What did we audit?

The State Budget Act requires the NAO to audit the accuracy of the annual accounts and the regularity of transactions of the state on an annual basis. The annual accounts of the state consolidate the financial statements of all state accounting entities, state-controlled companies, state-established foundations, and the profit-making state agency.

To provide an opinion on the accuracy of the annual accounts of the state and the legality of its transactions, the NAO conducted audit operations at the ministries to examine the compliance of economic transactions conducted in 2016 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 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.

The NAO examined whether the state’s annual accounts provide true information about the state’s financial position and performance for the year ended and whether state agencies have adhered to budget acts while performing their economic transactions.

Further, the report contains an overview of the implementation of government reform but the NAO abstains from expressing its opinion on that matter.

What was the scope of our audit?

The annual accounts of the state contain the financial indicators of public undertakings, foundations controlled by the state and profit-making state agency. The annual accounts of companies, foundations and profit-making state agency were audited by certified auditors. The NAO considered the opinions of certified auditors when expressing its opinion of the annual accounts of the state. The certified auditors who provided their opinions on the annual accounts of foundations, companies and the profit-making state agency did not assess the regularity of their transactions (except for the companies and foundations listed in Annex 1 hereto) and the NAO has not performed any additional activities in this respect.

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. The consolidated annual report of the state is the only financial statement provided to the Riigikogu - 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 2016 State Budget Implementation Report, the revenue collected by the state in 2016 amounted to 8.58 billion euros, which exceeded the revenue of 2015 by 594 million euros. The expenditure and investments incurred by the state amounted to 8.55 billion euros, which exceeded the corresponding indicator for 2015 by 210 million euros. In 2016, the revenue exceeded expenditure and investments by 34 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 sub-chapter “Government Sector Surplus/Deficit” of chapter “Financial Indicators for Public and Finance Sector” of the management report within the 2016 Consolidated Annual Report of the State).

According to the consolidated annual accounts of the state, the assets of the state as at 31 December 2016 amounted to 16.5 billion euros whereas the majority were fixed assets (forests, roads, buildings and machinery). Compared to the preceding period, the monetary value of assets has increased by 171 million euros.

As at 31 December 2016, the state’s liabilities totalled 7.4 billion euros - an increase of 338 million euros compared to the preceding period. Long-term liabilities of 4.88 billion euros comprise the majority of liabilities. The state's loan commitments amount to 2.9 billion euros, having decreased by 16 million euros compared to the preceding period. The pension commitments of the state amount to approximately 2 billion euros.

What did we conclude as a result of the audit?

The 2016 Annual Accounts of the State are correct in all material respects - save for the qualification on the value of fixed assets - 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 NAO issues a comment on the fixed assets of AS Eesti Raudtee amounting to 184.7 million euros as recognised under item “Tangible fixed assets” on the consolidated balance sheet of the state because there were indications that the value of said assets might have fallen.

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

The NAO finds that the 2016 Budget Implementation Report of the state which shows budgetary revenue of 8.58 billion euros, expenses of 8.25 billion euros, investments of 299.34 million euros and financing operations of 26.49 million euros provides reliable information on the state’s revenue (incl. grants received), expenditure, investments and financing operations.

The NAO is of the opinion that the economic transactions of the state have in all material respects been carried out in compliance with the State Budget Act, the 2016 State Budget Act and the 2016 State Budget Act Amendment Act. This means that the NAO did not find any significant errors in the implementation of the State Budget Acts.

The main observations of the NAO are as follows:

• As the optimal size of the Stabilisation Reserve Fund is not laid down by law and the Ministry of Finance has not provided its assessment, there is no idea as to the amount to be held in the fund for it to be sufficient in a crisis. For instance, such reserve funds have been set up and their required size determined by the Estonian Unemployment Insurance Fund (EUIF), the Estonian Health Insurance Fund (EHIF) and the Bank of Estonia as well as commercial banks.
• According to the Estonian Health Insurance Fund Act and the Unemployment Insurance Act, EUIF and EHIF may not use their money for any purpose other than that laid down by their respective Acts. The Ministry of Finance has used their money for making payments on behalf of the state which is in conflict with the aforesaid Acts. The NAO points out that the money of the EHIF and the EUIF held on the group accounts of the state belongs to those public law entities, i.e. that money is the property of the Health Insurance Fund and the Unemployment Insurance Fund. According to the law, the Ministry of Finance may hold and invest the money on those accounts, effect their payments and settlements, and render payment services to them.
• The EHIF and EUIF legal reserves amounting to 129.3 million euros as at 31 December 2016 should, due to their nature, be placed in the Stabilisation Reserve Fund (SRF) instead of the Liquidity Reserve where different rules apply to holding, investment and deployment of funds. Similarly to the SRF, the EHIF and EUIF are required to maintain a legal reserve to mitigate the risks stemming from macroeconomic changes, and this reserve may be deployed only in emergency situations following a specific decision to that end.
• The state budget should be more accurate and its explanatory memorandum should better clarify the substantive aspects and be more uniform. During the audit of the state budget implementation report, the NAO learned that the totals in the 2016 State Budget Act had not been adjusted following the amendments made during the processing of the draft act, and that the calculations for deriving the sectoral totals contained errors. Having analysed the explanatory memorandum to the 2016 state budget, the NAO concluded it was of uneven quality, and it lacked explanations for some expenditure, featured notable changes in revenue and expenditure, and contained excessive information that was not helpful for reading the budget. At the time of drawing up the explanatory memorandum, there were no specific requirements in place for such memoranda.
• Activity-based state budgets might not be the most effective method for ensuring more efficient use of money. The Riigikogu has adopted the State Budget Act Amendment Act whereby it has decided to make the transition to activity-based budgeting by 2020. However, no objectives, methods or action plans for this transition have been laid down although the actual transition has already begun.

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:

• devise principles for determining the optimal size of the Stabilisation Reserve Fund by assessing the nature and amount of any emergency expenditure to ensure the availability of sufficient reserves;
• initiate the mutual alignment of the State Budget Act, the Estonian Health Insurance Fund Act and the Unemployment Insurance Act provided that using the money of the EHIF and EUIF for making payments on behalf of the state is in line with the nature and functions of these two public law entities;
• place the legal reserves of the EHIF and EUIF in the Stabilisation Reserve Fund, reassess the target level for the amount of money in the Liquidity Reserve and ensure the availability of sufficient reserves;
• set out specific requirements for the composition of information provided in the explanatory memorandum to the annual state budget, and coordinate the drafting the that memorandum so as to ensure uniform quality of information therein;
• analyse the necessity of making the transition to activity-based budgeting, and - provided that it is decided to continue with the process - lay down the principles for activity-based budgeting and the action plan for transition.