chamber within Russia and abroad. The chairman is appointed (and can only be dismissed) by the State Duma on a majority vote; the deputy chairman is appointed by the Federation Council, also on a majority vote. In addition, there are twelve auditors, half o f whom are appointed by the State Duma and the other half by the Federation Council. Auditors can only be removed from office by a decision o f the assembly that appointed them and under specified circumstance^^^. Candidates are nominatedby a member o f the relevant assembly and are appointed by a majority vote of the deputies. The backgrounds o f the auditors vary, although in most cases they have experience o f state control, economics or finance; former politicians may be considered. Although there are no explicit provisions in the Law regarding reappointment, it is accepted opinion (within the Chamber and in other circles) that the members o f the Chamber may be reappointed after having served an initial term. 125. The term o f service o f the chairman, the deputy chairman, and the auditors is six years (a period o f office longer than that o f members o f the two federal assemblies that appointed them). The activities o f the Chamber may not be suspended because o f the 30Source: see previous reference. 31Paragraph4, Section 2. 32The importance o f the described forms o f budget control are noted inthe special resolution "Supreme Audit Institutions and Control over State Budget Execution" adoptedbythe fifthEUROSAICongress (Moscow, May, 2002). 33Such as breach o f Russian Federation law; ifthey are recognized as incapable by a decision o f a court; or by a decisionby a newparliament where at least two-thirds o fthe members o fthe State Dumaor Federation Council vote to cancel the powers o f the members o f the Chamber. Russian Federation CFAA: External Audif 35 dissolution o f the parliament. The immunities and legal protections granted to the members o f the Chambers imply that they may not be detained, arrested or made criminally responsible without the consent o f the assembly that appointed them; that criminal proceedings may be brought against them only by the prosecutor general; and that they may not be made criminally responsible for their actions without the consent of the Chamber. 126. The Accounts Chamber is a collegial body: the Collegium, composed o f the chairman, the deputy chairman and the twelve auditors o f the Chamber, is the institution's decisional body. The Collegium approves the Chamber's annual audit program, whose operational details are further defined in work plans elaborated by the audit departments. It organizes the audit work, determines the methodology o f controls and inspection activities, and approves the audit reports and other information to be delivered to the Federal Assembly. Sessions o f the Collegium are normally held on a weekly basis. Decisions adopted by the Collegium require majority support and are taken on a collegiate basis. All members, including the chairman, are equal in terms o f voting rights, although the chairman tends to have greater influence. Incase o f dissent from the majority view, members may express a minority viewpoint ina special opinion. Scope of Responsibilities 127. Pursuant to the law, the Accounts Chamber's primary role is to undertake the external audit of federal funds ( termed "total complex documentary examination") and report on its findings to the legislature. In addition, it i s responsible for a range o f other tasks, including providing an "independent expert opinion" on the draft federal budget law ("preliminary control^")^^. Inparticular, based on the provisions o f the Budget Code, the opinion o f the Chamber on the draft federal budget law for the upcoming year, submittedto the State Duma by its Chairman, may serve as a ground for rejection o f said draft law. The Chamber also considers requests from the President o f the Russian Federation, government committees, and commissions o f the Federal Assembly Chambers, individual deputies, and government authorities o f the Subjects o f the Russian Federation; however, it i s the Collegium that decides on the inclusion o f an ad hoc audit in the work plan. Finally, the law also gives the Chamber the right to pre-audit government expenditures ("current contr01s~~)~~. 128. To hlfill these responsibilities, the Accounts Chamber has elaborated an audit methodology establishing a control cycle over the execution o f the budget o f each financial year, involving ex-ante, concomitant and ex-post audits inthe form of: 0 preliminarycontrol o fthe draft budget for the next year; 0 current control, duringthe period o f execution o f the annual budget; and 34The Law on the Accounts Chamber requires the Chamber to give its opinion on the draft federal budget, problems o fbudgetary and finance policy, drafts laws and other acts o n budgetary and financial matters, drafts o f international treaties with legal implications for the federal budget, and projects to be financed from the federal budget. 35The Law on the Accounts Chamber requires the Chamber to provide, on a quarterly basis, a report onthe execution o f the federal budget that compares income and expenditure data against targeted amounts. Russian Federation CFAA: ExternalAudit 36 0 documentary examination o fthe budget for the previous year. 129. Based on the objectives and timeline set up inthe annual audit program, quarterly operational (current) work plans are prepared and adjusted during the year as necessary. There i s in fact an obligation for the Chamber to examine requests for changes to the audit plan and for ad hoc audit activities, although, as already mentioned, the Collegium has the final word on the proposed changes andnon-planned audit tasks. 130. According to the Law on the Accounts Chamber, the scope o f activities o f the Chamber encompasses all entities that receive, remit or use resources o f the federal budget; use or manage the federal property; enjoy tax, customs or other exemptions and privileges, granted by the federal law or federal bodies o f state power. It is the Chamber's responsibility to examine the final accounts o f revenues, expenditures and borrowing of central government agencies, other autonomous bodies, and o f government-invested organizations. The Chamber i s also required to examine the execution o f the financial plans of the federal extra-budgetary funds; the use o f state property (both in terms of its management and post-privatization development o f enterprises); and the use o f hnds by all other Subjects receiving financial support from the federal budget36.The Chamber's powers o f access to offices, documents and information i s extensive37. While these provisions appear strong, there are some problems in their practical implementation. For instance, although the Council o f Federation instructed the Chamber to audit the Central Bank o f Russia, and Law on the Central Bank was amended to remove ambiguity about the Chamber's rightso f access, no audit from the Chamber has yet taken place. 131. In line with the financing arrangements observed in countries with longer, established traditions of public extemal audit, the Accounts Chamber is exclusively funded by the federal budget (provided for in a separate line item) and has no revenue sources of its own. Although the budget i s agreed by the State Duma and Federation Council, the Ministry o f Finance has a strong influence over budget drafting and, therefore, may indirectly affect the Chamber's autonomy and independence (by cutting back its resources). Inpractice, however, it shouldbe noted that - since the establishment of the Accounts Chamber- there has been no difference o f opinion between the executive andthe Chamber regardingthe financing o fits costs3*. ActivitiesandProcedures 132. Intemal policies and procedures regarding the activity o f the Accounts Chamber are regulated by regulations approved by the Collegium. Considerable progress has been made since its establishment: the organizational structure i s being revised and improved, and the chairman intends to increase the efficiency o f Chamber's operations by codifying methodology and associated processes. The guidelines prepared to date pertain mainly to 36The audit o f these Subjects i s mandatory when budgetary support (from the federal budget) exceeds 50 percent o f their consolidated budget. 