DISCUSSION NOTE ON STRENGTHENING THE PARLIAMENT AND SUPREME AUDIT INSTITUTION RELATIONSHIP TO ENHANCE EXTERNAL AUDIT PERFORMANCE IN THE WESTERN BALKANS DISCUSSION NOTE ON STRENGTHENING THE PARLIAMENT AND SUPREME AUDIT INSTITUTION RELATIONSHIP TO ENHANCE EXTERNAL AUDIT PERFORMANCE IN THE WESTERN BALKANS CONTENTS Introduction 4 1. Context 6 2. Parliaments, Supreme Audit Institutions and Accountability 9 3. Challenges for Effective Financial Accountability 10 4. Global and Regional External Audit Benchmarks 12 5. Challenges for Parliament-SAI Relationships in the Western Balkans 21 A. SAI Independence 21 B. Examination of the Audit Reports 25 C. Following up on Recommendations Based on the Audit Report 29 6. Conclusion 31 Resources Consulted in the Preparation of the Discussion Note 32 Resource Team 34 2 3 Potential Candidates and the European Court of Auditors has identified the working relationship between SAIs and parliaments as a critical component for effective external audit.1 Therefore, the World Bank consulted closely with SIGMA in the development of this Discussion Note. INTRO The World Bank has been collaborating with Finance, Budget, and Public Accounts The Discussion Note is intended as a primer for dialogue between parliaments, SAIs, Committees in the Western Balkans as part and practitioners on how to better define and strengthen the relationship between of a Knowledge Partnership focusing on the external audit and legislative scrutiny stakeholders. To this end, this Discussion DUCTION strengthening financial oversight practices. The Note not only outlines the context and challenges, but also frames some questions Knowledge Partnership is supported under the that can help stakeholders reflect on the existing and aspirational nature of the Strengthening Accountability and the Fiduciary relationship. Environment (SAFE) Facility. The SAFE Facility was established by the Swiss State Secretariat for Economic Affairs (SECO) and the European The Discussion Note proceeds in five parts. First, the context for the discussion is Commission with the aim of improving public outlined. Second, the accountability relationship between SAIs and parliaments financial management in the Europe and Central is explored. Third, the main challenges for effective external audit and financial Asia region. oversight is reviewed. Fourth, global and regional external audit benchmarks will be detailed. Finally, the challenges for the Parliament-SAI relationship in the Western Despite some gains in external auditing Balkans will be examined and discussion questions framed around three areas of performance, the region continues to mutual interest for SAIs and parliaments – A. SAI Independence; B. Examination of underperform when it comes to legislative the Audit Reports by the parliament; and C. Follow-up on Recommendations based scrutiny of audit reports. Therefore, the on the audit reports. Knowledge Partnership includes a focus on how Finance, Budget, and Public Accounts Committees discharge their responsibilities to scrutinize government performance using the audit reports produced by Supreme Audit Institutions (SAIs) in the region. The SAIs from candidate and potential candidate countries to the European Union (EU), have a similar knowledge partnership with EU SAIs facilitated through the Joint Working Group for Audit Activities (JWGAA) and OECD/SIGMA, a joint initiative of the OECD and the EU, principally financed by the EU. The Network of the Supreme Audit Institutions of EU Candidate countries and 1 Developing Effective Working Relationships Between Supreme Audit Institutions and Parliaments. SIGMA PAPER No. 54 4 5 1. CONTEXT 1. CONTEXT 1 CONTEXT The mandate and responsibilities of parliaments and SAIs are intertwined. Parliaments well used. The Court of Accounts audits the accounts of government department and agencies, commercial and industrial entities under the are dependent on SAIs producing timely, high quality reports that allow them to purview of government ministries, and social security bodies. hold public officials to account for implementing the budget. Conversely, in many systems, SAIs are dependent on parliament to follow up on the recommendations • Board of Audit Model – This model is similar to the AG model in that it helps and preserve their independence. It is for this reason the seventh pillar of the PEFA the parliament exercise its oversight role. Some countries have a board framework, which focuses on external scrutiny and audit, has only two Performance system comprising an audit commission, which is the decision-making body, Indicators – one devoted to external audit and the other on the legislative scrutiny and the general executive bureau, which is the executive organ. The Board of the audit reports. This reinforces why the relationship between the SAI and of Audit is a constitutional organization independent of the executive; its parliament is central to effective external scrutiny. primary mandate is to analyze the state’ expenditures and revenues and report its findings to parliament. Similarly, there are three broad models that parliaments use to organize committees The exact nature of the relationship between the legislature and SAIs varies across to scrutinize audit reports prepared by the SAI: the globe – it depends on the model of SAI, parliamentary committee structures, the SAI’s reporting relationship to the legislature, and the type of audit reports • Consolidated Model – Parliaments have a single committee, such as the produced by the SAI. Finance or Budget Committee, responsible for sequentially managing the review of the budget (pre-budget phase, estimates process for revenue/ There are broadly three SAI models2: expenditure, and approval) and scrutinizing the annual audited financial accounts submitted by the SAI. • Auditor-General (A-G) Model – The Office of the Auditor General is an independent body that reports to parliament. This office, which consists of • Sub-Committee Model – Parliaments have a single responsible committee, professional auditors, submits periodic reports to parliament on the financial similar to the consolidated model, but actively use sub-committees to statements and operation of government entities, but with less emphasis manage committee business (including scrutinizing multiple audit reports) on compliance than in other models. These auditors are generally not civil on a rolling basis. Therefore, there is a specific mechanism within the servants, although their terms and conditions are normally similar to those committee that is used to specifically examine the audit reports but does of their civil servant peers. Auditors general usually report to parliament not exercise the authority of the full committee. annually, though