Competence to audit

The limits of competence of the State Audit Office or, in other words, the circle of agencies which the office is competent to audit, has been constantly modifying in order to adjust to the developments and meet the expectations of the changing society. Also, new fields of audit have been added along the years. At present, the State Audit Office is competent to assess the correctness of financial reports, as well as the efficacy of internal control, the quality of financial management, lawfulness of transactions and effectiveness of operations of audited agencies. An amendment to the State Audit Office Act is currently being elaborated whereby the authority of the Office in auditing local governments will be extended.

The majority of the Office’s duties involve auditing the Ministries and other government authorities. The Office also engages in the analysis of the operation of constitutional institutions (Chancellery of the Riigikogu, courts, Bank of Estonia, etc), legal persons in public law, and companies, foundations and non-profit associations the activities of which are relevant to public interest or which have access to public funds. The Office is also competent to audit local governments in using state assets, state budget funds and benefits or grants placed at their disposal.

Lately, the activities of legal persons in public law, legal persons in private law and local governments have been of particular interest to the Office, as in the public sector, no area should remain outside the control of the state. However, regardless of the results of audits and risk analyses which indicate that the use of funds by local governments should be placed under close scrutiny, the law still does not permit auditing the local governments’ own funds.

At present, significant deficiencies can be found in all the said areas. The control provided by private auditing companies deals only with the correctness of the annual report while the legality of performed transactions is not verified. As it is, even the auditing of the annual report has not been made mandatory to all local governments. The Local Government Organisation Act fails to determine the obligations of city and rural municipalities upon the organisation of internal control and internal audit.

The provisions of the State Audit Office Act which was in force until March 2002, concerning control over legal persons in public law and legal persons in private law were incomplete and contradictory. The Act did not prescribe auditing of foundations while the articles of association of numerous foundations stipulate that use of state budget funds allocated to such foundations are subject to auditing by the State Audit Office. The authority of the Office in auditing legal persons in public law is not uniform either: for some companies, the Office has the right to audit all of their economic activity while, in the case of others, only the use of state budget funds allocated to them must be audited. The authority of the State Audit Office upon the exercise of auditory control over legal persons in public law and legal persons in private law, was specified by the State Audit Office Act which entered into force on 4 March 2002. Those amendments to the Act were necessary at that time as risk evaluations and auditing experiences both indicated a need for closer supervision. Another area which needs attention is the issue of local governments. Although the annual reports of companies with state participation, foundations founded by the state and legal persons in public law are being audited by private auditing companies, the outcome is still insufficient. Private audits cannot verify the legality of transactions or assess the soundness of management, nor do they evaluate the sustainability of the operation of the legal person being audited or determine the reasons for loss. The above is not meant as criticism of private audit companies. The scope of the conclusive report of an ordinary audit is based on the financial statement of the audited entity and as such, is not meant to cover management issues. It is left to the authority which orders the auditing services, that is the Managing Board of a company, to seek extended audition. Unfortunately, persons who are authorised to do so, including representatives of the state, rarely deem it necessary.

Until the scope of auditing of the public sector is not prescribed by legislation and the persons who order audits, as a general rule, fail to seek extended examination, it remains up to the State Audit Office to deal with those issues. As a result, the entire economic activity of a legal person is assessed as a whole by auditing, or special attention is put on a specific part of its operation. Experience has shown that a conforming financial statement is not always the indicator of sound financial management.

Details about this article