37Unjustified refusal to present the required information to the Chamber, or inability to present documents and other materials as well as presentation o f incomplete or false information, entails criminal liability as per the Criminal Code o f the RussianFederation. 38Incase o fany differences o fopinionwiththe federal Ministryo fFinance inthe preparation o fthe Accounts Chamber's budget, the records o f such differences shall be submitted to the State Duma which, should such situation occur, retains final decision o n the Accounts Chamber budget. Russian Federation CFAA: External Audit 37 the scope o f Chamber activities, the methodological aspects o f which can be considered to be in the inception stage. Since 1995 the institution has accumulated experience in conducting analytical work over the last seven years, following a rather empirical approach: principles and norms are now being generalized on the basis o f this practical experience. 133. In 2000, following the appointment of a new chairman, the Chamber's internal regulations were modified to require greater interagency coordination. The modifications were related to the introduction o f a program for enhancing the efficiency o f the Chamber's activities (for instance, the adoption o f a new risk-based methodological approach, based on conducting more extensive and detailed audits o f the most significant entities); and also to the content of important, concomitant legislative reforms, such as the enactment o f the Budget Code and amendments to the Tax Code. Based on the new instructions, proposedactivities identified at the audit planningstage must be coordinated with the work o f other relevant state entities and agencies (including parliamentary ~ o m m i t t e e s ) ~ ~ . 134. Audit planning and reporting are both regulated under the Accounts Chamber's internal rules and procedures. However, in 2002 the Chamber worked on defining quality control mechanisms. The planwas to establish a dedicated organizational unit that should be responsible for operations evaluation and other quality assurance mechanisms (e.g. peer reviews). The Chamber appreciates that quality control can be only established by developing general guidelines (principles andpolicies) and assessing compliance with the procedures andpractices containedinthe guidelines. 135. The preparationo f the work plan i s a core activity o f the Accounts Chamber. The steps followed inthe preparationo f the audit planare as follows: 0 Duringthe last quarter, auditorsprepare their proposals for the following year, basically a list o fthe entities subject to audit and a conceptual framework. Some proposals may encompassjoint work with different organizational units. 0 The proposals are agreed uponwith the chairman who, with the support o f the deputy, prepares a summarydocument that i s submitted to the Collegium for official approval, normally by the end o f December. 136. The Chamber conducts on average more than 400 audits every year4'. The work i s normally carried out by a team o f three or four inspectors, although more complex audits may be carried out by a team consisting o f up to a dozen functional sub-teams. Teams are composed o f a varying number o fjunior, senior, and lead inspectors, based on the complexity and location o f the work, and are led by a chief inspector. In selecting 39 Coordination i s required with the audit authorities o f the President and government (KRU),the federal counter-espionage services, external intelligence services, the federal agencies o f communication and information, law enforcement agencies, the control bodies o f the Subjects o f the Federation, the central bank, tax administration and tax police, and the MOF. 40 In2001, for instance, the Accounts Chamber carried out 409 audits covering 1,545 institutions and organizations (source: The Accounts Chamber o f the Russian Federation- Opinion o n the World Bank documents in"Russian Federation: Country Financial Accountability Assessment" and Russian " Federation. Core Integrative Fiduciary Assessment -An Analysis o f Public Financial Management". budget spending units, the Chamber utilizes a risk-adjusted sampling methodology; audits are supported by computerized information systems, including a database designed to support auditing techniques. However, this system is still unfolding its potential to allow for greater use o f off-site, desk review o f data. As a result, inspectors still mostly carry out on-site inspections. 137. On the basis o f their work, auditors prepare their returns (called "acts"), which include all findings and details o f legislative, financial and other violations, including their monetary value. Where the inspectors have examined the efficiency o f operations, they will include details intheir acts. The acts are submittedto the auditor-in-charge, who prepares a report. The report is signed and submitted to the Collegium, where it is either adopted or rejected. If adopted, the full report i s sent to the State Duma, with a cover letter. In addition, the auditor-in-charge submits an endorsement to the auditee, which is copied to the relevant minister, sometimes the primeminister and the prosecutor general as deemed appr~priate~~. DisseminationofAudit Findings 138. The Accounts Chamber reports to the State Duma and the Federation Council. The reports, signed by the inspectors who did the fieldwork, include a summary signed by the chairman highlightingany shortcomings identified as well as legal violations and include recommendations for action, including suggested legal amendments. The Federal Assembly may pass a resolution on the findings presented in the reports, but these resolutions do not necessarily lead to any response fi-omthe executive. At the end o f each quarter, the various departments o f the Accounts Chamber prepare a cumulative report on the work done duringthe year. The departmental reports feed into the annualreport o fthe Chamber, which also includes information on the Chamber's own performance. The Chamber's annual report is reviewed by the Budget and Taxes Committee o f the State Duma and the Committee for Coordination with the Accounts Chamber o f the Federation Council, which make recommendations to the assemblies. On the basis o f these recommendations, proposals may be made for further work by the Chamber, to be incorporated into its work program the following year. The final Accounts Chamber annual audit report must be approved by the Council, submitted to the State Duma, and thenpublished. 139. In terms of providing information to the general public, the Chamber follows a policy o f transparency. Individual reports to the legislature are not published, but copies may be providedto the press on an informal basis. The results of individualreviews and investigations that are not covered by state secrecy or confidentiality clauses are summarized in the Accounts Chamber's monthly bulletin. The bulletin has a limited circulation o f about 2,000 copies, distributed mostly within state institutions and agencies. For more general dissemination purposes, the Chamber routinely issues press releases and gives conferences; more recently it also launched a website, where many reports are published, contributing to an increase in its openness and greater public availability o f audit results. 