The National Audit Office completed a summary of auditing local authorities in 2005

Toomas Mattson | 12/21/2006 | 12:00 AM

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TALLINN, 21 December 2006 - Audit Department V of the National Audit Office, which audits local authorities, compiled a generalised overview of the problems identified during the audits carried out this year. The National Audit Office sent the following letter to all local authorities:

As if 1 December 2006 the National Audit Office has audited seven local authorities: the Rural Municipalities of Saare, Vormsi, Rakke and Toila and the Cities of Kiviõli, Kuressaare and Paldiski. The audit reports are fully available on the website of the National Audit Office at www.riigikontroll.ee. The audited periods were years 2004 and 2005. In all the audits the goal of the National Audit Office was to assess the following:

  • the operativeness of the internal control system applied in the local authority for the purpose of ensuring the targeted and lawful use of the money and assets;
  • the compliance of the organisation of accounting in the local authority with the legislation and instructions regulating accounting;
  • the lawfulness of the economic activities of the local authority.

In order to be of assistance to all the local authorities in organising and developing the areas, the National Audit Office has drawn up a summary of the main observations and conclusions made during the audits.

1. Internal control system
The internal control system is a set of rules and procedures aimed at helping to manage the institution in a regular, sustainable, efficient and effective manner. The internal control system must ensure adherence to the management principles, preservation of the assets, precise accounting as well as timely submission of reliable financial and management information. The National Audit Office considers primarily the following as the elements of the internal control system in the units and bodies of the local authority:

  • the activities of the Audit Committee;
  • the organisation of the supervisory control exercised by the government of the rural municipality or city;
  • the publication of information pursuant to the Local Government Organisation Act and Public Information Act;
  • the existence and adequacy of provisions regulating the internal work organisation (rules of internal procedure, accounting policies and procedures, instruments regulating budgeting and implementation of the budget, procedures regulating management of funds, etc.);
  • the existence and adequacy of job descriptions;
  • the organisation of records management;
  • regular inventory checks.


The National Audit Office found serious deficiencies in the internal control systems of all the audited local authorities.

1.1. The work of the Audit Committee upon performance of the duties prescribed by law has not been sufficient.

According to the Local Government Organisation Act, a part of the internal control system for auditing the activities of the local authority is the establishment of an audit committee of the council. The audit committee works on the basis of a work schedule or one-time duties assigned by the council.

According to the observations of the National Audit Office, the audit committee has not achieved the objective prescribed by law and its role has been largely formal.

In the audited period none of the audit committees of the audited local authorities had a work schedule, which was approved by the council of the local authority. The work of the audit committees in 2004 and 2005 has lied mainly in assessment of the annual report. In a few instances the audit committee has been somewhat more active and made a few inspections on the basis of one-time duties assigned by the council.

The reason for the insufficient work of the audit committee of the council is primarily the fact that the members of the council do not have the required competence or experience for effective auditing and democratic principles of election have been disregarded upon formation of the committee. It also became evident that the members of the council of the local authorities and leaders of the government of the local authority are unaware of the role of the audit committee and the importance of its activities.

The National Audit Office finds that the council should adopt a work schedule for the audit committee or assign one-time audit duties in order to ensure the performance of the duties assigned to it by law. The National Audit Office also draws attention to the fact that the audit committees could weigh the involvement of experts or specialists in order to ensure effective audit results.

1.2. The information concerning the activities of the local authority has not been published to the prescribed extent and in the prescribed manner.

The Public Information Act and the Local Government Organisation Act set out a list of the information which the local authority must publish on its website or in another manner.

The National Audit Office identified that there were serious deficiencies in all the audited local authorities in publication of the information prescribed by law. Before auditing, most of the audited local authorities had not published the entirety of the information about the budget, the implementation thereof, public procurement or the job descriptions of the officials. There were very serious deficiencies of principle in publication of the register of documents and granting access to the register (incl. there were various problems with publication of the legislation of the rural municipality or the city).

The National Audit Office would like to draw attention to the fact that the publication and transparency of the activities of local authority are some of the most important principles which ensure the democratic sate order and performance of everyone's rights, freedoms and obligations. At present the National Audit Office is forced to admit that the local authorities have seriously disregarded these principles.
The National Audit Office considers it important that the local authorities bring their activities into compliance with the requirements provided by law and grant the public access to the entire information concerning their activities to the extent prescribed by law.

