04 19 LA S The World Bank 2 0 B E v ~~~~2001 notes NUMBER 59 PUBLIC SECTOR Features and functions of supreme audit institutions Supreme audit institutions can curb corruption by reinforcing legal, financial, and institutional frameworks and by reducing the arbitrary application of rules and laws. Supreme audit institutions are national and is independent of the legislative and agencies responsible for auditing govern- executive branches. The institution is an ment revenue and spending. Their legal integral part of the judiciary, making judg- mandates, reporting relationships, and ments on government compliance with laws Supreme audit effectiveness vary, reflecting different gov- and regulations as well as ensuring that pub- ernance systems and government policies. lic funds are well spent. The cour des institutions are But their primary purpose is to oversee the comptes audits every government body, management of public funds and the qual- including ministries, departments, and agen- useful in managing ity and credibility of governments' reported cies; commercial and industrial entities financial data. under the purview of ministries; and social public spending, In the past the World Bank and other security bodies. This model is used in the donors often established parallel auditing Latin countries of Europe (France, Italy, ensuring financial systems for their projects, undermining Spain, Portugal, and others), Turkey, and developing countries' supreme audit insti- most Latin American and francophone accountability, and tutions, on whose work they could not always African countries. rely. Equally problematic have been projects In the Westminster system, used in many strengthening public that encouraged performance auditing but Commonwealth countries (Australia, ignored basic weaknesses in financial Canada, India, the United Kingdom, and institutions management. many Caribbean, Pacific, and Sub-Saharan In recent years the Bank has tried to African countries), the office of the auditor strengthen oversight agencies such as general is an independent body that reports supreme audit institutions. This note is to parliament. Made up of professional audi- intended to help Bank staff appreciate the tors and technical experts, the office sub- role and nature of these institutions, par- mits periodic reports on the financial ticularly in managing public spending, statements and operations of government ensuring financial accountability, and entities-but with less emphasis on legal strengthening public institutions. compliance than in the Napoleonic system. The office serves no judicial function but, Different types of supreme when warranted, its findings may be.passed audit institutions to legal authorities for further action. Most developing countries use one of three The board system, prevalent in Asia, is auditing systems: Napoleonic, Westminster, similar to the Westminster model in that it or board. In the Napoleonic system the is independent of the executive and helps supreme audit institution-also called the parliament perform oversight. Indonesia, cour des comptes (court of accounts)-has Japan, and the Republic of Korea, for exam- both judicial and administrative authority ple, have an audit board composed of an FROM THE DEVELOPMENT ECONOMICS VICE PRESIDENCY AND POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK audit commission (the decisionmaking the budget has been implemented and body) and a general executive bureau (the managed. executive organ). The president of the board is the de facto auditor general. The Role of parliament board's primary mandate is to analyze gov- In the Westminster system the supreme ernment spending and revenue and report audit institution is a core element of par- its findings to parliament. liamentary oversight. Parliaments typically rely on supreme audit institutions to audit Types of audits public accounts. Then a multiparty pub- There are three basic audit types: finan- lic accounts committee usually reviews cial (or attest), compliance, and perfor- reports by the office of the auditor gen- mance (or value-for-money). Together these eral, considers testimony by witnesses from The three, basic three types form a comprehensive audit government departments and agencies, framework that over time provides a com- and sends its reports to the full parliament audit types are plete view of an organization or function. for comment and action. There are often In financial auditing the auditor assesses recommendations or instructions requir- financial, the accuracy and fairness of an organiza- ing follow-up action by both the auditor tion's financial statements. general and government accounting compliance, and In compliance auditing the auditor officers. checks whether government revenue and In the board system the audit board pre- performance spending have been authorized and used pares and sends an annual report to the cab- for approved purposes. Transactions are inet, which submits