41There are two types o f endorsements. Some may simply list the violations and make recommendations that certain practices be discontinued because they are damaging the public interest. Others are inthe form o f orders, which state explicitly when mandatory actionmustbe taken (for instance, returning funds). Russian Federation CFAA: External Audit 39 Staffing 140. The Accounts Chamber professional staff (inspectors) receive no formal certification as public auditors. Recruitment i s by personal recommendation andjobs are not advertised; there are different qualification requirements for each level. There i s no specific code on the conduct o f Chamber employees but there are orders from the chairman on specific topics such as recruitment procedures, confidentiality, and the handling o f sensitive documents. As state officials, staff are boundby the federal Law On Public Service and are required to sign an agreement binding them to confidentiality and barring them from undertaking independent work. Induction o f new staff is mostly carried out in-house and/or through external training courses with the various state academies. In carrying out its functions, the Chamber has the right to enlist other state control bodies and, importantly, the prerogative to contract non-state audit services and individual specialists. Audit Standards 141. The Accounts Chamber i s a member o f INTOSAI ,as well as o f regional bodies such as the European Organizations o f Supreme Audit Institutions (EUROSAI), and the Asian Organization o f SupremeAudit Institutions (ASOSAI). 142. In 2001 the Accounts Chamber was currently elaborating its own auditing standards, intended to conform with those presented in the Lima Declaration of Guidelines on Auditing Precepts. Although the Chamber is gradually moving towards the implementation o f the full range o f INTOSAI's Standards, its audit objectives are fundamentally of a legalistic nature (basically determining the level o f compliance with the law, rules and regulations). This methodological approach reflects, on the one hand, the country's traditions and cultural attitudes towards state control functions; on the other hand, it is also the result o f the relative priorities o f the various aspects o f extemal audit set out by the Chamber. As a result, the activities o f the Accounts Chamber are mainly focused on the "legality" and "regularity" objectives o f audit. Inthis respect, the Chamber carries out documentary reviews o f the executed budget that involve substantive testing (analytical procedures), covering examination o f payment documents and receipts, their verification ("analysis of maximally possible quantity o f original payment documents and verification o f authenticity o f accounting information" 42) and comparisons with MOF's and Federal Treasury's own accounts, as well as reconciliation with Central Bank's and other credit institutions' financial documentation. 143. The Chamber's investigations are therefore documentary innature (assessment o f the regularity o f administrative functions from a formal and substantial viewpoint) and their scope is compliance-oriented (assessment o f adherence to established rules and regulations). Consequently, the reports issued by the Chamber address a variety o f topics, including non-financial ( i.e. legal, organizational, administrative) aspects o f public financial management. Since in 2000 the Russian Federation began preparing an annual federal government balance sheet, it has become topical to perform financial audits, in the sense o f attestation o f public accounts. In that regard, the opinion issued by the Accounts Chamber on the report o f the government on the execution o f the federal ~~ 42 PublicationentitledAccounts Chamber of theRussian Federation 1995-2000,pg.17. budget43, makes explicit reference to financial statements. The Accounts Chamber's opinion, based on the provisions o f the Budget Code, is not legally binding; however, the State Duma, having considered the Accounts Chamber's opinion, may reject the government's report on the execution o f the federal budget. Recommendations 144. A well-functioning, independent external audit is a key pillar of a country's financial accountability framework and an important factor contributing to the stabilization o f the balance o f power between the executive and the legislative branches. Inparticular, the issuance by the Accounts Chamber of a general audit assurance on the Russian Federation government's financial position is important interms o f transparency and accountability of government operations, as well as public confidence. Inthat regard, the Chamber should (i) enhance its financial audit capabilities, i.e. attestation o f the annual govemment's report on budget execution and related financial statements, and (ii) expand its financial audit activities to also cover the annual financial statements o f the individual government entities under its purview, in order to reinforce and complement its general audit assurance on general government's consolidated accounts. In order to function fully in accordance with its constitutional mandate and on a par with other longer established Supreme Audit Institutions, the Accounts Chamber has embarked on a program o f improvements involving both institutional and organizational reforms, accompanied by a targeted program o f capacity building that would allow it to better fulfill its core ex-post, extemal audit responsibilities. Inparticular, the Accounts Chamber has prepared a long-term plan to assess public institutions' performance (value-for- money) inthe use o fpublic funds. The CFAA strongly supports these efforts. Scope ofWork 145. Regarding institutional reforms, the CFAA believes it is important to the Accounts Chamber's effectiveness that its role be well defined and that it undertakework appropriate to its independent status, in order to avoid compromising the effectiveness and credibility o f its work. The CFAA identified three practices that it considers inappropriate for the preservationo f the Chamber's independence and neutrality: 0 its involvement inbudget matters, specifically its role inbudget preparationwhen itprovides anindependent assessment ofthe draft federal budget, including assessingthe credibility of forecasts made bythe government inpreparing the annual federal budget law, andproposing adjustments o fbudget parameters and other indicators inthe course o f the parliamentary budget approval process44; 43For example, the Chamber's opinion on the execution o f the 2000 federal budget states that 29 articles of the Budget Code were violated inthe course o fbudget execution and that the volume o f executed revenues and expenditures were overestimated. The report also contained proposals related to the improvement of the budgetlegislation. 44For example, for the 2002 federal budget law, the Accounts Chamber pointed out that budget forecasts were underestimatedbecause they were based o n incorrect basic macroeconomic indicators. Inresponse to the observations o f the Chamber, the government increased the projections o f GDP and o f revenue receipts by over 3 percent and over 1percent, respectively. 0 its obligation to carry out work for the executive, such as interimreporting on budget execution; and 0 ad hoc requests from the legislature or other state organs - which are, inany case, rather limited(amounting, in2001, to less than 10 percent o f the total number o f audits carried out by the Accounts Chamber). 146. Traditionally, providing advice to the government on the budget is seen as a task within the hctions of a parliamentary Public Accounts Committee (PAC)-in the Russian Federation the parliamentary Committees on Budget and Taxes-and o f the Ministry o f Finance and/or the Treasury. Also, traditionally, auditors are not supposed to participate inany way in activities they will later be auditing. SAIs are properly involved inthe budget cycle only ex-post, once the government has reported to the legislature on budget execution. The danger i s that involvement prior to agreement on the budget may compromise the Accounts Chamber's subsequent ability to comment and independently assess the use o f budget funds. Involving the Chamber inbudget discussions inevitably politicizes its audit work, and may also undermine public confidence in the objectivity andnonpartisanquality o fthe Chamber's professionalwork. 147. For these reasons, the CFAA believes that it would be appropriate to limit the Chamber's role to ex-post auditing. Given the framework for budget management inthe Russian Federation, responsibility for providing an independent expert opinion to the Federal Assembly on budget formulation, revenue and expenditure forecasts, and policy analysis for draft laws should remain the prerogative o f the parliamentary Committees on Budget and Taxes. In doing so, the legislature should always consult with the Accounts Chamber to allow experience gained from the audit work to be brought to the attention o f the Committee's members. The Chamber i s reportedly in direct contact with the parliamentary Committees; this collaboration with the legislature is desirable and should be enhanced, with the Chamber carrying out, upon request, advisory hnctions to the Committees on specific matters that may arise during the review o f the draft budget law and interim reports on budgetexecution. 