1.3. The established procedures are not followed or the procedures are outdated.

According to the Local Government Organisation Act, it is within the competence of the council to establish various procedures regulating the activities of the local authority (the procedure for allocation of support, the procedure for provision of services financed from the budget of the rural municipality or the city, the procedure for use and disposal of the reserve funds, etc.). The government of local authority must also establish procedures regulating records management in the local authority (rules of internal procedure, procedure for records management, accounting policies and procedures, etc.).

The National Audit Office identified that in most of the local authorities there are serious deficiencies in establishment and adherence to the respective procedures. Often these procedures have not been updated, as a result of which they do not comply with the existing legal or economic environment.

It must also be noted that often the officials of the local authority do not comply with their competences specified in their job description. The status, competence and liability of the local authority, its bodies, agencies and agencies administered by the local authority agency are unclear. The law does not provide for a single interpretation, but local authorities themselves have not adopted regulations detailing the right of representation, competence and liability.

The National Audit Office finds that the main reason why the leaders of local authorities, their bodies and agencies have exceeded their competence, used money for a purpose other than prescribed and in a non-transparent manner, and managed the assets inefficiently lies in the absence, non-compliance and disregarding of the relevant procedures. This has been supported by the lack of an overview of the assets, rights and liabilities of the local authority and the vagueness of liability.

In its audits the National Audit Office has had to repeat over and over again that it is very important to bring the procedures and rules into compliance with legislation and adhere to them in order to ensure the legality of the activities of the local authority.

1.4. Legislation is not adhered to upon budgeting and implementation of the budget.

According to the Local Government Organisation Act, the approval and amendment of the budget, approval of the annual report and appointment of the auditor of the rural municipality or city is within the exclusive competence of the council. The budget of the local authority is drawn up pursuant to the procedure prescribed by law, considering the development plan of the local authority. According to the Rural Municipality and City Budgets Act, the government organises the implementation of the budget pursuant to the procedure approved by the council.

The level of budgeting in the local authorities is weak. Some of the audited local authorities did not have a letter of explanation of the draft budget. The approved budgets did not give an overview of the planned expenditure. If the budget does not give information about the substance of the expenditure and it is not accompanied by a letter of explanation, the monitoring of the implementation of the budget will be seriously impaired. This has also increased the use of the money for a purpose other than the prescribed purpose.

Another important observation made by the National Audit Office is that in many instances the budget appropriations were not used for the prescribed purpose, but the budget was not amended when the need for amendment of the budget arose. Without approving a supplementary budget costs for which no money had been allocated in the budget or which could not be covered by the allocated appropriations were incurred. The National Audit Office also found that the local authority and the agencies administered by the local authority do not adhere to the purpose and amount of the expenses set out in the budget upon assuming obligations.

Furthermore, there were serious problems with using the reserve funds of the budget. According to the general principles of the reserve funds, the reserve funds of the budget are meant to cover one-time expenses which could not be foreseen or planned in the budget while budgeting. The National Audit Office identified that in several instances the local authorities had not established any procedure for using the reserve funds, which would stipulate the bases and terms of using the reserve funds. Also, in several instances the reserve fund has been used for increasing the pay fund and covering operating expenses, which were not unforeseen.

It is regrettable that the aforementioned violations can be attributed to the irresponsible attitude of the leaders of the local authorities towards the use of the money and insufficient supervision over their activities.

The National Audit Office draws attention to the fact that the non-compliance with legislation upon budgeting and implementation of the budget results in the non-transparency of the local authority, unauthorised use of funds and the risk of a misuse of the funds. It is vital that the leaders of the local authorities acknowledge the importance of the legality of the use of the public funds and transparent use of the funds and take measures ensuring that.

2. There are deficiencies in the organisation of the accounting, which have led to serious mistakes in the annual accounts.

