TALLINN, 4 September 2023. – The National Audit Office has determined that the state’s annual accounts 2022 present the state’s financial position, financial performance and cash flows of the concluded accounting period fairly in all material aspects, and economic transactions during the accounting period of the state were in all material aspects carried out in accordance with the state budget laws. However, despite these positive findings, the National Audit Office, serving as Estonia's supreme audit institution, encountered an impediment when attempting to audit the labour costs of the Ministry of the Interior, as the ministry obstructed their audit. In such circumstances, the National Audit Office is unable to provide an assessment regarding the accuracy of labour cost figures within the Ministry of the Interior's area of governing and the legality of budgetary expenditures related to its labour costs.

Auditor General Janar Holm remarked, “This marks an unprecedented occurrence in the history of the National Audit Office, where the audited entity has impeded access to essential data required for the auditing of the State's Annual Accounts. Pursuant to Section 46(2) of the National Audit Office Act, I have officially apprised the State Budget Control Select Committee of the Riigikogu regarding the obstruction of the National Audit Office's operations, and I respectfully request that this grave situation be deliberated within the committee.”

In 2022, the labour costs within the Ministry of the Interior's area of governing amounted to 304.28 million euros, equivalent to approximately 25% of the central government's total labour costs. To conduct our audit, the National Audit Office requires access to financial, personnel, and salary data from the audited entities. Beginning with the 2022 audit, the National Audit Office has implemented an automated data retrieval process via the state's secure data exchange layer, X-tee. This platform facilitates information exchange among the state's databases while pseudonymising personal data, replacing identifiable information with pseudonyms, numeric codes, and other identifiers. This approach ensures secure data processing and storage, reduces reliance on personal data, minimises manual workload for our auditors, ultimately optimising efficiency. It empowers auditors to focus on the essence of transactions, rather than expending valuable human effort on automatable tasks. The National Audit Office sources data from the reporting environment administered by the State Shared Service Centre, which does not include state secret-protected information.

However, during the audit of the State's Annual Accounts, the three audited entities – the Ministry of the Interior, the Government Office, and the Ministry of Defence – were not prepared for automatic data exchange through the X-tee platform as suggested by the National Audit Office. Instead, the National Audit Office proposed an alternative approach, wherein the entities would independently provide the necessary statements related to administrative expenses and investments, as well as pseudonymised personnel and salary reports. Both the Government Office and the Ministry of Defence efficiently adopted this alternative data transmission method as recommended by the National Audit Office, enabling the completion of the requisite audit procedures. In contrast, the Ministry of the Interior declined the proposed alternative information transfer method and insisted on manual data extraction from the HR and salary reporting environment, which contained personalised data. This approach would have diverted the National Audit Office's attention to technical data extraction rather than allowing a focus on the Ministry of the Interior's transactional content.

Auditor General Janar Holm has expressed deep concerns regarding the Ministry of the Interior's approach during the audit, deeming it contradictory and perplexing. "It is particularly puzzling that the Ministry of the Interior declined both the automatic data transmission via the X-tee and the alternative data transmission method, which proved suitable for the Government Office and the Ministry of Defence. The Ministry cited personal data protection and security risks as reasons for this refusal. However, it's noteworthy that the method of information exchange proposed by the Ministry of the Interior itself exposes auditors to a greater volume of personal data compared to the solutions put forth by the National Audit Office. This approach fails to minimise access to such data," Holm pointed out.

Nevertheless, the Auditor General had restructured the National Audit Office's workflow just last year, precisely to prevent the identification of personal data through individual requests and direct access to the database, a method suggested by the Ministry of the Interior. Holm stated firmly, "The statement included in the Minister of the Interior's response, claiming that the Ministry provided auditors from the National Audit Office with access to all necessary personnel data in accordance with legislation, is ill-informed and infringes upon the National Audit Office's independence. The Minister of the Interior does not possess the authority to dictate to the National Audit Office how it should conduct its work, the extent to which the supreme audit institution should carry out its tasks, or what constitutes adequate information for drawing sound conclusions during audits. These matters are within our own jurisdiction." Holm emphasised, "The National Audit Office operates free from directives and interference from both legislative and executive state authorities in selecting audit subjects, planning and executing audits, and preparing audit reports."

The primary activities of the National Audit Office are governed by the National Audit Office Act, and in cases involving sensitive information containing state secrets, the State Secrets and Classified Information of Foreign States Act also applies. The Minister of the Interior has cited a government regulation from 2013 as the basis for denying data access to the National Audit Office. According to this regulation, access to structural, personnel, and salary data of the Ministry of the Interior requires the Ministry's consent. However, it is worth noting that this regulation does not apply to the core functions of the National Audit Office. The rights of the National Audit Office are directly derived from the law, and under the law, auditees are obligated to provide the necessary information for audits. While officials from the National Audit Office have the authority to examine information carriers containing state secrets during audit operations, this was not necessary in this particular audit.