148. The law also requires the Accounts Chamber to provide a quarterly "operational report on the progress o f budget execution" that compares revenue and expenditure data against targeted amounts45.This ensues from the Accounts Chamber's task o f organizing and exercising control over the "timely execution o f the revenues and expenditures" o f the federal budget (and the budgets o f the federal extra-budgetary funds) in terms o f "amounts, structures, and end-uses.'' Also inthis case, although the executive can clearly benefit from drawing on the knowledge and experience o f the Chamber (for instance in terms o f feedback into next year's budget process), the CFAA recommends that responsibility for reporting on the progress o f budget execution should remain solely with the executive branch, including the Treasury and the MOF. A more appropriate role for the Accounts Chamber would involve, for example: helping to set standards for government accounting and financial reporting; drawing attention to potential or actual conflicts of interest in government stewardship activities; and encouraging management ~ 45Special attention is given to the impact o n budget execution o f the general economic situation o f the country and trends inmacroeconomic indicators that measure tax receipts, tax-compliance, and financial sector performance, among others. Russian Federation CFAA: External Audit 42 to develop sound financial and oversight practices over its operations, including robust financial reporting, a sound control framework, and modem internal audit functions. W o r k Program 149. A key aspect o f an Accounts Chamber's independence is its ability to set its own work program. Audit requests from the l e g i ~ l a t u r eare ~ ~ common practice in many countries and also represent an indirect control mechanism to ensure that the SAI's work program i s aligned with parliamentary needs and concerns. The Lima Declaration of Guidelines on Auditing Precepts itself states that the powers o f the national legislature to mandate ad hoc audits may not be challenged. SAIs normally consider these requests on their merits and decide whether to turn them down or postpone action; preserving its discretion to decide is, in fact, a fundamental aspect o f a SAI's independence. Presently, the mandates (resolutions) of either Chamber o f the federal Assembly, and requests signed by at least one-fifth o f the total number o f the State Duma or the Council of Federation, are subject to mandatory inclusion in the work plans and programs o f the Accounts Chamber. 150. Inorder to preserve the Accounts Chamber's fullindependence and ensure that its resources are usedon the highest priority tasks, the CFAA therefore recommends that: 0 budgetpolicybe formulated exclusively bythe executive andthe legislature's PAC; 0 budget executionreporting hnctions be the sole responsibility o f the MOF; and 0 the Accounts Chamber be given free hand, under all circumstances, to rule on the merit o fadhoc requests comingfrom the legislature (Le. there should beno obligation for the Chamber to take on work outside its independently planned investigations). Enforcement Role 151. In terms of enforcement aspects of the Chamber's audit work, the Law on the Accounts Chamber establishes a clear link between identifying irregularities and correcting them. In fact, the Law gives the Chamber the authority (once it has identified breaches o f law and regulations "that cause direct damage to the state" as well as in the event o f "intentional or systematic violation o f rules"), to issue mandatory orders to the management o f the audited body mandatingrectification or repayment (accruing to the federal budget). The procedure inplace when audit results show embezzlement o f public funds or assets implies submission o f the audit materials by the Accounts Chamber directly to law-enforcement authorities. Inthe event o f repeated non-compliance or undue execution o f remedial actions prescribedby the Chamber, it may seek authorization from the State Duma to suspend all types o f financial, payment and settlement operations on the accounts o f the entities inviolation. 46Or fromthe government, since INTOSAIguidelines clearly state that the maintenance o fthe SAIs' independence does not preclude requests from the executive proposing matters for audit. Russian Federation CFAA: External Audit 43 152. The danger o f granting the Accounts Chamber such corrective powers is that its independence may be compromised when it becomes embroiled in disputes between the executive andthe legislature. There may also be a risk o f undermining its reputation ifits orders are ignored or challenged in the courts. The Chamber could then become a direct and active participant in a series o f potentially time-consuming or difficult lawsuits. The role o f the Chamber might more properly focus on drawing the results o f its audits to the attention o f the executive and the parliament, and then overseeing the results o f the action that parliament or government chooses to take - the ultimate sanctions being ordered and applied by the courts, for instance, in cases o f fraudulent behavior uncovered by the Chamber involving criminal violations. 153. It is, in fact, the government's responsibility to ensure that funds are properly managed and control weaknesses eliminated, and the legislature's to ensure that the government takes appropriate action, opportunely advised by the Chamber. At the same time, adequate oversight should be exercised on the public audit functions carried out by the Accounts Chamber, in order to close the state accountability loop. At present, these oversight functions are performed by the Council o f Federation Committee for Coordination with the Accounts Chamber and, inpart, by the Budget and Tax Committee o f the State Duma47. The Accounts Chamber reports are, in fact, discussed by these parliamentary Committees, and resolutions on these reports are issued by the two houses of the Federal Assembly. Inabsence o f a dedicated parliamentary Audit Committee, the CFAA specifically recommends that the two Committees devote greater attention to scrutinizing the activities o f the Accounts Chamber, publicizing audit conclusions and outcomes, and following them up. Inparticular, formal processes are to be introduced for government to respond to parliamentary recommendations for action following scrutiny o f the results o f the Chamber's audit activities, processes that would determine the extent o f administrative and, possibly, criminal judicial action, to be triggered by the findings presented inthe Chamber's reports. 154. The Council o f Federation Committee for Coordination with the Accounts Chamber and the Budget and Tax Committee o f the State Duma should also be vested with responsibility to determine the Accounts Chamber financing needs, in order to address issues relating to the funding o f the Chamber's operations. Recent developments inintemational best practice4*, infact, suggest that inorder to protect the funding of the SAI, its budget should be determined exclusively by the parliament, based on the financing needs arising from the audit plan for the next year, including all necessary operating expenses as well as investments. Pursuant to the current budget legislation o f the Russian Federation, budget drafting is an exclusive power o f the executive branch; however, opportune changes may be considered to ensure that the Accounts Chamber financing is protected, and therefore not subject to reduction when public expenditures are beingcut. 