it to parliament. Board reviewed to determine if government staff attend all deliberations on fiscal departments and agencies have conformed accounts and are expected to explain the to all pertinent laws and regulations. This board's opinions. process includes checking the spending In cour des comptes-style supreme audit authority in the annual budget and any rel- institutions, parliaments do not automati- evant legislation. cally receive the auditors' reports, though Performance or value-for-money audit- they may receive a report on the court's ing determines whether taxpayers have work. There are, however, four possible received value for their taxes. Auditors work forms of collaboration between the court closely with subject matter experts who offer and parliament: advice and review audit results. The man- * The president of the court may, at his date for performance auditing varies among or her discretion, pass the court's find- supreme audit institutions. Sometimes it ings to parliament's finance committee. is confined to reviewing operational effi- * A parliamentary committee may ask the ciency. In other cases it extends to review- court to conduct a specific management ing the effectiveness of government audit, which typically audits the economy, programs in achieving their objectives. efficiency, and effectiveness of processes in the organization (or organizations) Audits and the budget cycle being audited. Audits are an integral part of the budget * The court's annual report, presented to cycle. The budget sets out the government's parliament and submitted to the coun- fiscal policies, detailing revenue, spending, try's president, addresses the legal con- and the economic policies on which they cordance between the general accounts are based. As a public document the bud- of the finance department and the get requires public disclosure, evaluation, treasury. and auditing-and here supreme audit insti- * In a separate document, the court pre- tutions play a key role. Based on the report pares an annual report for parliament by the auditorgeneral or cour des comptes, on the use of the resources made avail- a public accounting is issued describing how able by the previous year's finance act. PREMNOTE 59 OCTOBER 2001 Conditions for successful security of tenure of its magistrate members, supreme audit institutions and by its right to design its own program Several features are crucial to the success of activities. of a supreme audit institution. Adequatefunding, facilities, and staff Supportive environment Supreme audit institutions require adequate Supreme audit institutions function within funding, equipment, and facilities. In the a wider institutional setting. Thus they are developing world, where such elements are effective only to the extent that they are per- often inadequate, there is potential for mitted to conduct their work and their supreme audit institutions to operate more reports are used to promote accountability. efficiently. But it is unlikely that increased In many countries public accounts are efficiency alone would generate enough sav- poorlymaintained, parliament maybe weak, ings to provide competitive salaries and Autonomy is and the ministry of finance may not ensure modern technology. Governments need to that audit issues are addressed. Flagrant recognize the costs as well as the high essential for an abuses identified by supreme audit institu- returns of audits, and provide commensu- tions may not be prosecuted-and in some rate funding. auditor general cases their work may be sabotaged. To ensure high quality work, supreme audit institutions need well-qualified, ade- Clear mandates quately remunerated staff who are encour- Auditing mandates should be anchored in aged to continuously improve, especially in rules set by parliament. Before drafting such their areas of expertise. For example, audi- legislation, supreme audit institutions and tors can enhance their skills in fraud detec- governments must determine the auditors' tion and information technology through independence and reporting responsibili- a combination of training, education, and ties, the scope of audits, and the entities experience. to be audited-elements shaped by national The number of authorized personnel legislation and domestic conditions. In West- should be determined independently of minster parliamentary systems an audit also government control. For example, in the ensures that the supreme audit institution board model the audit commission deter- addresses all the issues parliament wants mines the number of workers in the gen- scrutinized by an independent body. eral executive bureau. To maintain their credibility, supreme audit institutions should Independence be managed such that a performance-audit Independence is a basic feature of supreme of their operations would result in a favor- audit institutions in industrial countries. able report. Autonomy is essential for an auditor gen- eral given the need