in some countries they report more frequently. Within parliament, a specialized public accounts committee or other designated • Bifurcated Model – Parliaments have separate committees devoted to: (i) committee (see below) reviews the audit reports, investigates further the formulation and approval of the budget (e.g. the Budget Committee); incidents of waste and abuse of funds, and recommends to parliament and (ii) scrutinizing the public accounts and reviewing performance of corrective government actions. public officials in achieving the objectives of the approved budget (e.g. Public Accounts Committee). • Cour des Comptes Model – (or Court of Accounts) Has both judicial and administrative authority and is independent of both the legislative and In broad terms, SAIs produce one or more of the following types of audit that are executive branches of government. The institution is part of the judiciary; furnished to parliaments3: it makes legal judgments on compliance with the laws and regulations • Financial Audit – In financial auditing, the auditor attests to the accuracy and exercises a budget control function to assure that public funds are and fairness of presentation of financial statements. SAIs oversee the quality 2 The Role of Parliament in Curbing Corruption (2006). World Bank Institute 3 The Role of Parliament in Curbing Corruption (2006). World Bank Institute 6 7 1. CONTEXT 2. PARLIAMENTS, SUPREME AUDIT INSTITUTIONS AND ACCOUNTABILITY and credibility of the governments’ reported financial data.4 Ultimately, the 2 PARLIAMENTS, SUPREME AUDIT INSTITUTIONS AND ACCOUNTABILITY Accountability exists when there is a relationship where an individual or body, auditor adds credibility to financial statements by providing an unqualified and the performance of tasks or functions by that individual or body, are subject audit opinion on the financial statements, or at least providing useful to another’s oversight, direction or request that they provide information or information explaining any reservations. justification for their actions. 5 • Compliance Audit – In compliance auditing, the auditor verifies that the governments income and expenditures have been authorized and used for approved purposes. The audit team reviews transactions to determine The concept of accountability involves two distinct stages: answerability and whether the government department or agency has conformed to all enforcement. Answerability refers to the obligation of the government, its agencies pertinent laws and regulations. This includes checking the spending and public officials to provide information about their decisions and actions and authority in the annual budget and any relevant legislation. to justify them to the public and those institutions of accountability tasked with providing oversight. Enforcement suggests that the public or the institution • Performance Audit – Performance or value-for-money auditing confirms responsible for accountability can sanction the offending party or remedy the whether taxpayers have received value for their tax revenues. This type contravening behavior. Different institutions of accountability might be responsible of auditing seeks to ensure that the administrative procedures adhere to for either or both stages. sounds management policies, principles and practices. Also, it looks at procedures, information systems, and performance measures used by the audited organization, and that the organization’s performance helps achieve its institutional objectives. Performance auditing sometimes is confined Agencies that use public funds are required to provide information to SAIs for them to reviewing operational efficiency or the extent to which due economy to conduct their assessments. In this sense, SAIs primarily focus on answerability has been observed in the use of resources, while in other cases, it extends (however, some SAIs may have enforcement powers). Parliaments possess the to reviewing the effectiveness of government programs in achieving their constitutional authority to draw on the SAI’s audit report to hold public officials objectives. or those using public funds to account for their actions and seek to remedy the cause of the problem through use of several oversight tools, including committee Financial audits are conducted by almost all SAIs and are an input to more complex hearings. Therefore, parliaments provide the enforcement element needed to performance audits. The Public Expenditure and Financial Accountability (PEFA) achieve comprehensive financial accountability. Performance Indicator 31 specifically measures parliament’s scrutiny of the financial audit reports to the exclusion of other types of audit. However, SAIs are increasingly reviewing the economy, efficiency and effectiveness in using public finances to implement policy and programs. Anecdotally, practitioners have observed that the SAI model can influence the type of audits that are conducted. For instance, Cour des Comptes – by virtue of being part of the judicial branch – often conduct compliance audits; whereas, Auditors- General that report directly to a devoted audit committee in parliament are often early adopters of performance audits as they are well suited for use in parliamentary oversight hearings. 4 McGee, David G. (2002). The Overseers – Public Account Committees and Public 5 Bovens, M. 2006. Analysing and Assessing Pubic Accountability: A Conceptual Spending. Commonwealth Parliamentary Association Framework. European Governance Papers No. C-06-01: 1. 8 9 3. CHALLENGES FOR EFFECTIVE FINANCIAL ACCOUNTABILITY 3. CHALLENGES FOR EFFECTIVE FINANCIAL ACCOUNTABILITY 3 CHALLENGES FOR EFFECTIVE FINANCIAL ACCOUNTABILITY The usefulness of the parliamentary-SAI relationship varies considerably. At one The Open Budget Survey 2017 defines oversight institutions as the essential core extreme, committees receive audit reports they cannot understand, or may be to effective democratic government and public financial management by providing so out of date they are of little interest to parliamentarians; therefore, the audit “horizontal” accountability.6 In many countries, including the Western Balkans, findings aren’t taken up by parliament. Conversely, there are examples where the the SAI is represented by the Auditor-General, whose office is a core element of SAI sees limited value in engaging with parliament. For instance, Cour des Comptes parliamentary oversight as he/ she reports directly to Parliament.78 that only perform compliance audits and have enforcement powers, might not see value in strengthening the working relationship with parliament beyond complying with their duty to report to parliament. The Open Budget Survey report highlights important concerns on the