4'The Council o fFederation Committee for Coordination with the Accounts Chamber, with a view to refine the functional attributions of the Accounts Chamber, has prepared a draft law o n amending the federal law Onthe Accounts Chamber, which has been submitted for consideration to the State Duma. 48For instance, New Zealand's Public Audit Act, 2001. Russian Federation CFAA: External Audit 44 Conformitywith InternationalStandards 155. An important aspect pertaining to the core functions o f a Supreme Audit Institution i s the definition and consistent implementation o f audit standards. The CFAA recommends that the Accounts Chamber work on the implementation o f INTOSAI Standards on Auditing, with the objectives of: 0 gradually aligning financial audits to international best practice, such as that observed inOECD countries, particularly inthe areas o f evaluation o finternal controls and analysis o f financial statements; 0 enhancing the internal quality assurance functions over its audit activities ( particularly inthe areas o fplanning, execution and reporting; and 0 establishing external quality assurance mechanisms through external review by another SAI. Complementarityof InternalandExternalAudit 156. The reliance o f the external auditors-the Chamber- on the work performed by the government's internal auditors i s particularly important. The goal should be to avoid duplication andto reinforce the process through which policies, procedures and practices governing public financial management are verified as being adequate and sound. Internal and external audit should be compatible and complementary, and both should follow a risk-based approach. The primary role of an organization's internal audit functions is, in fact, to exercise preventive control, and ex-ante and current controls over the operations o f an organization should therefore be the prerogative o f internal auditing. The ultimate goals o f external audit are: 0 to provide, ex-post, an assurancethat accounts fairly present the financial position andthe results o f operations o f an organi~ation~~;and 0 to detect systematic control weaknesses and associated risks ina professional, judgmental manner, andprovide practical recommendations for their removal. 157. The differing roles o f internal and external audit also imply differences in the extent and frequency o f required access to government records. In particular, in 2001 access to Treasury information systems by the Accounts Chamber was under debate by the government, the Federal Assembly, and the Chamber itself. Obtaining direct, on-line 49Infact, unless there is total coverage (100percent oftransactions), there is always the possibilitythat errors, misstatements, corruption and fraud may remain undetected. At the same time, verifying only recorded transactions will necessarily fail to detect successfully hidden income and expenditure (as inthe case o f double-bookkeeping or black revenues) that can only be tracked by analyzing the auditee's sources o frevenues and typology o f expenditures. A more suitable approach would be to assess the risk (statistical probability) that assets and revenues are not entered inthe books (or are recorded for incorrect amounts), and the risk o f corrupt behaviors that could undermine existing internal controls, such as collusion. The assessment o frisk could be derived from sectoral norms and patterns, data time series, and related past experience. Hypotheses should be corroborated by tests conducted on the basis o f an appropriate level of materiality. real-time access to the Treasury General Ledger was regardedby the Accounts Chamber as a valuable means o f maintaining oversight over government spending and receipts. However, this day-to-day type o f monitoring and compliance checks is part o f the ex-ante and current control responsibilities o f the Federal Treasury Controls and Inspections Department (CID). Likewise, the risk analysis o f government's financial and payment systems is better placed within the framework o f developing modem internal audit functions within the Ministryo f Finance. Although the Chamber should clearly have full and unrestricted access to all sources o f data and documentation- includingthe full range o f Treasury accounts and records - to carry out its ex-post external audit work, the real- time examination of transactions by the Accounts Chamber is a costly and duplicative activity. Day-to-day oversight o f Treasury operations could be effectively achieved through enhanced communication, including data exchange, between the Accounts Chamber and government's control and audit bodies within the Treasury and MOF, with the aim o f building mutual reliance and recognizing the different specialization and prerogatives ofinternal and extemal auditing. Relationship with Local Governments 158. The Chamber is a federal authority and currently has no regional branches within the territory o f the Russian Federation. The Accounts Chamber employs some 1,150 regular staff, o f whom the majority are professional staff involved in audit work. This staff complement enables the Chamber to give full examination to line ministries once a year. Authorities below this level (e.g. second-level spending units) are likely to receive attention less frequently. 159. The Accounts Chamber has no authority to audit the execution o f the budgets o f regional administrations or local state bodies. Pursuant to the provisions o f the Budget Code, control over the execution o f the respective budgets o f the Subjects o f the Russian Federation and the local self-government bodies is the responsibility o f the respective financial control bodies o f the Subjects o f the RF and the municipal financial control bodies. As a result, regional and local authorities have set up their own control and audit bodies (also called Accounts Chambers) in 74 o f the Subjects o f the Russian Federation, which are established by the Subjects' legislative bodies and the representative bodies o f the local self-governments. 160. Traditionally, the regional and local Accounts Chambers have worked quite separately from the federal-level Accounts Chamber. The CFAA finds that there is a need to redefine and institutionalize the relation between the federal Accounts Chamber and the regional/local governments' Accounts Chambers. Significant accomplishments inthat direction are (i) establishment, at the end o f 2000, o f the Association o f Control and the Audit Bodies of the Russian Federation, created under the aegis of the Accounts Chamber"; and (ii) the establishment, in 2002, o f the Union o f Municipal Audit Bodies, which was also created with the participation o f the Accounts Chamber. Inorder to fully exploit the potential o f these initiatives, the CFAA recommends that the enactment of legislation on regional audit bodies be considered, providing for specialization and adequate division o f labor between the federal and the sub-national Chambers, and for a 50The chairman of the Accounts Chamber is also the chairman ofthe Association of Control andAudit Bodies o f the Russian Federation. Russian Federation CFAA:Extemal Audit 46 coordinating role by the federal-level Accounts Chamber. The system would work as a network, with the Accounts Chamber in the lead by defining methodological approach and exercising quality control over the work o f regional and local control and audit bodies. CapacityDevelopment 161. To support the substantive recommendations o f this report, the CFAA recommends preparation of a capacity development program for the Accounts Chamber, built around the objective o f buildingfinancial audit (attestation) capabilities. The steps involved inthis programwould be: 0 interms ofresources, developingan adequate skills mix, includingtrainingto equip the Accounts Chamber's professional staff with strong financial auditing and financial controls diagnostic skills; and 0 interms ofapproach, movingbeyond cataloguing errors inorder to target systemic control weaknesses. 