The deficiencies in the organisation of the work of the Estonian Centre for Defence Investments and the Defence Forces affect the accounting of assets, expenses and receivables in accounting and budget implementation alike. The problems in the organisation of work that date back to previous years have still not been resolved and risks are increasing as the amount of money available for defence increases dramatically. In some cases, the risks have materialised.
The audit also revealed serious difficulties in obtaining the necessary data from the agencies under the Ministry of Defence. Not all the contracts concerning the intermediation of aid for defence purposes were presented to the National Audit Office – the number of these contracts, the time of their conclusion and their total amount are therefore not known to the National Audit Office. The Defence Forces were also unable to provide information on the quantities, cost and inventory of stocks that had been registered. It took the Estonian Centre for Defence Investments three months to provide the supporting documents for economic transactions.
“In a situation where the whole society is making efforts that place a significant burden on people and affect the financing of the development of various areas of life in order to finance the enhancement of the state’s defence capabilities, the Ministry of Defence must be respectful of the taxpayers’ efforts,” said Auditor General Janar Holm. “The problems identified by the National Audit Office cannot be regarded as strictly accounting problems or a situation where ‘the paperwork simply has to be in order’ – the audit revealed that the organisation of work was a mess, which has financially measurable consequences. Erroneous payments made to contractors, amounting to several tens of millions of euros in the worst case, or a nearly €10 million advance payment that has been waiting to be settled for eight years now, are just the major examples. The confusion in linking contracts, advance payments and goods, and other problems highlighted in the report, point to a systemic problem in the use of funds that needs urgent and substantive attention by the Ministry of Defence. In addition to the confusion and mess, the failure to provide the data and contracts necessary for auditing the annual accounts of the state, or difficulties in finding the underlying documents, also creates mistrust in a situation where trust should be created,” the Auditor General said.
The Ministry of Defence must follow the principles of the Estonian Financial Reporting Standard in recognising economic transactions and, in cooperation with the Director General of the Estonian Centre for Defence Investments and the Commander of the Defence Forces, the Minister of Defence must promptly address the serious problems identified in asset accounting, stocktaking and other operational processes. The National Audit Office will audit the contracts and other information requested from the Ministry of Defence and the agencies in its area of government for auditing the previous year’s annual report, but not received, in the course of the audit of the consolidated annual accounts for the current financial year and submit its conclusions to the Riigikogu, including information on whether the Ministry of Defence has taken unacceptable risks for the state budget.
The audit indicated that the Estonian Centre for Defence Investments and the Defence Forces have problems in managing the contracts signed and in monitoring the arrival of the goods to be delivered.
Examples:
- The National Audit Office found unjustified advance payments during the audit. For example, in March 2024, the Estonian Centre for Defence Investments paid a supplier approximately US$79.1 million in error, and in July of the same year, it paid an additional US$8.7 million. The supplier refunded US$47.8 million. The supplier left the remainder (US$40.0 million) in an advance payment account to cover future transactions under the same contract. According to the explanations given to the National Audit Office, the Estonian Centre for Defence Investments did not consider it necessary to recover the overpaid amount because it considered it time-consuming and complicated. The Centre explained that over time, purchases will be made for this amount anyway. At the same time, another supplier has had a prepayment balance of €9.6 million euros accumulating on its account already since 2018, which has essentially been an interest-free long-term loan at the expense of the Estonian taxpayer. In previous years, the Centre has ordered additional goods from this supplier, but has not used the possibility to offset the order against this advance payment for several years.
- There are errors in the delivery and receipt documents of defence equipment purchases and in other purchase documents, which means that it is not always possible to verify the contract under which the goods were received and whether and when they arrived. For example, the audit revealed instances where invoices had been accepted, even though some of the goods had not been delivered or there was no information on whether the deficiencies identified at first had been rectified.
- The problem of timely registration of assets has not been solved. There is no guarantee that after the acquired assets have been received and a partial advance payment has been made, monitoring will be carried out to ascertain when and in what quantities the assets actually arrive at the Defence Forces. In the course of the audit, the National Audit Office identified cases where assets received as aid from foreign countries were registered with a year’s delay, or where fixed assets acquired in the period 2021–2024 were kept in the warehouse of the Defence Forces and only registered after a delay of several years. Registering assets with significant delays and incorrectly carries the risk that the preservation and existence of the assets is not guaranteed.
