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Discussion paper, Joop Vrolijk, joint SIGMA ReSPA PIFC regional conference, Skopje, 19 September 2019


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Discussion paper on guidelines for PIFC compliant financial inspection, Joop Vrolijk, SIGMA expert, joint SIGMA-ReSPA PIFC regional conference for EU candidate countries and potential candidates, Skopje, 19 September 2019.

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Discussion paper, Joop Vrolijk, joint SIGMA ReSPA PIFC regional conference, Skopje, 19 September 2019

  1. 1. 2 Rue André Pascal 75775 Paris Cedex 16 France Tel: +33 (0) 1 45 24 82 00 This document has been produced with the financial assistance of the European Union (EU). It should not be reported as representing the official views of the EU, the OECD or its member countries, or of partners participating in the SIGMA Programme. The opinions expressed and arguments employed are those of the authors. This document, as well as any data and any map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. © OECD 2019 – The use of this material, whether digital or print, is governed by the Terms and Conditions to be found on the OECD website page DISCUSSION PAPER FOR 5TH REGIONAL CONFERENCE ON PUBLIC INTERNAL FINANCIAL CONTROL FOR EU CANDIDATE COUNTRIES AND POTENTIAL CANDIDATES GUIDELINES FOR PIFC COMPLIANT FINANCIAL INSPECTION SKOPJE, North Macedonia, September 2019
  2. 2. 2 Introduction This paper presents a set of guidelines for financial inspection (FI) in order to establish or consolidate a financial inspection function, which is complementary to but does not replace the internal audit (IA) function. The guidelines will be discussed at the 5th SIGMA PIFC conference for EU candidate countries and potential candidates in Skopje, North Macedonia in September 2019. It should be noted that a FI function is not mandatory for EU candidate countries and potential candidates but where a FI function will be established or already exists, the guidelines should be taken into account after their approval at the PIFC conference of September 2019. Further, the way in which the guidelines are implemented will depend on the local regulatory framework for administrative investigations. The guidelines take into account the current legislation of the countries reviewed for this discussion paper (see annex) and what realistically could be implemented in EU candidate countries and potential candidates. Finally, FI cannot replace the responsibility of managers to ensure that their organisation at all times operates within the law to deliver services efficiently and effectively. It is the responsibility of management to make sure that cases of mismanagement and negligence are dealt with promptly and effectively. Cases of fraud and corruption should be reported to the appropriate authorities for action as soon as evidence emerges that this has indeed occurred. Proposed guidelines for financial inspection FI is an ex-post control function. In practice the powers, mandate, scope, and tasks of FI functions in EU candidate countries and potential candidates1 differ, which can influence the development of public internal financial control (PIFC). 1. The ex-post control function of financial inspection should check cases of serious mismanagement, suspected professional misconduct and negligence. The FI function should include dealing with cases of serious mismanagement and suspected professional misconduct by officials of state, regional, municipal institutions or other organisations funded by the state, regional or municipal institutions, such as publicly owned enterprises. It should be less concerned with minor, local cases, which should be dealt with by the managers of the entities themselves, supported by their IA function. These requirements may be illustrated by the following examples: 1 Albania, Bosnia and Herzegovina, Kosovo*, Montenegro, North Macedonia, Serbia and Turkey. * This designation is without prejudice to positions on status, and is in line with United Nations Security Council Resolution 1244/99 and the Advisory Opinion of the International Court of Justice on Kosovo’s declaration of independence.
  3. 3. 3 2. Financial inspection should only check compliance with laws, regulations, rules and national and international agreements. FI should check the regularity of public sector activities, i.e. adherence to formal criteria such as relevant laws, regulations, rules and agreements and not on the propriety, i.e. observance of the general principles governing sound financial management. FI is an ex-post check with focus on the past to ensure financial and budgetary discipline and not on the future to support management, which is the function of IA. Assessing the propriety is a more IA related activity than a FI related activity.2 In general, FI should check the legality of transactions related to budget, accounting and assets and liabilities. All documentation related to the inspections should be checked at the premises of the inspected entity. This should be the minimum position. However, the scope of the FI could be broader, the powers of the FI function could also include: o to carry out cross checks of transactions in the books of the third parties that are involved in the transactions; o the obligation of commercial banks to submit information on bank accounts to the financial inspectors. The need to extending the powers of FI institutions will depend on the set up and powers of law enforcement institutions (e.g. existence of Economic Police) or other administration services (e.g. fiscal investigation services). 