role of parliaments and SAIs in the oversight of public funds. For example, most legislatures exercise more oversight earlier in the budget process than they do According to an IPU/UNDP questionnaire for parliaments globally, the clear majority during implementation. This suggests that governments are more constrained of parliaments (90 per cent) receive reports from SAIs. However, a much smaller when seeking to pass the budget but have somewhat more freedom during the percentage (66 per cent) report having clearly established procedures for reviewing year with only limited legislative review. This can lead to spending that is not in line reports.10 Additionally, the survey also indicated a wide range in the number of with the initial priorities agreed to in the approved budget and generally opens the reports received each year. In most countries where there is a big number of reports door to mismanagement of public funds by spending agencies. being submitted to parliament, its capacity to review these reports is limited. The Open Budget Survey includes a question about ex post oversight of the budget The 2017 UNDP/ IPU Global Parliamentary Report notes that beyond having limited (Question 118).11 It probes whether a committee examined the Audit Report on the capacity to review information that they receive, parliaments face challenges annual budget produced by the Supreme Audit Institution (SAI), and whether this enforcing their recommendations. Using all the means at parliament’s disposal to resulted in an official report with findings and recommendations. A key issue it tried ensure action on the issues raised by auditors, including the power of exposure, to identify is how soon after the SAI releases the report does the legislature review is important for enhancing the impact of parliamentary oversight.9 The Report it. recommends that parliament and oversight institutions build a culture of mutual trust by working together. This ensures that parliament is confident in the findings of the external bodies, and that the external bodies are confident in parliament’s Similarly, PEFA PI-30 (Dimension 2) measures the time taken from the production desire to take seriously their recommendations. of the consolidated accounts for the SAI to submit the audited public accounts to the legislature. PEFA PI-31 (Dimension 1) measures the length of time the legislature takes to review the audit report on receiving it from the SAI. In both instance, action should be taken within three months of the triggering event. 6 Open Budget Survey Report 2017. International Budget Partnership, August 2018 7 Stapenhurst, R et al (2014). Following the Money – Comparing Public Accounts Committees. Commonwealth Parliamentary Association, World Bank Institute, London, 2014 8 In the Western Balkans, usually the responsible committee is the Finance/ Budget Committee, except for Kosovo where there’s a Public Accounts Committee and in Serbia 10 Global Parliamentary Report 2017 - Parliamentary Oversight: Parliament’s Power to where there’s a sub-committee on SAI audit reports. Hold Government to Account. Interparliamentary Union, UNDP, 2017 9 Global Parliamentary Report 2017 - Parliamentary Oversight: Parliament’s Power to 11 Guide to The Open Budget Questionnaire: An Explanation of The Questions and The Hold Government to Account. Interparliamentary Union, UNDP, 2017 Response Options. International Budget Partnership, August 2016 10 11 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS The 2017 Open Budget Report notes that despite efforts for consolidating their The International Standards of Supreme Audit Institutions (ISSAIs) codify several independence, SAIs may still fail to play their proper role in the accountability obligations related to the SAI-Parliament relationship. These obligations are outlined system. In some countries, SAIs lack adequate budgets to carry out their work (37 in Table 1, 2 and 3 below, which cluster the ISSAI obligations according to three percent of the countries surveyed in 2017). In 38 countries, no Audit Reports are themes: (a) Reporting; (b) Communication; and (c) Follow-up and Performance published and in 41 countries, the legislature does not review audit findings.12 Reporting.15 4 Table 1: ISSAI Reporting Standards GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS THEME REQUIREMENTS REFERENCE ISSAI 1 Section 16 The Global Initiative in Fiscal Transparency (GIFT) recognizes the need for an independent and well-resourced SAI, stating they “should have statutory Reports are submitted to ISSAI 10 Principle 7 independence from the executive, the appropriate mandate, access to information, Parliament and Published. ISSAI 12 Principles 2, 3 & 4 and appropriate resources to audit and report publicly on the raising and commitment of public funds. It should operate in an independent, accountable and ISSAI 20 Principle 7 transparent manner”.13 Appropriate Communication ISSAI 12 Principle 4 Tools ISSAI 20 Principle 8 According to OECD best practices, the SAI should complete its audits within six Reporting Provide relevant, timely, and months of the end of the budget year for administrative units (that is, ministries, objective information to the ISSAI 12 Principle 3 departments, or agencies). PEFA PI-30 (Dimension 2) specifies three months on legislature. receiving the consolidated accounts, which should be provided to the SAI within three months of the end of the budgeting period. Audit reports identify themes, common findings, trends, root causes and audit ISSAI 12 Principle 3 The Lima Declaration of Guidelines on Auditing Precepts (Chapter VI, Section 16 recommendations, and are (1)) makes it clear that the auditor’s annual report should be published and made discussed with key stakeholders available to the public.14 12 Open Budget Survey Report 2017. International Budget Partnership, August 2018 13 Principles of Public Participation in Fiscal Policy. Global Initiative in Fiscal Transparency (GIFT), March 2016 (Principle 9) 15 See further Developing Effective Working Relationships Between Supreme Audit 14 http://www.internationalbudget.org/wp-content/uploads/LimaDeclaration.pdf Institutions and Parliaments. SIGMA PAPER No. 54. 