TALLINN, 3 September 2024 – The state's annual accounts for 2023 are accurate but the Ministry of Defence was issued a qualified opinion for not following the Estonian Financial Reporting Standard in the recording of some of its economic transactions. In addition, the National Audit Office concluded in its annual report that domestic grants should be distributed more transparently and that more frequent checks should be made to ensure that they are used for the intended purpose.

The National Audit Office finds that the state’s annual accounts for 2023 present the state’s financial position, financial performance and cash flows of the concluded accounting period fairly in all material aspects. The audit confirmed that the state's economic transactions are, in all material aspects carried out in accordance with the State Budget Acts. The 2023 State Budget Implementation Report provides reliable information on the state's collected revenues, expenditures made, investments and financial transactions carried out by the state, leaving out the aforementioned qualification regarding the Ministry of Defence's budget implementation report. As a result of the audit, the National Audit Office has also sent memoranda to the ministries and the Government Office with more detailed observations and recommendations.

However, the National Audit Office found that there were errors in the 2023 State Budget Act. Financing transactions in the budgets of the Ministry of Economic Affairs and Communications and the Ministry of Regional Affairs and Agriculture were not or were inaccurately recorded in the State Budget Act. These are contributions or repayments to the Estonian Business and Innovation Agency and Rural Development Foundation trust funds and the management fees of the funds. Thus, certain transactions were not planned at all in the State Budget Act and some of them were on the wrong budget line. As a result, there were in reality some €122 million more transactions than in the State Budget Act.

In addition, the funds earmarked for the area of the Ministry of Economic Affairs and Communications for covering the increase in energy prices were inadvertently doubled, i.e. from the €100 million needed to €200 million. This issue has already been addressed in public.

The National Audit Office points out that the Ministry of Defence did not follow the Estonian Financial Reporting Standard in the recording of some of its economic transactions. Namely, in the 2023 Budget Implementation Report, the Ministry recorded nearly €190 million worth of defence-related assets that had not arrived in Estonia by 31 December 2023 and the risks and rewards associated with their possession had not been transferred from the seller to the buyer, i.e. the Ministry of Defence. In financial accounting, the principle is that an economic transaction is recorded in both the accounts and the budget implementation in the period in which the transaction actually takes place – the purchase of an asset is recorded when the buyer acquires control over the goods.

The Ministry of Defence's 2023 Budget Implementation Report includes purchases of defence-related assets for which legal ownership has been taken over from foreign suppliers on the basis of an instrument drawn up following a factory acceptance test – before the planned and actual delivery of the goods to Estonia. In the case of some transactions, the Ministry has regarded the date of the instrument drawn up after the acceptance test of the foreign factory as the moment of acquisition of control, although the relevant procurement contracts and the instruments of transfer of legal ownership also stated that the risks associated with the assets are transferred from the seller to the buyer when the goods are delivered. This means that the rewards and risks associated with the assets transferred under the instrument continued to remain with the seller and did not pass to the Ministry of Defence.

The Ministry of Defence has indicated in the course of the audit that the current practice is based on the outcome of the 2021 discussion between the National Audit Office, the State Shared Service Centre and the Ministry of Defence. However, the situation that has now developed is not in line with the views expressed in the debate referred to, which concerned exceptional cases. The 2023 transactions related to the qualified opinion are not exceptions, but a broader approach; the audit did not reveal any substantive reason why it was necessary to record the transactions in the Budget Implementation Report before the acquisition of control over the goods.

Similarly to previous years, the National Audit Office draws attention to the weaknesses in the internal control system of the Estonian Centre for Defence Investments and the Defence Forces, which affect the accounting of assets, expenses and receivables in both accounting and budget implementation.

In addition, the audit showed that domestic grants are not always distributed transparently and that at times, it is not monitored that they are used for intended purpose. In 2023, around €3.2 billion was provided from the state budget for domestic grants. However, the explanatory memorandum to the draft Budget Act does not make clear in which areas of activity, why and on what basis the grants were to be distributed. The annex to the explanatory memorandum on grants discloses only partial information on the legal entities receiving grants and is not consistent with the information provided in other parts of the explanatory memorandum. According to the analysis of the National Audit Office, the actual amount of domestic grants given was almost four times higher than the amount stated in Annex 3 of the explanatory memorandum.

There are various guidelines and rules on the distribution and use of foreign grants, which is subject to controls at various levels, regular reporting, etc. At the same time, ministries often give out domestic grants without setting clear objectives for the beneficiary, asking for reports on the implementation of the contract afterwards and assessing whether the money was used for the agreed purpose.

The distribution of domestic grants is not always transparent and does not always ensure fair competition – some institutions have no procedures for distributing domestic grants and money is awarded without public competition.

Considering the volume of domestic grants, the public and the Riigikogu must know the areas and programmes in which grants are to be distributed, why and on what basis (legislation, calls for proposals, etc.) as well as the amount of the grants. This information must be included in the explanatory memorandum to the draft State Budget Act and the provision of information on grants must become more systematic.

Institutions must have a procedure in place to implement the grant programme. To ensure transparency, the distribution of grants must either be based on the law or on the basis of free competition, such as open calls for proposals. The distribution of grants by other means, for example by means of a decision, can only be used in exceptional circumstances and must be justified.

The large volume of unused budget surpluse from the previous financial year and the late identification of thereof has led to a situation where there is no comprehensive overview of the money actually available for use by ministries during the financial year. The increase in the carry-over balances has stopped in 2023 at €1.6 billion, but it will still take around half a year to determine the unused balances for the financial year. The determination of balances, which takes six months, raises the question of whether, and for what purpose, this money was actually earmarked by the ministries, if it was not needed in the first half of the year following the financial year. Moreover, there is a risk that it will take so long to determine the balances that there will be no time to use the funds in a sensible way. The high volume of the budgetary balances and the delays in carry-over decisions undermine the transparency of the state budget process.

Background

The Consolidated Annual Accounts of the State, incl. the State Budget Implementation Report, provides the Riigikogu and the public with information on economic transactions that have already been carried out. However, the basis for deciding on state revenue and expenditure is the State Budget Act for the year, which is why it is necessary for the draft State Budget Act together with the explanatory memorandum to be prepared by the Ministry of Finance to contain correct and comprehensible information.

The state’s total revenue in 2023 according to the 2023 State Budget Implementation Report amounted to €14.9 billion. The state’s expenditure and investments totalled €16.6 billion: the expenditure amounted to €15.9 billion and investments €701.6 million. According to the Consolidated Financial Statements of the State, the monetary volume of the state’s assets as at 31 December 2023 comprised €24.1 billion and the majority of the assets are fixed assets (forest, roads, buildings, machinery). Compared with the previous period, the monetary value of assets has not changed significantly (up by €0.1 billion).

The state’s liabilities totalled €18.4 billion as at 31 December 2023, which means that they have increased by €1.7 million compared to the previous period. Long-term liabilities in the amount of €11.9 billion comprise the majority of liabilities. The state’s has loan liabilities in the amount of 8.2 billion euros and they have increased by 1.3 million in comparison with the previous period.

The National Audit Office audits the annual accounts included in the state’s consolidated annual report and the regularity of the state’s transactions every year. Pursuant to the State Budget Act, the National Audit Office completes the audit no later than on 31 August in the year following the accounting year.

Priit Simson
Communication Manager, National Audit Office
+372 640 0777
+372 5615 0280
[email protected]
[email protected]
http://www.riigikontroll.ee/

• Posted: 9/3/2024 10:00 AM
• Last Update: 9/3/2024 8:40 AM
• Last Review: 9/3/2024 8:40 AM