2.1. The overall level of the organisation of accounting is very poor.

The National Audit Office finds that the overall level of accounting in the local authorities is very poor. There are too many deficiencies in accounting, which can mostly be attributed to the insufficient use of the resources of the local authority upon hiring competent accountants and their training. The accountants do not apply the requirements arising from amendments of legislation in their work or are simply unaware of them. The accountants’ skill of using the accounting programs is inadequate. Usually, no effective on-site support is available. It must also be noted that rural municipality and city mayors do not realise their liability for the organisation and correctness of the accounting, as a result of which the entire area and the accountants have been deprived of the required support.

2.2. There are serious deficiencies in accounting.

Among other things, the National Audit Office audited the fixed asset accounting in the local authorities. Fixed assets usually account for 80-90% of the assets of the local authority, which means that correct fixed asset accounting is very important, affecting the financial status and the gains of the local authority.

As a result of the audits it was concluded that the fixed asset accounting and the accounting of the economic transactions pertaining to fixed assets is extremely poor in the local authorities. This has resulted in a situation where all the audited local authorities do not have an overview of their assets or the value thereof. Although the National Audit Office identified numerous mistakes in fixed asset accounting we consider it important to point out the most frequent and serious ones:

  • The fixed assets have not been registered, i.e. for instance, land units, buildings and structures belonging to the audited local authorities have not been registered.
  • The fixed assets acquired before 1995 and assets the acquisition cost of which cannot be reliably determined have still not been re-evaluated, although the deadline of the respective re-evaluation was 31 December 2005.
  • The classification of the fixed assets is wrong. For example, assets which had been granted use of to third parties and should therefore be classified as real estate investments had been indicated under fixed assets.
    The deficiencies in the accounting of fixed assets have brought about a situation where none of the local authorities has an overview of its actual financial status and the results of the economic activities.


2.3. The quality of the annual reports is poor.

The National Audit Office also evaluated the compliance of the annual reports of 2004 and 2005 with the requirements provided for in the Accounting Act, the Guidelines of the Accounting Standards Board and the General Rules for State Accounting. The National Audit Office found that none of the annual reports complied with the requirements prescribed by law. In addition to various formalisation mistakes all the reports contained essential undisclosed information the publication of which has been prescribed by legislation.

The National Audit Office emphasises that accurate annual reports and the disclosure thereof is very important, because the information contained in the report gives the local authority itself as well as the external consumers of information (the residents, creditors, the government sector, etc.) an overview of the financial status of the local authority, changes thereof and the results of the activities of the agency. Thus, they serve as an important basis for making decisions.

3. Legality of economic transactions.

In addition to the operativeness of the internal control system and the organisation of accounting the National Audit Office also audited the legality of the transactions of the local authorities. First and foremost, the compliance of the economic transactions with the Local Government Organisation Act, the Rural Municipality and City Budgets Act, the Public Procurement Act, the Anti-corruption Act, the annual budget of the local authority for 2004 and 2005, the effective statutes and other relevant procedures was identified.

According to the National Audit Office, the main problem upon performance of economic transactions is the failure to comply with legislation. There are serious violations of laws as well as internal procedures of the local authorities. Although the National Audit Office found decisions and transactions, which were in conflict with legislation in almost all areas of activity of the local authorities, most of the violations were associated with the following areas:

  • There were systematic and serious deficiencies in the organisation of public procurement: the procurement had repeatedly not been organised, there were mistakes in the choice of the tendering procedure, organisation of the tendering procedure and submission of declarations.
  • City and rural municipality mayors had repeatedly exceeded their authority, paying remuneration, bonuses, support and compensation to the officials of the city or the rural municipality and other employees without any respective order of the council.
  • In some instances the rural municipality or city mayor had entered into transactions which were in conflict with the Anti-corruption Act.


According to the National Audit Office, most of the violations upon entering into economic transactions can be attributed to insufficient competence, which can undoubtedly be attributed to the limited resources of the local authority. It can also be attributed to the fact that the officials are unaware of their role and do not have a sense of responsibility.

The National Audit Office hopes that the aforementioned observations will be of help to the audited local authorities as well as other local authorities upon critical assessment of their activities and resolution and prevention of possible problems.

 

Toomas Mattson
Communication Manager of National Audit Office
Telephone: 6400 777
Mob: 51 34900
E-mail: toomas.mattson@riigikontroll.ee

  • Posted: 12/21/2006 12:00 AM
  • Last Update: 9/17/2015 10:33 PM
  • Last Review: 9/17/2015 10:33 PM

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