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 examined the compliance of economic transactions conducted by state authorities in 2018 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.

This report further includes an overview of internal controls put in place to prevent corruption accompanied by relevant recommendations from the NAO.

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 the profit-making state agency 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 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 and give the government the opportunity to explain its activities undertaken during the accounting year.

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 2018 State Budget Implementation Report, the state’s revenue in 2018 amounted to 9.95 billion euros. The expenditure and investments incurred by the state amounted to 9.80 billion euros and 465.5 million euros, respectively. In 2018, expenditure and investments exceeded revenue by 318.6 million euros. It is not a surplus or deficit of the government sector which is calculated using other calculation methods - for more information see chapter “Financial Indicators for Public and Finance Sector” of the management report within the 2018 Consolidated Annual Report of the State.

According to the consolidated annual accounts of the state, the assets of the state as at 31/12/2018 amounted to 16.1 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 668.7 million euros.

As at 31/12/2018, the state’s liabilities totalled 8.8 billion euros - an increase of 860.6 million euros compared to the preceding period. Long-term liabilities of 5.57 billion euros comprise the majority of liabilities. The state’s loan commitments amount to 3.1 billion euros, having increased by 175.6 million euros compared to the preceding period. The pension commitments of the state amount to approximately 2.6 billion euros.

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

The 2018 Annual Accounts of the State provide in all material respects a fair presentation of the state's financial position, financial performance and cash flows during the ended accounting period.

The NAO finds that the 2018 Budget Implementation Report of the state which shows budgetary revenue of 9.95 billion euros, expenses of 9.80 billion euros, investments of 465.5 million euros and financing operations of 49.0 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 2018 State Budget Act and the 2018 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:

• Costs that are related to adjustments in pension provisions or to litigation are still not planned in the state budget. As for the so-called non-monetary expenses, only depreciation costs and the expense arising from the residual value of fixed assets sold are included in the budget whereas other expenses like costs related to public sector pension provisions are not. Consequently, for some expenses in the 2018 State Budget Implementation Report, budgeting and implementation are recognised in different sections of the report meaning that the comparability of the budget and its implementation is not ensured.
• The targeted reserve fund has been used to finance activities that are not compatible with the purpose of the reserve fund. In conjunction with the transition to accrual-based budgeting in 2017, the targeted reserve fund was deployed to finance costs arising from changes in accounting policies. Including the Government of the Republic's decision made at the beginning of 2019, 36.9 million euros have been planned to this end for the period 2017-2022. The NAO finds that now, two years after said transition, the government areas should already be able to budget expenses that were previously funded from the targeted reserve.
• 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 potential needs. Over the last 15 years, the Stabilisation Reserve Fund (SRF) has been boosted on account of state budget surplus only once, the SRF and the Liquidity Reserve have shrunk, and the central government's liquid assets are in negative territory. This gives the NAO reason to believe there is a risk that the (low) level of reserves will be ignored if there are no rules to assess the adequacy of the SRF.
• According to the Ministries and the Government Office, they lack sufficient authority and means to perform their functions under the Anti-corruption Act. The Anti-corruption Act requires government agencies to ensure that officials adhere to their obligations and authorises the agencies to verify declarations of interest. According to agencies, the performance of both functions is complicated by the Personal Data Protection Act which provides that data on officials and persons related to them may be collected and processed only subject to their consent.

What did we recommend as a result of the audit?

Main recommendations by the NAO to the Minister of Finance, the Minister of Public Administration and the Minister of Justice:

• envisage expenses of notable amount in the state budget;
• ensure that government areas include all their expenses in the budget;
• 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;
• assess the impact of the provisions of the Personal Data Protection Act on the performance of functions and exercise of rights arising from the Anti-corruption Act, and develop a solution that allows complying with both said Acts.