12 13 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS Table 2: ISSAI Communication Standards Table 3: ISSAI Follow-up & Performance Reporting Standards THEME REQUIREMENTS REFERENCE THEME REQUIREMENTS REFERENCE Establish good working relationships, communications ISSAI 10 Principle 7 policies and procedures in liaison Submit follow-up reports to ISSAI 12 Principle 3 with Parliament. Parliament. ISSAI 20 Principle 3 & 7 Engage with Parliament and its Follow-up Communication committees and raise awareness ISSAI 12 Principle 3 about SAI’s role. Monitor and follow-up on ISSAI 10 Principle 7 (The Role and recommendations from SAI and Work of SAIs) ISSAI 20 Principle 7 Parliament ISSAI 20 Principle 3 Assist Parliament in understanding audit reports. Provide advice on how SAI audit Submit an annual activity report findings and opinions might be ISSAI 10 Principle 3 to Parliament. used to the greatest effect. Performance Be aware of the expectations Reporting of stakeholders and responsive, ISSAI 12 Principle 5 SAIs should be subject to external ISSAI 12 Principle 8 without compromising scrutiny and report the results to independence. ISSAI 20 Principle 7 & 9 external stakeholders Communication Ensure stakeholders’ expectations (Relevance to and views are factored into ISSAI 12 Principle 5 Stakeholders) organizational and audit planning. Assess whether stakeholders believe they are effective and SAI reports need to be submitted to parliament and published, the SAI should ISSAI 12 Principle 7 contribute to improvements in the provide relevant, timely, and objective information to the legislature, and the public sector. SAI should discuss the themes, common findings, trends, root causes, and audit Communication contributes recommendations with the parliament.16 The SAI should also seek to establish good to stakeholders’ awareness of ISSAI 12 Principle 3 working relations with the parliament, engage with the parliament to raise awareness the need for transparency and of the SAI’s role, and provide advice to the parliament on how the SAI audit findings accountability. and opinions could be used to the greatest effect. Finally, the SAI should submit Communication Periodic assessment of whether follow-up reports to parliament and monitor and follow-up on recommendations (Other) the SAI is communicating ISSAI 12 Principle 3 made by the SAI and the parliament. effectively. Contribute to the debate on ISSAI 12 Principle 7 16 ISSAI 1, Section 6; ISSAI 10, Principle 7; ISSAI 12 Principles 2, 3 & $; and ISSAI 20, improving the public sector. Principle 7 & 8. 14 15 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS Rick Stapenhurst et al provide a framework for an ‘ideal PAC’ in “Following the The Principles of Public Administration, developed by SIGMA to support the Money – Comparing Public Accounts Committees” (Box. 1), which includes specific European Commission’s approach to public administration reform in the European reference to the relationship between the PAC and A-G. Union (EU) Enlargement process17, set out clear expectations for the role and work of the SAI in relation to parliament. Public Administration Principle 15 requires that Box 1: Criteria for an Ideal PAC20 an independent SAI is empowered and required by the constitution to report its findings annually and independently to the parliament or any other responsible Mandate and Powers public body, and this report is published. Principle 16 requires the SAI to provide • There is clarity on the Committee’s role and responsibilities. the legislature, and especially legislative committees, with relevant, objective and • The Rules and Acts of Parliament must empower the PAC with the appropriate timely information, and that there is a formal mechanism for parliament to consider powers to carry out its mandate. SAI reports. • The PAC members should have a common understanding and articulation of the PACs’ mandate, roles and powers. • The committee should have unconditional access to all government agencies and have the power to ‘follow’ government money provided to non-government service Complementing this extensive patchwork of obligations for what SAIs should do to providers. strengthen the SAI-Parliamentary relationship is a growing pool of principles and • In addition to issues raised by the Auditor, the committee has the power to benchmarks for parliamentary stakeholders. The Commonwealth Parliamentary investigate other matters. Association’s Recommended Benchmarks for Democratic Legislatures added a new • Parliaments hold an annual debate on the work of the committee. benchmark in their 2018 edition, namely, “all reports of the Supreme or National • The Committee has established a procedure with the government for following up Audit Office shall stand referred to the Public Accounts Committee, or a designated its recommendations and is informed about what, if any, action has been taken. Committee, for further report”.18 Relationship with the Auditor General • The Auditor’s Report is automatically referred to the committee and the Auditor meets with the committee to go over highlights of the report. CPA Benchmarks 7.2.7 and 7.2.8, recognize, respectively that “there shall be an • In all its deliberation, the committee uses the Auditor as an expert adviser. independent, non-partisan Supreme or National Audit Office whose reports are tabled in the Legislature in a timely manner”, and that “the Supreme or National Structure and Organization Audit Office shall be provided with adequate resources and legal authority to • The Committee is small; committees seem to work well with 5-11 members, none of conduct audits in a timely manner.”19 whom should be government Ministers. • Some practical issues to consider in determining the size of the PAC, include (a) the PAC’s mandate and responsibilities, (b) the size of Parliament, and (c) the number of audit reports to be reviewed by the PAC Political Representation • Senior opposition figures are associated with the PAC’s work, and probably chair 17 OECD (2017), The Principles of Public Administration, OECD Publishing, Paris: http:// the Committee. www.sigmaweb.org/publications/Principles-of-Public-Administration_Edition-2017_ENG.pdf • The Chair is a senior parliamentarian, fair-minded and respected by parliament. • Committee membership should provide for adequate participation by opposition MPs’ 18 Principle 7.2.9, Recommended Benchmarks for Democratic Legislatures. Commonwealth Parliamentary Association. First published 2006. Revised and updated 2018. 19 Recommended Benchmarks for Democratic Legislatures. Commonwealth 20 Stapenhurst, R et al (2014). Following the Money – Comparing Public Accounts Parliamentary Association. First published 2006. Revised and updated 2018. Committees. Commonwealth Parliamentary Association, World Bank Institute, London, 2014 16 17 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS (NPC), as part of the Knowledge Partnership, developed the NPC Performance their proportion of PAC membership should at least represent their proportion of the Framework that specifically addresses regional parliamentary expectations and seats in Parliament. performance aspirations. The section relating to external scrutiny and audit are • A PAC should develop a clear written statement describing the role and detailed in Box. 2. responsibilities of a Chair. Term of Office Box 2: NPC Performance Framework • The Committee is appointed for the full term of the Parliament. • Experience and continuity are some of the critical factors for success of a PAC. • The nature of a PAC’s work is such that it may vary over from one year to another Parliamentary Involvement Ex Post and may require follow up. • A PAC invests resources in building capacity of its members. The return on 3.2 Parliament and SAI Relationship investment takes a substantial period to be realized. 