162. The World Bank is keen to provide assistance and guidance where possible, especially with respect to the transition to INTOSAI Standards on Auditing. In the process o f building internal capacity, a possible pragmatic solution in the short term could be for the Accounts Chamber to contract out the assurance part o f its audit activities to private sector audit firms. Financial audits would be conducted under the umbrella o f the Chamber's legal authority, but would be carried out by mixed audit teams (private sector auditors and Chamber inspectors). Chamber auditors would certainly benefit from the exposure to audit methodology and practices, in effect a form o f on-the- job training. Although the feasibility of this approach is nominally guaranteed under the Accounts Chamber Law, it may have a negative impact on the Chamber's reputation and could potentially generate legal and regulatory conflicts (for instance, relating to access to information by non-state auditors). These risks should be carefully evaluated by the authorities and ways found to mitigate them, if this approach i s to be followed. This recommendation is of particular relevance with respect to the annual audit o f the Central Bank of Russia, which could be carried out by a mixed audit team, including Chamber inspectors. QualityAssurance 163. In terms of overall quality assurance, besides establishing a dedicated organizational unit incharge o f internal quality control, the CFAA recommendsthat the work o f the Accounts Chamber be reviewed, on a regular basis, by another SAI. Initiating external quality control and operational reviews o f the Chamber by another SA1 would represent a natural evolution in the working relations-including staff exchanges, that provide exposure to international experience- that have recently been established with SAIs in other countries from which the Accounts Chamber has received technical assistance in the form o f bilateral cooperation, including the U S General Accounting Office (GAO). Twinning arrangements have reportedly been established between the Accounts Chamber and the UK National Accounting Office (NAO) and the Swedish National Accounting Office (SNAO); the involved institutions, in broadening and Russian Federation CFAA: External Audit 47 deepening their operational involvement with the Accounts Chamber, could consider the opportunity o f introducing inter-institutional peer-review programs. Russian Federation CFAA:Portfolio Fiduciarv Considerations 48 VII. PORTFOLIO FIDUCIARYCONSIDERATIONS 164. The CFAA found that, with respect to its lending operations, the World Bank i s adequately discharging its financial management fiduciary responsibilities. The CFAA risk assessment concluded that the current ring-fencing approach to project implementation arrangements should be maintained, effective operationalization o f the reforms introduced in public financial accountability - recognizing that - based on the the present arrangements could in due course be subject to revision. The overall control environment in the Russian Federation is in fact evolving but, at present, is still weak (see box on Corruption and Governance). 165. In1999, withinthe existing fiduciary framework for adjustment lending, the Bank introduced front-end accountability requirements consisting o f a real-time tracking system, complemented by an external, independent audit o f the Deposit Account held at the Central Bank. These requirements were designed to ensure that disbursements o f its remaining adjustment loan balances reach the Ministry o f Finance's budget accounts or are utilized directly by the Central Bank o f Russia only for sovereign, external debt payments. 166. As for the Bank's investment lending, since 1998 Bank staff have been consistently implementing the project financial management arrangements mandated by the Financial Management Initiative (FMI). The Bank's Moscow-based financial management team also took innovative steps, now regarded as best practice Bank-wide, to improve the audit quality o f Bank-financed projects. In coordination with the MOF, the team introduced a system o f pre-qualification o f private sector audit firms (either domestic or part o f an international network), aimed at retaining only those firms that demonstrate adequatetechnical capabilities andinternal quality control mechanisms. Recommendations 167. Based on the CFAA's findings regarding existing weaknesses inthe public sector financial accountability framework and the scope for hrther developments, and in line with the agreements reflectedinthe Country Portfolio Performance Reviews (CPPR), the CFAA recommends that, from a fiduciary perspective, the current ring-fencing approach to institutional and implementation arrangements be maintained for Bank-assisted projects in the Russian Federation. For investment-type operations, these arrangements are based on (i) assignment o fproject management and implementation responsibilities to multi-project Foundations, which are autonomous, non-commercial legal entities; and (ii) maintenance o f loan funds (Special Accounts) within major state banks o f the Russian Federation, owing to the (still) ongoing stabilization o f commercial banks following the August 1998 financial crisis. 168. In terms of governance, the CFAA considers that the framework currently in place for government oversight o f the Foundations i s satisfactory. This framework involves Russian Federation CFAA:Porffolio Fiduciary Considerations 49 0 agency agreements betweenMOF and the Foundationsthat define rights and responsibilities for implementation o f each specific project; 0 supervisory boards (composed o f representatives o fMOF, Ministry o f Economic Development and Trade andrelevant sectoral ministries) that approve the yearly budget, broken downbyprojects, and perform other oversight functions; 0 interministerial committees that oversee, for instance, procurement (review o f every contract above specified thresholds); and 0 management oversight, through regular reporting bythe Foundations to the M O F andrelevantministries, annual external audits and regular controls performedby the Accounts Chamber, MOF's Control and Revision Department (KRU)and other government controllers. 169. Taken together, this combination o f budgetary controls and day-to-day implementation monitoring represent a powerfbl deterrent to collusion and can ensure the transparency and accountability o f the Foundations' activities. Conditionsfor MovingtowardsMinistry-basedImplementation 170. The present arrangements do pose some limitations on developmental impact, since they potentially detract from line ministries' ownership o f projects and may limit in- house capacity building at the line ministry level. However, these drawbacks are positively offset by cost-effectiveness and efficiency considerations. Inthe case o f multi- project Foundations, in fact, the incremental start-up costs for additional projects are minimal. For instance, inthe area o f financial management, the only additional cost is to customize existing accounting software to take into account the new project. A stand- alone PIU would need to purchase and install its own accounting software, train new staff, and prepare an operational manual. Likewise, individual project auditing costs are lower when grouped under the umbrella o f the Foundations' audit arrangements. Finally, multi-project Foundations tend to remain lean, employing highly skilled staff to provide specialized, professional services across a range o f projects under implementation, thereby also ensuringconsistency o f results. 171. Owing to the World Bank's Europe and Central Asia Regional guidelines on Project Implementation Units (PIU), and renewed interest from the government to reconsider the benefits o f ministry-based implementation arrangements, the CFAA believes that the present arrangements could, in due course, be subject to revision, with three ultimate objectives: 0 the progressive transfer o f management responsibilities to sectoral ministries and relevant state agencies; 0 the placement o f Special Accounts incommercial banks, inconsideration o f the benefits accruing to project execution from a more expedited, efficient service andbetteroperational conditions; and eventually, the channeling o f loan funds through the Treasury. Russian Federation CFAA:Poltiolio Fiduciarv Considerations 50 172. The first objective, which could be considered for new projects on a case-by-case basis, would be achieved by empowering the relevant line ministries and state agencies (the beneficiaries) with the project's strategic governance along with monitoring and evaluation functions. However, pending the graduation o f the government's financial management and procurement capacity and infrastructure to a level o f performance that would allow the World Bank to rely on those systems, the CFAA recommends that fiduciary functions (disbursement, procurement, accounting and reporting, and operational reviews) continue to be outsourced to specialized agencies. Such agencies (possibly the successors o ftoday's Foundations) present the advantage o f utilizing skilled consultants and reliable, suitable, and stand-alone computerized information systems. 