Since the Defence Forces did not provide the National Audit Office with detailed records of the inventories registered in accounting and evidence of stocktakes, the National Audit Office issued a qualification in its report on the accuracy of the inventory balance of the Ministry of Defence in the amount of €723.9 million. The Defence Forces did not provide the National Audit Office with data on the inventories registered for the first time (which amount to €707.8 million), and it is not clear which inventories are recognised in the balance sheet, in what amount and at what value, and which are not recognised in the balance sheet without justification.
Similar to the previous year’s audit, the National Audit Office finds that the Ministry of Defence did not follow the Estonian Financial Reporting Standard when recognising its economic transactions. This means that the Ministry showed some transactions in the budget implementation report at the moment when the legal ownership of the defence assets was taken over from foreign suppliers, not when the goods were actually delivered to Estonia and the risks were transferred from the seller to the Ministry of Defence. In financial accounting, the principle is that the purchase of an asset is recognised when the buyer acquires control over the goods.
Although in the audit published last year, the Ministry of Defence promised to recognise future transactions correctly, it retroactively charged purchases from three suppliers totalling €45.8 million to the expenses of 2024 in April 2025, citing the transfer of legal ownership. These goods were actually delivered in 2025 and should therefore be recognised in the budget implementation report for 2025. As the Ministry of Defence made similar errors in the previous period as well, the part concerning the Ministry of Defence in the 2024 state budget implementation report shows understated grant income in the amount of €24.3 million, investments in the amount of €16.9 million and expenditure in the amount of €144.8 million.
The National Audit Office also cannot confirm that the Ministry of Defence has not assumed any risks to the Estonian state budget in connection with the transfer of funds for the acquisition of defence equipment and supplies to the target countries of the EU defence cooperation, because the contracts necessary for the assessment were not submitted to the National Audit Office. The State Budget Acts of 2024 and 2025 give the Ministry of Defence permission to intermediate the funds necessary for the acquisition of defence equipment and supplies to the target countries of the EU defence cooperation. The permission was granted on the condition that no risks will be assumed for the state budget with the intermediation of defence supplies and the budget of the Ministry of Defence will not be used for the purposes of intermediation.
As not all the requested intermediation agreements were submitted to the National Audit Office, the number and total amount of mediation agreements concluded is not known to the National Audit Office. It is known that during 2024, the Ministry of Defence was prepaid grants in the amount €533.2 million. Only three grant agreements were submitted to the National Audit Office for review, which covered a small part, i.e. a little more than 10%, of the prepayment made to the Estonian Centre for Defence Investments.
The National Audit Office has previously seen in similar transactions that the Ministry of Defence has assumed the usual risks to the state budget associated with procurement activities and the use of grant money, and that Estonian state budget funds have been reserved for a long period of time due to these transactions, i.e. they could not be used to cover its own needs. For example, there was a case where €88.9 million had been reserved in the budget in this way for almost 1.5 years.
It is understandable that it is important to be flexible and respond quickly when intermediating aid. The State Budget Acts of 2024 and 2025 are based on the principle that no risks may be assumed for the state budget when defence supplies are intermediated. However, if supporting the target countries also requires assuming certain risks for the national budget, such possibility must be provided for by legislation.
The Ministry of Defence and its area of government are only a part of the audit of the consolidated annual accounts of the state. In the other parts of the audit, the National Audit Office noted, among other things, that it still takes about half a year for various state agencies to explain the balances of funds not used in the financial year. The carry-over of these balances to the following year is in breach of the requirements established by the State Budget Act and the guidelines of the Ministry of Finance.
In 2024, a total of €1.7 billion was carried over to 2025, which is approximately 8.7% of the final budget for 2024. Compared to the balances carried over from 2023 to 2024, the budget carried over from 2024 to 2025 is bigger by €130.8 million. The main errors made by the areas of government are that the transfer of budget surpluses involves changing the purpose of the state budget, which is generally not allowed.
For example, the Ministry of Regional Affairs and Agriculture and the Ministry of Climate changed the allocation of the balances between the different activities when they entered the balances into the cost accounting information system after the approval of the order to carry forward the balances from 2023 to 2024. However, the Ministry of the Interior, the Ministry of Justice and the Ministry of Climate have also carried over budget balances from 2023 to 2025, although the State Budget Act gives the option to extend the use of state budget funds by one fiscal year. According to the National Audit Office, the ministries must comply with the current regulations, as this is the only way to ensure transparency and targeted use of budget funds. If the current regulation does not meet the actual needs, the Ministry of Finance should change it.