3.2.1 Irrespective which SAI model, the parliament should seek to preserve the operational, financial and functional independence of the SAI. Activities • The Committee meets frequently and regularly. 3.2.2 Although the SAI need not report solely to the parliament, it should transmit • The typical witness is a senior public servant (the “accounting officer”) accompanied finalized audit reports to the parliament as soon as they are published. by the officials that have a detailed understanding of the issues under examination. • A steering committee plans the Committee’s work in advance and prepares an 3.2.3 The parliament should have input into the selection of the head of the SAI. agenda for each meeting. • The Committee strives for some consensus in its reports. 3.2.4 The legal framework should outline the role parliaments play in overseeing the • Hearings are open to the public; a full verbatim transcript and summary minutes are removal of the head of the SAI from office. quickly available for public distribution. Performance 3.2.5 The committee and the SAI should hold consultations on the SAI’s annual work- • A committee should assess its performance annually. plan. As the committee and SAI should be operating at arm’s length, the committee • A committee should have a performance framework to assess its effectiveness/ should not dictate the SAI’s work-plan. However, the SAI should consider the performance. committee’s priorities when developing its work-plan to ensure that its audit work is Resources responding to the needs of the parliament. • Committees should be involved in determining their own budgets. Such budgets should provide financial resources for member allowances, site visits, and costs 3.2.6 The committee should ensure the SAI is sufficiently funded through the annual related to public hearings. appropriations to independently perform its audit functions and responsibilities. • The committee is adequality staffed, with an experienced clerk and a competent researcher(s). 3.3 Examination of the Audit Reports 3.3.1 In instances where there is an increased number of compliance and performance audit reports produced by the SAI, the committee responsible for examining the audit reports should implement mechanisms to prioritize and/ or bundle audit reports. Consistent with these global good practice norms, the Network of Parliamentary Committees on Economy, Finance, and European Integration of Western Balkans 3.3.2 In determining which audit reports to prioritize, the committee should consider: 18 19 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS 5. CHALLENGES FOR PARLIAMENT-SAI RELATIONSHIPS IN THE WESTERN BALKANS 5 CHALLENGES FOR PARLIAMENT-SAI RELATIONSHIPS IN THE WESTERN BALKANS21 The premise of this Discussion Note is that a strengthened working relationship • The Audit Opinion between SAIs and parliaments brings benefits to both institutions in that it enhances • Size of The Budget Allocation external audit and strengthens financial oversight. This section aims to highlight • Budget Performance some of the main challenges facing SAIs and parliaments in nurturing a more effective relationship. The key issues are framed in terms of the benefits that can • The Incidence of Similar Negative Audit Opinions; And flow to the respective institutions from an effective working relationship and what • Any Special Aspects Raised by The SAI When Prioritizing Consideration of Audit needs to be done to bring about and fortify the relationship. Findings. The relationship is examined from the perspective of: 3.3.3 The committee should be able to rely on technical assistance from the SAI when reviewing and using the audit reports to scrutinize government performance. A. SAI Independence; 3.3.5 The committee should be able to initiate inquiries independent of it receiving B. Examination of the Audit Reports; and an audit report and draw on additional sources of evidence to scrutinize the performance of public officials in implementing the budget. C. Following up on Recommendations. It is hoped the discussion questions at the end of each section will prompt a 3.4 Timing substantive dialogue between stakeholders as to how strengthen the Parliament- 3.4.1 The legal framework should establish deadlines for the SAI to submit the SAI Relationship in the Western Balkans. The aim is to try and begin to foster audited public accounts to parliament and by when parliament reviews the financial consensus as to what a constructive and productive working relationship should audit report. look like in the Western Balkan context. 3.4.2 Examination of the annual financial audit report by parliament should take place within 3 months from receipt of the report. Ideally, the parliament should A. SAI Independence examine the report and make recommendations prior to the next parliamentary budget session. Irrespective which SAI model, the parliament should seek to preserve the operational, financial and functional independence of the SAI. Independence of 3.5 Recommendations based on the Audit Report the SAI, particularly from the entity that is being audited (the government), has 3.5.1 The legal framework should require action be taken by government in response many elements to it, including appointment of auditors, tenure, career expectations, to recommendations made by parliament after reviewing the audit report. method of removal, funding and legal immunity. 