The National Audit Office is expressing growing concerns about the increasing attempts by state authorities to restrict access to information. Auditor General Janar Holm has observed a recent trend in the handling of public information, where state institutions are increasingly attempting to limit access under various pretexts. Holm finds it especially troubling that national security concerns are now being lightly used as justification, even in the case of the National Audit Office.

In addition to the Ministry of the Interior's obstruction of the National Audit Office's examination of labour costs within its area of governing, there were also delays in the submission of data concerning administrative expenses and investments within the same scope. The Ministry of the Interior withheld administrative cost and investment data for an extended period, resulting in a delay of nearly six months before the National Audit Office received the necessary information, occurring during the final stages of the audit.

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However, when comparing this year's comprehensive State Annual Accounts with the previous year's report, some positive developments come to light. For example, in 2022, the Defence Forces exhibited notable progress in enhancing their asset accounting. In the prior year's audit, the National Audit Office had made a qualification on the balance of tangible fixed assets, stemming from deficiencies in the management of the Defence Forces' asset accounting, leading to errors. Although improvements have been made in asset accounting within the Defence Forces over the past year, there remains a need for continued refinement of processes related to asset accounting and inventory management. By synchronising and organising the asset accounting registers, the accuracy of the fixed assets balance reflected in the accounts has been substantially validated. 

The issues within state budgeting, as previously highlighted by the National Audit Office, have persisted without any new budgeting principles being introduced in 2022.  The Ministry of Finance continues to examine the state budgeting methodology and strives to develop a new information system for budget management.

Auditor General Janar Holm has consistently noted in annual audit interviews that “activity-based budgeting,” as it is referred to, remains largely regarded within the ministries as a project requested by the Ministry of Finance, with unclear objectives and benefits. In practice, real-world operations adhere to different formats.

Holm emphasized, “The current so-called activity-based budget and its corresponding execution data lack consumers. Unfortunately, this does not prevent the portrayal, ignoring reality, of a transition to the new budget format as a success story that only needs a little adjustment or new information systems. I am certainly not suggesting that the idealistic goals of activity-based budgeting are inherently flawed. We simply cannot implement it in reality; it would require an entirely different kind of management and thinking. In reality, the world operates differently. My discussions with members of the Riigikogu also reveal minimal demand for this so-called activity-based budget within parliament. Moreover, the government's funding decisions do not align with an activity-based budget picture but are rooted in practicality. In my view, the Riigikogu, as the recipient of the budget, deserves a pragmatic portrayal, not to mention the public.” Holm further stated, “Continual improvements in methodology and information system development do not address the fundamental issue – if something is impractical, then it remains so.”

The National Audit Office acknowledged that despite the Government of the Republic's reserve being designated for extraordinary expenses, funds are consistently allocated from it for activities that could be anticipated. Throughout 2022, the Government of the Republic's reserve was repeatedly tapped for activities that were foreseeable and could have been budgeted within the budgets of the respective ministries. Examples include payments to support the Film Estonia Fund, cover costs associated with ice-breaking services, fund state border construction and maintenance, procure medicines, support the amendment of the Public Information Act, and promote Estonian-language education. Additionally, the principles guiding fund allocations did not align with current legislation, as funding decisions amounting to EUR 16.6 million were retroactively made for a budget year that had already expired.

The National Audit Office has been making similar observations regarding the government reserve for several years.

Background Information

The Consolidated Annual Report 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.

According to the report on the implementation of the state budget 2022, the state’s revenue in 2022 was 14.00 billion euros. The state’s expenditure and investments totalled 14.54 billion euros, with expenditure making up 13.91 billion euros and investments 630.08 million euros. According to the state’s consolidated annual accounts, as of 31 December 2022, the financial volume of state assets amounts to 23.99 billion euros and most of the assets are made up of fixed (non-current) assets (forests, roads, buildings, machinery). In comparison with the previous period, the financial volume of assets has increased by 4.56 billion euros.

As of 31 December 2022, the state has liabilities in the total amount of 17.07 billion euros, which have increased by 2.98 billion euros compared to the previous period. The majority of liabilities are made up of long-term liabilities in the amount of 10.23 billion euros. The state has borrowings totalling 6.95 billion euros, which have increased by 1.05 billion euros compared to 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
Head of Communications of the National Audit Office of Estonia
+372 640 0102
+372 5615 0280
[email protected]
[email protected]
http://www.riigikontroll.ee/

• Posted: 9/4/2023 11:30 AM
• Last Update: 9/4/2023 4:26 PM
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