173. Achievement o f the second objective (Special Accounts in commercial banks) would require the positive reassessment o f credit institutions' soundness, along with fit andproper ownership. 174. The third objective (channeling loan funds through Treasury) would need to be regarded as a medium- to long-term objective, as the treasury system i s not equipped, at present, to operate in harmony with World Bank disbursement procedures or accounting and reporting requirements. Shifting loan funds to Treasury would depend on achieving positive results inthe following activities (some already underway), among others: 0 filladoptionandsmoothoperationoftheTreasurySingleAccountanduniversal coverage o f the Treasury; 0 refinement o fpublic sector accounting andreporting (includingpreparation of a statement o f accounting policies), and its capability to deal with special purpose financial statements; and 0 strengthening government internal controls over accounting and reportingas well as internal auditing functions, which need to be reoriented to a system- management andrisk-basedapproach. 175. The CFAAbelieves that such a shift to Treasury should, infact, be aprerequisite to allowing the transfer o f a full range o f project implementation activities (including financial management) to ministries and govemment agencies (the first objective). Audit of BankProjects 176. Based on the Bank's current audit policy, the CFAA recommends maintaining current arrangements for the annual audit o f Bank-assisted projects, which involve audit by private sector audit firms competitively appointed among those pre-selected by the Bank, in consultation with the MOF (11 firms at present). In addition, the work performed by the Accounts Chamber should also be reviewed by the Bank on a regular basis and taken into consideration in project preparation and supervision. The Accounts Chamber routinely performs documentary reviews o f Bank projects because they involve international borrowing and the use o f budget funds inthe form o f counterpart financing. These reviews are geared mostly towards assessing the efficiency and cost-effectiveness o f project expenditure and the prevention andor detection of possible waste o f resources and abuses. Russian Federation CFAA: Portfolio Fiduciarv Considerations 51 177. All Chamber reports received by the Bank are reviewed by the Bank's Moscow- based financial management team and any issues related to non-compliance with loan stipulations, as well as cases o f ineligible expenditure, are being followed up at the country level. While it is, in fact, recognized that the Accounts Chamber reports are important for portfolio monitoring and evaluation as well as for follow-up purposes, the CFAA foundthat there have nonetheless been several instances inthe Chamber's reports o f misunderstandings as to the legal and operational aspects of loan funds disbursement and tracking mechanisms (especially in the case of adjustment operations). More importantly, the Chamber's reports do not provide the type o f audit assurance on project financial statements and accessory financial information and summary schedules (Special Account Statement and Statement of Expenditures) that are needed, under the current audit policy, to discharge the Bank's fiduciary obligations. While Accounts Chamber reports need to be taken into account, the CFAA believes that they cannot, nor should they, replace the audit reports carried out by private sector auditors. Accordingly, the World Bank 0 has advised all audit firms engaged inBank-assisted projects to review the Accounts Chamber reports as part of their normal audit procedures (relating to the examination o f all external correspondence); and 0 has undertakenan open dialogue with the Accounts Chamber regardingBank- assisted projects. 178. At a more general level, the CFAA recommends that Russian Federation authorities ensure that the World Bank receives the Accounts Chamber's annual report on federal budget execution, as per the MOF's request. Bank review o f and familiarity with this information would help to build the bridge between the front-end accountability arrangements now governing the Bank's budgetary support to the Russian Federation and the execution o f the budget. In the medium term, should the Bank and the Russian Federation agree to arrange for investment projects to be implemented by ministries and state agencies, for loan funds to be channeled through and operated by the Treasury, and/or for a move towards programmatic lending, the CFAA recommends that the Bank review these annual budget execution reports inorder to enhance the overall level o f assurance that public fimds are being used for the intended purposes. The CFAA believes that reaching this level o f assurance will require continued technical assistance, from the World Bank and other donors, to develop capacity within key state institutions (Ministry of Finance, Federal Treasury, and Chamber o f Accounts) and to strengthen public financial accountability and financial management systems. ANNEX1:CORRUPTIONAND GOVERNANCETHE RUSSIAN IN FEDERATION The 1999 CAS for the Russian Federation highlighted the fact that corruption is perceived to be widespread and deep-rooted, undermining efforts in economic management and public sector administration reform. The evidence o f the pervasive incidence o f corruption, and associated waste and misuse o f resources, i s alarming. According to Nations in Transit 2001, "organized crime and corruption cost Russia about U S D 15 billion a year, according to figures provided by the State Duma Security Committee. According to the Ministry o f Interior, crime cartels controlled in 2000 about 40 percent of Russia's private enterprises, around two-thrds o f state enterprises, and 50 to 85 percent o f banks. The black market economy, which was largely criminally run, amounted in2000 to about 40 percent o f Russian GDP." According to a Gallup International poll reported inApril 2000 (conducted through interviews with senior bankers, business leaders and government officials), Russia placed inthe top 20 o f the most corrupt countries inthe world. Russia was ranked 82 out o f the 90 countries surveyed inthe Transparency International's 2000 Corruption Perceptions Index (CPI) and received a score o f 2.1 on a scale o f 0 (highly corrupt) to 10 (highly clean). According to the World Bank Institute (WBI) indicators of governance, which aggregate data from a wide range o f extemal surveys and assign higher ranks to better performers, the Russian Federation falled inthe lowest quartile: m112" o f 155 countries interms o f graft/corruption (measuring perceptions o f corruption, where corruption is defined as the exercise o f public power for private gains) and 0116" of 156 countries interms o f government effectiveness (combining perceptions o f the quality o f public administration provision, the quality o f the bureaucracy, the competence o f the civil servants, the independence o f the civil service from political pressures, and the credibility o f the government's commitment to policies). Duringthe economic transition, owing to the persistence of Soviet era power structures, corruption mainly took the form of: (i) corruption, whichinvolvedhighstateofficialsandstate enterprisesrunbyoligarchs, ofteninassociationwith grand various criminal organizations; and (ii) adrmnistrative and petty corruption, which involved graft and bribery o f civil servants. As to the former, scandals have come to light inrecent years over the non-transparent way in which privatization was carried out during the Yeltsin era (second half o f 199Os), when insider deals allowed members o f the elite to move between government and business, using their connections and positions to accumulate