The unused part of the Government’s reserve in 2024 was not approved until 6 months after the end of the fiscal year, on the same day when the annual accounts of the state was signed i.e. 30 June 2025. The Ministry of Finance has carried over €36.3 million more of the balances of the Government of the Republic than allowed by the limit established for the Government of the Republic with the 2024 state budget.
In addition, the audit indicated that the problems in the allocation of the domestic grants given to the ministries have remained largely the same as in previous years – the allocation of domestic grants is not always transparent and in some cases, it is not ascertained whether they are used for their intended purposes.
Last year, the National Audit Office pointed out that the explanatory memoranda of the draft state budgets for 2023 and 2024 did not make it clear how much and on what basis the ministries planned to distribute the national grants. The explanatory memorandum of the 2025 state budget is more detailed than previous ones, but still of uneven quality across ministries. The National Audit Office recommends improving the explanatory memorandum of the state budget so that the section on the grants to be allocated is more comprehensive, clear and uniform and contains clear information on to whom, how much and on the basis of which grants are given.
The National Audit Office examined how the amounts paid as operating grants are formed by auditing the grant agreements on a random basis. In most of the cases audited, the amounts were historical amounts that have been increased over the years. Grant recipients are generally not asked to submit budget requests with substantive justification, not is it possible to establish that negotiations over the amounts of operating grants were held. Also, operating grant recipients often do not have to explain the purpose for which the received grant will be used, the reasons why it is not used or the justification for carrying over the balance to the next year.
According to clarifications provided by the Ministry of Finance, the principles for the allocation of national grants are being reviewed. At the time of preparation of the audit report, the Ministry of Finance has prepared the Draft Act Amending the State Budget Act, which also clarifies the allocation of domestic grants.
State accountancy
With the exception of the Ministry of Defence, accounting in the areas of government of ministries is largely well organised and this is also reflected in the National Audit Office’s overall opinion of the financial statements of the state.
The National Audit Office finds that the state’s annual accounts for 2024 present the state’s financial position, financial performance and cash flows of the concluded accounting period fairly in all material aspects, except for the above qualification regarding the inventory balance of the Ministry of Defence. In the opinion of the National Audit Office, the 2024 state budget implementation report provides reliable information on the state's collected revenues, expenditures made, investments and financing transactions carried out by the state, leaving out the aforementioned qualification regarding the budget implementation report of the Ministry of Defence. As a positive, the National Audit Office pointed out in its audit that the inventory of receivables and payables related to pensions, social benefits and allowances, which had not been carried out by the Social Insurance Board for a long time, was comprehensively completed in 2024.
Background
The consolidated annual accounts of the state, including the state budget implementation report, provides the Riigikogu and the public with information on economic transactions that have already been carried out. The consolidated annual report of the state has been prepared pursuant to the State Budget Act and the Generally Accepted Accounting Principles of Estonia. The consolidated annual report of the state consists of the state’s financial statements (i.e. the state’s consolidated and unconsolidated report) with the state budget implementation report, additional information about local governments, the public sector and the government sector, and the management report.
The Minister of Finance is responsible for the preparation of the consolidated annual report of the state and state accountancy is organised by the Financial Accounting Department of the State Shared Service Centre.
The state’s total revenue in 2024 according to the 2024 state budget implementation report amounted to €16.2 billion. The state’s expenditure and investments totalled €17.5 billion: expenditure amounted to €16.6 billion and investments to €0.9 million. According to the consolidated financial statements of the state, the monetary volume of the state’s assets as at 31 December 2024 amounted to €26.7 billion and the majority of the assets are fixed assets (forest, roads, buildings, machinery). Compared to the previous period, the monetary volume of assets has increased by €2.6 billion (fixed assets, inventories and financial investments have increased).
The state’s liabilities totalled €20.8 billion as at 31 December 2024, which means that they have increased by €2.3 billion compared to the previous period. Long-term liabilities in the amount of €13.4 billion comprise the majority of liabilities. The state has loan liabilities in the amount of €9.7 billion and they have increased by €1.5 billion in comparison with the previous period.
The National Audit Office audits the financial statements 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 financial year.