3.5.2 The legal framework should require the government to respond to the parliament’s recommendations within a specific timeline. The SAI should have a professional relationship with the government, while maintaining its independence. The SAI should also have a working relationship with all relevant committees in parliament, but especially with the Finance Committee/ Public Accounts Committee. This relationship can differ depending on the 21 Derived from the NPC Performance Framework and SIGMA Paper No. 54 20 21 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS 5. CHALLENGES FOR PARLIAMENT-SAI RELATIONSHIPS IN THE WESTERN BALKANS Staffing complement, professionalism and technical capacity varies amongst SAIs jurisdiction – in some cases, the relationship is very close, and the parliament is able and has implications for the efficient production of SAI reports. Furthermore, to refer matters to the SAI for action. In other instances, the relationship is more restraints on the number of staff/ auditors recruited can influence the scope and distant, with the SAI only reporting to parliament and, potentially, appearing to give extent of auditing work a SAI conducts. Beyond the number of public sector evidence as a witness. positions created for the SAI, cumbersome hiring processes that delay recruitment of qualified staff acts as a constraint and impacts on an SAI’s capacity to deliver on its mandate. SAI Head Independence from direct government control or interference is critical for SAIs to Participating in public hearings can improve transparency around the budgeting effectively perform their role. Their business is to make professional judgements – constraints experienced by the SAI, while also enhancing the credibility of the SAI based on generally accepted accounting practices – about how well the government by showcasing its audits to the public. The PAC/ Finance Committee should call spends money and accounts for what it has done. the SAI to provide evidence during hearings on the audit reports. At the beginning of each hearing the Chair should ask the head of the SAI whether s/he has the resources s/he needs to perform the SAI’s mandate.  The legislature or judiciary should see their involvement in the appointment of the head of the SAI as a tool to ensure the SAI’s independence from the executive.22 Appointment procedures vary greatly across countries, as well as across different types of SAIs. Moreover, conventions and informal practices can greatly affect the In high functioning systems, the PAC/ Finance Chair should be the SAI’s advocate de facto independence of the head of the SAI. within parliament during the estimates process and when the Finance bill is debated. If the SAI doesn’t have the resources to perform their responsibilities at some point during the fiscal year, the parliamentary committee should take it up directly with Ultimately, appointment and removal procedures and the term of office of the Treasury/ Ministry of Finance to ensure adequate resources are allocated. If there SAI Head define the political space the SAI Head can work with when seeking to are ongoing concerns about the financial independence of the SAI, the parliament preserve the independence of the office. A SAI Head that can only be removed for could consider moving the SAI’s budget - as a separate, devoted line item - under the good cause and with the consent of the parliament is far better positioned to push parliament’s budget to ensure appropriate funding for the scope of their mandate back against efforts to interference in the work planning and day to day activities and to protect the allocated resources from being reprogrammed or eroded across of the SAI by the government without fear of reprisal. the fiscal year. SAI Staff and Resources SAI Work-Plan Adequate funding and resourcing are critical to a SAI’s independence and proper It is good practice that the designated committee and the SAI hold consultations on functioning. Resourcing reductions should not be used as a tool to reduce the the SAI’s annual work-plan. As the committee and SAI should be operating at arm’s effectiveness of a SAI. Furthermore, any expansion of the scope of the SAIs work length, the committee should not dictate the SAI’s work-plan. However, the SAI should be accompanied with an increase in resources. should consider the committee’s priorities when developing its work-plan to ensure that its audit work is responding to the needs of the parliament. A regular program of consultation around the SAI’s work-plan is recommended. 22 Question 124 - Guide to The Open Budget Questionnaire: An Explanation of The Questions and The Response Options. International Budget Partnership, August 2016 22 23 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS 5. CHALLENGES FOR PARLIAMENT-SAI RELATIONSHIPS IN THE WESTERN BALKANS B. Examination of the Audit Reports DISCUSSION QUESTIONS • How can parliament use the annual budgeting process to protect the Although the SAI need not report solely to parliament, international practice independence of the SAI and ensure the SAI is sufficiently resourced? suggests that it transmits finalized audit reports to the parliament as soon as they are published. The role parliament plays differs depending on the type of • Should parliament set up briefing meetings with the SAI and Treasury (or SAI model in the country, the type of audit transmitted to the parliament, the Finance Ministry) during the pre-budget stage to form an opinion on the parliamentary committee structure, and the formal role played by parliament during adequacy of funding available to the SAI?23 the external audit phase of the budget process. For instance, when there is an A-G • What role should parliament play in the appointment/ removal of the Model or Board Model SAI, the parliament is meant to consider the merits of the head of the SAI and in protecting their independence? audit report, focus on the audit recommendations, and scrutinize qualified audit findings. The committee should then make recommendations to remedy egregious • To what extend should the SAI consult with the parliament on their work- behavior, ensure the behavior is not repeated, or address systemic issues through plan and what mechanisms should be in place to facilitate it? recommendations for broader reforms. However, when a Cour des Comptes reports to parliament, the most important public finance function the parliament has is the certification of the audited accounts. However, with the adoption of additional audit types, such as performance audits, the role of parliament in the examination of audit reports produced by Cour des Comptes is also evolving. PEFA Performance Indicator 31 (Legislative scrutiny of audit reports) focuses on legislative scrutiny of the audited financial reports of central government, including institutional units, to the extent that either (a) they are required by law to submit audit reports to the legislature, or (b) their parent or controlling unit must answer questions and take action on their behalf. The indicator examines elements such as the timing of audit report scrutiny, hearings on audit findings, recommendations on audit by the legislature and transparency of legislative scrutiny of audit reports. Strengthening the performance and transparency of parliamentary committees’ examination of the audit reports can have cascading benefits for SAIs.     