private fortunes. A s to the latter, administrative corruption in 2000 had a major impact on business activities - particularly affecting small-medium enterprises (SME) - increased the cost of doing business as well as discouraged foreign investments. It also had repercussions on households, given the hidden (or extra-cost) o f access to basic services, such as health, education, etc, which, inturn, diminished the trust inpublic institutions. A transparent framework for privatizationwas introduced under the 1997 PrivatizationLaw. However, the concept o f conflict o f interest (and o f setting clear boundaries between public and private sector activity) was not widely assimilated in the Russian Federation. Politicians have often combined executive power with a direct or indirect interest inbusinesses that are affected by that power. Corruption and money laundering have received considerable press attention, specifically the transfer o f allegedly illegally earned money through the commercial banking system. Such fiduciary risks and related allegations o f lack o f transparency in government raise the stakes vis-a-vis the reputation and development risks for both the Bank and the development community at large, Effective enforcement o f the newly adopted money-laundering legislation would be a crucial step in producing concrete results inthe fight against criminal organizations and inimprovingthe country's intemational standing. Strong and determined political leadership i s needed to overcome the institutional causes and systemic impact o f corruption. Recognizing the importance o f curbing corruption to foster economic development, including higher quality of public a b s t r a t i o n ' s service delivery, and the creation o f an enabling environment for further development o f the private sector, the present government is committed to fight corruption and extortion and to institute a climate o f openness and trust in relations between citizens and the public administration, on the one hand, and o f transparency in the conduct of business, on the other. A parliamentary commission on corruption was established in 2000. The commission, composed o f 19Duma deputies, i s conducting studies to analyze evidence o f corruption and it i s expected to come up with recommendations for improving legislation in this area. While the govemment has taken some very positive steps in a number o freform areas, however, the commitment o f the authorities to create a high-level inter- ministerial anti-corruption commission, at present, has not been fulfilled Russian Federation CFAA: Annex I/: List of Counfemads Mef 53 ANNEX11:LISTOF COUNTERPARTSMET Meeting Contact person Mr.Vladimir SergeevichBelov, Secretariat ~ Head o f Department o f financing tel. 298 9196 ! o f various sectors o f economy, fax 913 4459, MOF Department o f Internationalcooperation fax 913 43 11 ~ I Mr.Vladimir Anatolievich Secretariat Shalaev, Deputy Head o f Budget tel. 298 9795 PolicyDepartment, M O F direct 298 9764 Mr.RichardClifford, Headofthe Resident Mission Mr.MstislavPlatonovich Ms. Lena Dobrolyubova Afanasief, DeputyHead o f Secretariat Department, Accounts Chamber Mr.PaulSmith, USAID,Banking Sector ReformProject Ms. Tatiana Gennadievna Secretariat tel. 298 9640, fax 9280059 Nesterenko, DeputyMinister o f Address: Ilyinka, 9 - 5 pod'ezd Finance, Head o fTreasury Internalphone 9640 ~~~ Ms.Valentina Grigorievna Zueva, Secretariat: t. 298 9640, f. 9280059 Deputyheado fthe main Address: Ilyinka, 9 - 5 pod'ezd department o f Federal Treasury nternal phone 9640 Mr.Andrei Yurievich Petrov, Mr.Alexei Mitin,Headofthe division of Deputy Minister o fFinance control for the auditing practice Mr.AndreiV. Krikunov,Headof Tel. 298 05 34, the State FinancialRegulationand Mr.KrikunovAndreiVasilievich, secretariat Audit Department (KRU) 298 05 17 Address: Ilyinka, 9 - 5 pod'ezd '1 Mr.MikhailMikhailovich State Duma, entrance 10 from Georgievsky per.1 Zadomov, DeputyChairman o fthe State Duma Committee on Budget andTaxes Russian Federation CFAA: Annex // List of Counterpark Met 54 Meeting Contact person ~ _ _ __ _ ~ -~~ _ _ _ Mr.Alexei Yurievich Simanovsky, Mr.Alexander Mitkov, Assistant to Head Director o f Prudential Banking Division for cooperation with international Supervision Department, Central financial organizations t. 929 4551 Banko fRussia (CBR) Ms.LarissaValerievna Gorbatova, Secretariat-tel. 220 04 64 f.22005 11 DeputyHeado fAuditingand Direct 220 9203 Methodology Department, M O F Address: Slavyanskaya ploschad', dom 4, str. 3 room 533 (premises o fthe Ministryo f Labor) I /Is. LudmilaIvanovna Gudenko, Iirector o f Accounting and Mr.Alexander Mitkov, assistant to Head I LeportingDepartment, CBR Divisionfor cooperation with international financial organizations t. 929 4551 1 Ms.Semenovna Sitnikova, Mr.Alexander Mitkov, assistant to Head 1 Director o f Department for Divisionfor cooperation with international j Licensing, Bankingand Auditing financial organizations t. 929 4551 activities, CBR Mr.EvgeniyArkadievich Dzhima, Director o f Intemal Audit and Inspections Department, CBR Ms.SamokhinaGalina All calls to the Federal Commission for I Evgenievna, Head o f Department Securities Market should be made through the for Regulation o f Securities Market reception - t. 935 87 90. For further assistance Mr.SolodyankinDmitriy please ask Mr.Alexander Viktorovich Germanovich, Head o fDepartment Zagorskiy, Assistant to Igor Vladimirovich for Securities Market's Kostikov, Chairman-f. 959 9308 Supervision Russian Federation CFAA: Annex 111: Bibliosraphv and References 55 ANNEX111:BIBLIOGRAPHYAND REFERENCES e Accounts Chambero fthe RussianFederation 1995-2000 (booklet publishedby the AC) e The Accounts Chamber ofthe RussianFederation - Opinion on the World Bank documents in"Russian Federation: Country Financial AccountabilityAssessment" and" RussianFederation. Core Integrative FiduciaryAssessment-An Analysis of Public Financial Management" e Accounts Chamber o fthe RussianFederation: Act OnAuditing Efficiencyand ExpediencyDisbursement ofthe IBRDLoanRU-4234 for the Social Protection Implementation Project by the RussianFoundation for Social Reforms in2000 and 1" Quarter 2001, June 6,2001 e Accounts Chamber o fthe RussianFederation: Report on Findingso fthe Thematic Review o f Legality, Efficiencyand Eligibility ofExpenditures under the Bureauof Economic Analysis Loanof the International Bank for Reconstruction and Development (IBRS) #21 (213), June 9,2000 e BritishBroadcastingCorporation: Text ofRussian's PresidentAnnualAddressto the Federal Assembly, April 3,2001 e Freedom House: Nations inTransit 2001 -Russia e Government ofthe RussianFederation: Basic Trends inSocial and Economic Policy ofthe Government ofthe RussianFederation, 2000 e InternationalMonetary Fund:RussianFederation - Report on Observance o f StandardsandCodes, September 14,2000 e Russian Federation MOF: RF Federal Budget Execution Report for January- September2000 -ExplanatoryNote e SwedishMinistryofFinance(Swedish-RussianCooperation Programme): A note on Budget and Accounts Classifications, February2002 e The World BankPoverty Reduction andEconomic Management Unit (ECSPE): Russia-Towards Improvingthe Efficiencyo fPublic InvestmentExpenditures, September 18,2001 e The World Bank, OperationEvaluation Department(OED): The Bank's Efforts to Build Capacity for Public Financial Accountability inRussia, September 2001 e The World Bank, OperationEvaluationDepartment (OED): World Bank's Assistance for Public Sector Management and GovernanceinRussia, September 2001 e The World Bank: Budget Managementinthe RussianFederation -Fiscal Policy Note, June 1998 e The World Bank: Fiscal ManagementinRussia, 1996 e The World Bank:RussianFederation - Issues inBudget Management Reform (draft), October 17,2001 e The World Bank:RussianFederation-Treasury Development Project; Aide Memoire andImplementation Plan: Pre-appraisalmission September 15-October 3, 2000; Project Appraisal Document (Decision MeetingReviewPackage); Quality Enhancement Review (February2001) e The World Bank Europe and Central Asia Region - AnticorruptioninTransition: Confronting the Challenge of State Capture. Russian Federaiion CFAA: Annex IV: Map 56 ANNEXIV: MAP OFTHE RUSSIAN FEDERATION