to report directly to par- Sharing of knowledge and experience liament without interference from other International exchanges of ideas, knowledge, branches of government. The leader of a and experience improve audits, harmonize supreme audit institution needs both legal standards, promote best practices, and gen- and traditional status to ensure that senior erally help supreme audit institutions fulfill bureaucrats will make information available their mandates. International congresses and and respond appropriately to recommen- training seminars, regional and interregional dations. Independence can be strengthened conferences, and international publications by setting out the auditor general's role in have promoted the development of audit- the country's constitution-as in India, ing. Moreover, supreme audit institutions Indonesia, Japan, Uganda, and Zambia. should work closely with enforcement offi- In the Napoleonic model, for example, cials in government agencies to share skills the autonomy of the cour des comptes is and insights and to become ni-ore adept at guaranteed by its status as a court, by the uncovering corruption. PREMNOTE 59 OCTOBER 2001 Adherence to international auditing based on reliable.reporting and internal standards controls, is a crucial part of detecting and Audits are more effective when supreme audit preventing corruption because it promotes institutions adhere to professional auditing transparency and accountability in govern- standards, such as those promulgated by the ment programs and actions. International Organization of Supreme Audit Institutions (INTOSAI) or international pro- Further reading fessional accountancy bodies. Dye, Kenneth, and Rick Stapenhurst. 1998. Pillars of Integrity: Importance of Supreme Limitations Audit Institutions in Curbing Corruption. Supreme audit institutions face different Washington, D.C.: World Bank Institute. limitations because of countries' distinct INTOSAI (International Organization of Supreme audit constitutional, legal, political, social, and Supreme Audit Institutions). 1977. "Lima economic systems, making it impossible to Declaration of Guidelines on Auditing institutions face offer universal remedies. The main limita- Precepts." Ninth Congress of INTOSAI, tions are: Lima, Peru. different limitations, * Limits on independence. Mbanefo, Uche. 1998. "StrengtheningAfrican * A shortage of qualified, experienced per- Supreme Audit Institutions. A Strategy making it impossible sonnel-a severe problem for many insti- Paper and Action Plan." World Bank, tutions because staff cannot keep up with Africa Region, Operational Quality and to offer universal the changing scope, techniques, and Knowledge Services, Washington, D.C. complexities of their work. Sahgal, Vinod. 1998. Strengthening Legisla- remedies * A lack of adequate monitoring and fol- tiveAudit Institutions: A Catalyst to Enhance low-up of audit findings. Control over Governance and Combat Corruption. Ottawa, public funds is less effective if audit Ontario: Office of the Auditor General queries and recommendations are not of Canada. followed up by parliament and acted on by the executive branch. This note was written by Rick Stapenhurst (Senior * Limits on the scope of audits. Restricted Public Sector Management Specialist, World Bank audits undermine the effectiveness of Institute) andJack Titsworth (Consultant, Africa supreme audit institutions and call into Region), drawing on and substantially extend- question the motivations -for their exis- ingthe analysis in Dye and Stapenhurst (1998). tence. Some supreme audit institutions The note incorporates a substantial contribution cannot audit enterprises if the state has from David Shand (Financial Management only a limited financial interest; others- Adviser, Financial ManagementBoard) and sev- cannot conduct external cbntrol over eral other reviewers both inside and outside the international organizations. World Bank. The authors are grateful to Lisa Borgatti for excellent research assistance. Role in curbing corruption Ifyou are interested in similar topics, consider Although preventing corruption is not an joining the Anticorruption Thematic Group. Con- explicit responsibility of supreme audit insti- tact Helen Sutch (x35438) or Tripti Thomas tutions, audits may detect fraud and abuse. (x87706), or click on Thematic Groups on Fostering strong financial management, PREMnet. This note series is intended to summarize good practice and key policy find- "| ||| | ings on PREM-related topics. The views expressed in these notes are those of the authors and do not necessarily reflect the views of the World Bank. PREM- rrN V | notes are distributed widely to Bank staff and are also available on the PREM website (http://prem). If you are interested in writing a PREMnote, email your idea to Sarah Nedolast. For additional copies of this PREMnote please contact 0RdnMa&0auaDemMt the PREM Advisory Service at x87736. Prepared for World Bank staff