Greater transparency around parliamentary committee hearings, especially the use of public hearings, incentivizes parliamentary committees to perform better as their activities are viewed by constituents eager to understand how their representatives are representing them. The parliamentary committee’s performance is dependent on receiving quality audit reports as inputs to the hearings.  If the SAI is unable to produce high quality, timely reports, the parliament is more likely to advocate for adequate resources to be allocated to the SAI to enable it to furnish parliament with 23 Stapenhurst, R et al (2014). Following the Money – Comparing Public Accounts the reports they are looking for.   Committees. Commonwealth Parliamentary Association, World Bank Institute, London, 2014 24 25 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS 5. CHALLENGES FOR PARLIAMENT-SAI RELATIONSHIPS IN THE WESTERN BALKANS Prioritizing Audit Reports Timing PEFA24 Dimension 31.2 (Hearings on audit findings) states that in-depth hearings on The OECD Recommendations on Budgetary Governance advocates for SAIs to key findings of audit reports take place regularly with responsible officers from all deal “authoritatively with all aspects of financial accountability, including through audited entities which received a qualified or adverse audit opinion or a disclaimer. the publication of its audit reports in a manner that is timely and relevant for the This dimension assesses the extent to which hearings on key findings of the SAI take budgetary cycle”.25 The PEFA Framework PI-30 establishes three months after place. Hearings on key findings of external audit reports can only be considered ‘in- receiving the consolidated public accounts as the preferred timeline for the SAI to depth’ if they include representatives from the SAI to explain the observations and submit the financial audit to parliament. findings as well as from the audited agency to clarify and provide an action plan to remedy the situation. Similarly, under the PEFA Framework, a parliamentary committee is assessed as being a high performer if it reviews the financial audit report within three months A well-functioning SAI will continuously improve the rate at which it conducts of the report being submitted to parliament. This timeline for scrutinizing the audits, the types of audits it performs, and possibly the number of entities it audit report is reinforced in Principle 16 of the OECD/ SIGMA Principles of Public audits. However, there won’t be a corresponding increase in the capacity of the Administration, which expands the requirement to include all types of audit reports responsible committee in parliament to process and review the growing volume of submitted to parliament. Ideally, parliament should examine the audit report and audit reports it receives. The technical capacity of the committee secretariat will make recommendations prior to the next parliamentary budget session so that the increase with time and experience; however, the size of the secretariat cannot grow recommendations can be reflected in the appropriations for the next fiscal year. as easily as the number of auditors attached to the SAI. Furthermore, with each election cycle, the capacity of the Members will be denuded. Parliaments derive their legitimacy from periodically returning to the citizens to have their mandates This tight timeline requires the SAI and parliament to collaborate closely to maximize refreshed. After each election cycle, experienced returning parliamentarians will efficiencies. The parliament should ensure the SAI receives adequate resources to often rotate to new committees and Members whose mandates weren’t renewed do its work within the specified timeline and the SAI should support parliaments’ won’t return to parliament. efforts to scrutinize all the audit reports within three months of them being tabled to ensure the recommendations are relevant and can have impact. SAIs will need to work with the committee Chair and the committee secretariat to manage the influx of reports. This can be done using risk assessments to prioritize audit reports according to the most pressing issues or to focus on agencies that have the greatest recurring qualified audit findings. SAIs and committee secretariats can work together to prepare concise briefing memos on the audit reports for the committee Members and suggested lines of inquiry that can be explored during hearings. Finally, SAIs can work with the committee Chair and secretariat to group similar audit reports so that they can be dealt with during one hearing to improve efficiency and reduce the risk of backlogs building. For instances, multiple audit reports pertaining to a single agency (even if they are across multiple years) can be grouped together and scrutinized in a single hearing. 24 PEFA: Framework for Assessing Public Financial Management. PEFA Secretariat, 25 Recommendation of The Council on Budgetary Governance. Public Governance and Washington DC, February 2016 Territorial Development Directorate, OECD, February 2015 (Principle 10.d) 26 27 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS 5. CHALLENGES FOR PARLIAMENT-SAI RELATIONSHIPS IN THE WESTERN BALKANS C. Following up on Recommendations Based on the Audit Report DISCUSSION QUESTIONS • How should parliaments prioritize examination of audit reports when the PEFA Dimension 31.3 (Recommendations on Audit by Legislature) states that number and variety of audit reports prepared by the SAI increases? the legislature should issue recommendations on actions to be implemented by the executive and systematically follows up on their implementation. In addition, • What role should the SAI play in helping/supporting the parliament in the responsible committee can follow-up on the recommendations made by the prioritizing its work? external auditors and would be expected to have a follow-up system to ensure that • What steps can the SAI and parliament take to ensure audit reports are such recommendations are appropriately considered by the executive. submitted to parliament within three months of receiving the consolidated accounts and that parliament scrutinizes and reports on the audits three months after they are received from the SAI? Ideally, for every recommendation, the executive should confirm whether they accept or reject the recommendation or accept the recommendation with caveats. The implementing agency should update the legislature during subsequent hearings whether recommendations have or have not been implemented. A parallel recommendation tracking system – usually managed by the SAI - can independently verify progress made in implementing recommendations. If the government refuses to accept and act on recommendations of the parliament and SAI, the parliament has several additional accountability tools it can consider using to try and prompt government