What did we audit?

Every year the National Audit Office (NAO) audits the state’s annual accounts. Further, the NAO examines whether state agencies have performed their economic transactions in compliance with the essential relevant legislation: the State Budget Acts, the State Assets Act and the Public Procurement Act. In that context, the NAO expresses an opinion as to whether the budget acts have been adhered to in the performance of economic transactions. The most significant observations about omissions detected in transactions with state assets and in public procurements are set out in the audit report.

To provide an opinion on the accuracy of the annual accounts of the state and the legality of its transactions, the NAO conducts audit operations at the ministries to examine the compliance of economic transactions conducted in 2015 with the State Budget Acts, the State Assets Act and the Public Procurement Act, and determine whether items which are relevant in terms of the state's report have been correctly recognised in the financial statements of the ministries. The results of the conducted audit operations are set out in the audit reports which the NAO has prepared for each Ministry. The financial audit reports are available on the website of the NAO.

What was the scope of our audit?

In addition to the indicators of state accounting entities, the annual accounts of the state contain the financial indicators of public undertakings, foundations controlled by the state and the profit-making state agency. Certified auditors have audited the annual accounts of the aforesaid entities, and the NAO has taken their opinion into account in expressing an opinion on the state’s annual accounts.

The NAO did not carry out audit procedures to check the additional information about local authorities, the public sector and the government sector disclosed in the Consolidated Annual Report of the State because, according to the State Budget Act, this is not the NAO's duty.

Why is this important for the taxpayers?

The Consolidated Annual Report of the State endorsed by the Government of the Republic, accompanied by the NAO's audit report concerning it, is submitted to the Riigikogu for approval. This is the only financial statement provided to the Riigikogu which is the user of the report.

According to the Accounting Act, the purpose of submitting the annual accounts of the state is to allow the Riigikogu to exercise control over the government, give the government the opportunity to explain its activities during the accounting year and provide the Riigikogu with necessary information for adopting new budgeting decisions.

By auditing the state’s annual accounts the NAO provides assurance that the accounting indicators presented to the Riigikogu and the public provide true information about the state’s financial position and performance for the year ended and that the State Budget Implementation Report includes relevant information about the state’s revenue as well as expenditure, investments and financing operations made on the account of such revenue.

According to the 2015 State Budget Implementation Report, the revenue collected by the state in 2015 amounted to 7.99 billion euros, which exceeded the revenue of 2014 by 111 million euros. The expenditure and investments incurred by the state amounted to 8.34 billion euros, which exceeded the expenditure of 2014 by 503 million euros. In 2015, the revenue exceeded expenditure by 350 million euros (NB! It is not a surplus or deficit of the government sector which is calculated using other calculation methods - for more information see the management report within the 2015 Consolidated Annual Report of the State).

According to the consolidated annual accounts of the state, the assets of the state as at 31 December 2015 amounted to 16.3 billion euros whereas the majority were fixed assets. Compared to the preceding period, the monetary value of assets has increased by 51 million euros.

As at 31 December 2015, the state’s liabilities totalled 7.1 billion euros - a decrease of 38 million euros compared to the preceding period. Long-term liabilities of 4.85 billion euros comprise the majority of liabilities. The state's loan commitments amount to 2.9 billion euros and have not changed notably compared to the preceding period. The pension commitments of the state amount to approximately 2 billion euros.

What did we find and conclude based on the audit?

The 2015 Annual Accounts of the State are correct in all material respects, which means that they give a true and fair view of the state’s financial position as well as its financial performance and cash flow for the year ended.

The accounting of state agencies, state-controlled foundations and companies is well managed in most part and the annual accounts are largely free of material errors.

The NAO is of the opinion that the state's economic transactions were performed in all material respects in accordance with the State Budget Act, the 2015 State Budget Act and its amendment act. This means that the NAO did not find any significant errors in the implementation of the State Budget Acts.

Although the annual accounts of the state are accurate in the material part and the state has, in most cases, respected the legislation concerning the state budget in effecting economic transactions, it needs to focus more on how to improve budget planning, reporting on state budget implementation, and managing the liquidity risk.

