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 agencies.

To provide an opinion on the accuracy of the annual accounts of the state and the legality of its transactions, the NAO examined the compliance of economic transactions conducted by state authorities in 2017 with the State Budget Acts, and determined whether such transactions have been correctly recognised in their accounts.

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.

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 agencies. The annual accounts of companies, foundations and the profit-making state agencies were audited by audit firms. The NAO considered the reports of certified auditors when expressing its opinion of the annual accounts of the state.

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 2017 State Budget Implementation Report, the state’s revenue in 2017 amounted to 9.16 billion euros. The expenditure and investments incurred by the state amounted to 8.84 billion euros and 414.8 million euros, respectively. In 2017, expenditure and investments exceeded revenue by 100.3 million euros (NB! It is not a surplus or deficit of the government sector because agencies financed from the state budget make up only a part of the government sector - 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 2017 Consolidated Annual Report of the State).

According to the consolidated annual accounts of the state, the assets of the state as at 31/12/2017 amounted to 17.3 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 788.7 million euros.

As at 31/12/2017, the state’s liabilities totalled 7.9 billion euros - an increase of 484.8 million euros compared to the preceding period. Long-term liabilities of 4.84 billion euros comprise the majority of liabilities. The state's loan commitments amount to 2.9 billion euros and have remained on the same level compared to the preceding period. The pension commitments of the state amount to approximately 2.4 billion euros.

What did we find and conclude as a result of the audit?

The 2017 Annual Accounts of the State provide in all material respects fair presentation of the state's financial position, financial performance and cash flows during the ended accounting period.

The NAO finds that the 2017 Budget Implementation Report of the state which shows budgetary revenue of 9.16 billion euros, expenses of 8.84 billion euros, investments of 414.8 million euros and financing operations of 159.7 million euros provides reliable information on the state’s revenue, 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 2017 State Budget Act and the 2017 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 cover the estimated needs. 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. Over the last two years, the Stabilisation Reserve Fund has not been boosted on account of state budget surplus and no alternative solution has been provided to compensate for this.
• The transition to accrual-based budgeting was quite smooth. However, all non-monetary expenses are not included in the state budget. Currently, only depreciation costs are included in the budget whereas other expenses like costs related to calculating public sector pension provisions are not. Nevertheless, they are shown in the State Budget Implementation Report which makes actual expenditure to appear considerably higher than planned expenditure.
• As from 2016, the budget of the Ministry of Finance contains a targeted reserve fund even though the State Budget Act does not provide for one. The State Budget Act sets out the framework for budgeting that cannot be modified with annual budgets. In the opinion of the NAO, the purpose of creating such reserve fund remains unclear. The amendment to the State Budget Act that will be enforced from 2020 onwards allows making earmarked allocations within the Government of the Republic's reserve fund to finance measures approved by the government but does not authorise the setting up of a specific reserve fund in the budget of the Ministry of Finance.
• Functioning of information systems essential for financial accounting was found to be free of any shortcomings that could notably affect the quality of financial data based on these systems.

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;
• envisage non-monetary expenses of notable amount in the state budget;
• assess the justification of setting up the reserve fund created within the budget of the Ministry of Finance, and if necessary, align the setting up of that reserve with the State Budget Act and ensure its transparent use.