action. These vary depending on the jurisdiction and whether it is a presidential or parliamentary system; however, they include additional oversight hearings, individual Members posing questions to the responsible minister during plenary debates, interpellations, motions of no confidence, impeachment/ removal procedures, and reflecting the parliament’s displeasure with an agency’s refusal to address a problem by reducing its appropriations in the following fiscal year. Key take-aways on recommendation follow-up include: • Plenary debate endorsement of committee recommendations – After the committee has finalized its recommendations, a plenary session should be held to debate, amend, and endorse these recommendations after which they become formal recommendations of the parliament. However, the committee’s job doesn’t end there – it should conduct additional oversight to ensure that recommendations are implemented by the government. • Acceptance by government of parliamentary recommendations and what action they could take (i.e. understanding/ treasury minute process). 28 29 4. GLOBAL AND REGIONAL EXTERNAL AUDIT BENCHMARKS 6. CONCLUSION After audit results and recommendations are discussed and validated by the legislature, the executive is normally asked to take certain actions to 6 CONCLUSION The premise of this Discussion Note is that a strengthened working relationship address the audit findings. The executive is given a chance to respond to between SAIs and parliaments brings benefits to both institutions in that it enhances these recommendations by parliament. external audit and strengthens financial oversight. This Note provides the context, • Whether parliament or the SAI should track implementation. There are existing international expectations, and challenges facing the relationship. It also different examples as to the SAI and legislature’s tracking (or lack thereof) poses several questions to assist interested stakeholders reflect on the nature of of actions by the executive to address audit recommendations. The lack the existing relationships in the Western Balkans with the hope that it will stimulate of clarity as to who should formally take responsibility of tracking the a dialogue on how to improve the working relationship between these two key implementation of recommendations by the government can lead to external audit institutions in the region. confusion and generally weaken the impact that these recommendations can have. However, ISSAI 10 Principle 7 and ISSAI 20 Principle 3 provide a positive obligation on SAIs to monitor and follow-up on recommendations from the SAI and parliament. • Follow-up on recommendation implementation. Following up on recommendations helps build, among other factors, accountability and responsibility for delivery as well as complaint mechanisms.26 If recommendations are not implemented, parliament, during budget formulation the following year, should seek to sanction the respective line ministry/ implementing agency. DISCUSSION QUESTIONS • Who should formally work on tracking the implementation of recommendations? How can the parliament and SAI better work together on this? • Should parliaments adopt a formal discharge procedure for the previous year’s audited accounts before commencing the new budget session? 26 Principles of Public Participation in Fiscal Policy. Global Initiative in Fiscal Transparency (GIFT), March 2016 30 31 RESOURCES CONSULTED IN THE PREPARATION OF THE DISCUSSION NOTE • Relations Between Supreme Audit Institutions and Parliamentary Committees SIGMA Papers: No. 33, OECD 2003 • Citizen Engagement Practices by Supreme Audit Institutions - Compendium of Innovative Practices of Citizen Engagement by Supreme Audit • Stapenhurst, R et al (2014). Following the Money – Comparing Public Institutions for Public Accountability. Department of Economic and Social Accounts Committees. Commonwealth Parliamentary Association, World Affairs, United Nations Secretariat, 2013 Bank Institute, London, 2014 • Developing Effective Working Relationships Between Supreme Audit • The Reality of Democratic Parliaments: What Criteria of Evaluation? (2009). Institutions and Parliaments. SIGMA PAPER No. 54, OECD 2017 Parliamentary Assembly of La Francophonie. International Organization of La Francophonie, Paris (Principle 2.3.2.5; 2.3.2.6) • Global Parliamentary Report 2017 - Parliamentary Oversight: Parliament’s Power to Hold Government to Account. Interparliamentary Union, UNDP, • The Role of Parliament in Curbing Corruption (2006). World Bank Institute 2017 • Guide to The Open Budget Questionnaire: An Explanation of The Questions and The Response Options. International Budget Partnership, August 2016 (Question 101; 118; 119; 120; 121) • Open Budget Survey Report 2017. International Budget Partnership, August 2018 • McGee, David G. (2002). The Overseers – Public Account Committees and Public Spending. Commonwealth Parliamentary Association. • Parliaments and Budgetary and Financial Oversight in the Western Balkans. Network of Parliamentary Committees of Finance, Budget and European Integration (NPC), Westminster Foundation for Democracy (2014). • PEFA: Framework for Assessing Public Financial Management. PEFA Secretariat, Washington DC, February 2016 (Dimension 31.1; 31.2; 31.3) • Principles of Public Participation in Fiscal Policy. Global Initiative in Fiscal Transparency (GIFT), March 2016 (Principle 9) • Recommendation of The Council on Budgetary Governance. Public Governance and Territorial Development Directorate, OECD, February 2015 (Principle 10.d) • Recommended Benchmarks for Democratic Legislatures. Commonwealth Parliamentary Association. First published 2006. Revised and updated 2018. (Principle 7.1.2; 7.2.7; 7.2.9;) • Reed, Quentin (2013). Maximizing the Efficiency and Impact of Supreme Audit Institutions Through Engagement with Other Stakeholders. Anti- Corruption Resource Centre, UNDP 2013 32 33 RESOURCE TEAM Mitchell O’Brien Senior Governance Specialist | Accountability Institutions Governance Global Practice World Bank Group Email: mobrien@worldbank.org Ermal Vila Governance Consultant Governance Global Practice World Bank Group Email: evila@worldank.org SAFE means Strengthening Accountability and the Fiduciary Environment. It is a Trust Fund program administered by the World Bank and was established by the Swiss State Secretariat for Economic Affairs (SECO) and the European Commission with the aim of improving public financial management in Europe and Central Asia region. This Trust Fund program provides support for activities to assess public financial management (PFM) performance, identify and implement actions to achieve improvements and share knowledge and good practices across countries in the region. 34 35