• The Ministry of Finance has used the funds of the Estonian Health Insurance Fund and the Estonian Unemployment Insurance Fund for solving the state's liquidity issues. The audit revealed that, in addition to settling the accounts of the Estonian Health Insurance Fund and the Estonian Unemployment Insurance Fund, the Ministry of Finance has used the money of those two Funds for effecting payments of the central government because the state lacked liquid financial resources. The NAO finds that such unilateral discretion exercised by the Ministry of Finance, whether on temporary or more permanent basis, has not been expressly set out in the State Budget Act, the Estonian Health Insurance Fund Act or the Unemployment Insurance Act. Such actions require an unambiguous permission/decision from the Riigikogu in the form of legislative provisions to avoid legal disputes and interpretations and ensure legal clarity. Hence, the Riigikogu needs to decide whether or not it should allow this, and correspondingly revise the wording of relevant legal provisions.
• The NAO finds that the State Budget Implementation Report does not present information in a way that is sufficiently clear for the users of such information as the report shows the funds carried forward from the preceding financial year in the column "Final budget" along with the funds for the accounting year which makes them indistinguishable from the expenses for the accounting year. Compared to earlier reports, the notes to the report provide more detailed numerical information on the funds carried forward but there are still no additional explanations as to why the funds needed to be carried over. Therefore, the reader of the report is unable to learn why the money remained unused by the ministries during the preceding and the accounting year, and for what purposes it was allocated.
• All transactions have not been transparently budgeted. For instance, funds were allocated to the Ministry of Economic Affairs and Communications for increasing its financial assets without indicating the financial assets to be acquired; the budget did not include funds for the Ministry of Finance to lend to the Environmental Investment Centre (EIC); the Ministry of Social Affairs paid for the acquisition of financial assets on the account of operating expenses (contributions to foundations upon their establishment and acquisition of holdings) although such transactions should have been budgeted as financing transactions. Further, the budget does not include in full the money required for the core activity of the Ministry of the Environment because the core activity is additionally financed each year on project basis from the Environment Programme via the EIC. Furthermore, the revenue from the activities of these two ministries has not been included in their budgets which should be used for any operations related to them. Hence, the budget implementation report is not sufficiently transparent.
• The state agencies consistently mishandle the budgeting of long-term lease contracts by failing to recognise the long-term commitments arising from lease contracts as financing transactions in the annual state budget. Thus, for years, the state agencies have violated the State Budget Act that permits the state agencies to assume commitments and effect finance lease transactions only if the state budget allows this and contains the corresponding means. Hence, the concluded lease contracts have been incorrectly recognised in the accounts which leads to errors in the statistics on public finances.
• The planning of investments and budget implementation in the fields of information and communication could be improved. As from 2013, an Advisory Committee at the Ministry of Economic Affairs and Communications is involved in the planning of additional financing requests for ICT investments and developments whereas the role and responsibilities of this committee have not been laid down by legislation, and the committee does not effect follow-up checks of the financed activities. The accuracy of planning funds needs to be improved within the government areas of certain ministries because acquisitions have been planned that have been delayed and such delays should have been foreseen, and activities have been planned that were not even started during the budgetary year.
• The management reporting of ministries should be improved to provide reliable input for management decisions. The state intends to make the transition to activity-based budgeting that links the budget to specific activities of ministries and their agencies whereby the effectiveness of such activities will be individually measured. The transition to activity-based budgeting is essential to enable measuring the performance of ministries and ensure the reliability and completeness of reports on such performance. To this end, more detailed requirements should be set for the reports on the implementation of operational programmes of ministries to ensure their reliability and usability as an input for budget decisions.

What did we recommend as a result of the audit?

Important recommendations of the NAO to the Minister of Finance and the Minister of Public Administration:

• initiate the amendment of the State Budget Act and, where necessary, the Estonian Health Insurance Fund Act and the Unemployment Insurance Act to ensure legal clarity as to whether the funds held and invested by the Ministry of Finance may be used for the state's liquidity management;
• outline, in the consolidated annual report of the state, justifications for carrying forward significant amounts from the accounting year to the following year, and include a reference to the location of more detailed information;
• plan, on uniform basis and in full amount, the funds of all ministries necessary for the performance of statutory functions within their respective budgets;
• guide the ministries during the budgeting process so that they would ask permission for financing transactions in order to eliminate state budget violations arising from contracts already entered into and prevent errors in the planning of new lease contracts;
• draw up more detailed guidelines for preparing the reports on the implementation of operational programmes and include in those guidelines specific requirements to the structure of, and data presentation in, those reports.