3. Financial inspection should cover the whole public sector Public sector is a broad concept. FI institutions should at least have the mandate to inspect o State budget/Municipal budget/Regional budgets, including EU funds o State Owned and Municipal Enterprises o Commercial companies with at least 50% of ownership by state or municipality o Entities funded by State Owned and Municipal Enterprises and Commercial Companies o Guarantees by State or Municipality 2 Compliance auditing by Supreme Audit Institutions includes both aspects, regularity and/ or propriety (ISSAI 4000, clause 24). BOX 2 - EXAMPLE OF NO FINANCIAL INSPECTION The FI institution receives a request from the Ministry of Education. The subject is the Technical University administration. There is a complaint about the legality of employee expenditures. The ministerial salary regulations are not properly implemented. The remedy is to strengthen arrangements for calculation of salaries and management of payroll system. A FI is not needed. The FMC department and/or IA unit of the Ministry of Education will have to investigate the matter and take measures to improve the implementation of the ministerial salary regulations. However, if top management of the Technical School is involved or there is a real suspicion of fraud or mismanagement then the FI institution should start an inspection. BOX 1 - EXAMPLE OF A FINANCIAL INSPECTION The FI institution receives a request of a Civic Association. The subject is the Municipality administration. There is a complaint about improprieties and malfeasance in the work of the municipal top-official. The control of financial management is weak due to possible abuse by the mayoral authority. The remedy is to improve governance and financial management arrangements. ‘External’ FI is needed because there is a suspicion that the top-official is involved in the malfeasance.
  4. 4. 4 o Aid programmes of State/Municipality/State Owned and Municipal Enterprises This should be a minimum position. The authority to inspect (ex-post) the awarding and implementation of Public Procurement of EU contracts and grants could be added too with a view to the future accession of the EU candidate countries and potential candidates to the EU. 4. Financial inspection should be a reactive control activity The FI should only work on the basis of complaints and signals of mismanagement, suspected professional misconduct and negligence. Requests for FI can be submitted by: o the President of the Republic o the Prime Minister’s Office o the Council of Ministers o the Minister of Finance o State authorities, natural persons and legal entities o Internal Audit units o the Public Procurement Agency o the Supreme Audit Institution o Prosecutor's Office o AFCOS o EU institutions such as EC services and OLAF Sources for signals of irregularities could be: o Internal Audit reports o Financial Management and Control reports of the CHU of the MoF o Employees in the public or private sector (‘whistle-blowers’) o Informants (anonymous individuals or otherwise) highlighting elements of financial mismanagement, suspected fraud, theft, destruction of property, abuse of power or corruption. 5. Financial inspection should be a centralised, professional control function FI should be a centralised function and could be located within the MoF or Prime Minister’s office. FI activities are closely related to the mandate and tasks of the MoF. However, location of the FI function in the MoF has the disadvantage that serious suspicions of mismanagement by top officials of the MoF could be hard to investigate by the FI institution, because the head of the FI institution may be overruled by his/her superiors within the MoF. Another option is to locate the FI institution in the Prime Minister’s office, where the FI function will have more power. The disadvantage of that option is that the FI function does not have a close connection with MoF institutions. A centralised FI function guarantees better objective, impartial and professional results than a decentralised FI function A critical mass of professional expertise is essential and should be guaranteed by training or possibly licensing. External experts from private and public entities could be contracted, if needed. 6. Financial inspections should be based on risks As the mandate of FI is broad and in general the resources of FI functions are too limited to meet all requests for inspections, FI institutions should prioritise requests for inspections on the basis of risks and amounts at stake. These risks should be laid down in a database to be developed by the FI institution and should focus on risks for serious mismanagement, suspected professional misconduct and negligence by
  5. 5. 5 officials of state, regional, municipal institutions or other organisations funded by the state, regional or municipal institutions, such as SOEs and MOEs. The limited resources should be applied effectively and not overlap with IA, SAI or Prosecutors work. In any event, FI should be cautious in inspecting suspicions of fraud and corruption. Law enforcement offices should be contacted in an early stage of the inspection in order to avoid making procedural mistakes, which could lead to declaring the case inadmissible by the Court. 7. Financial inspectors should have unlimited access to premises and documentation of the inspected entity. Financial inspectors should have unlimited access to premises and documentation of the inspected entities. In the event, financial inspectors FI do not have access, the FI regulations should define that access will be guaranteed by top level management (e.g. via the Minister of the Interior) or the individual responsible and/or the inspected entity shall be penalised. 8. Financial inspection should hold perpetrators administratively liable. The FI should be authorised to hold inspected entities accountable for violating laws and regulations but can only penalise administratively. It is not have law enforcement powers or authority. The FI institution should have several instruments available. Depending on the nature of the violation, the FI institution could request to eliminate irregularities or refund the damage. The FI institution should request the inspected entity and/or the entity to which the inspected entity is subordinated to take action but the FI should not have powers to force the inspected entities to do so since it would be assuming a responsibility that belongs to the management. In the event the management of the inspected entity does not co- operate with the financial inspectors or does not follow up the request of the FI institution to take action, the FI institution can start a misdemeanour procedure, either against the entity or the responsible official. In the event of a suspicion of a criminal offence, the FI institution should contact the Prosecutor’s office. 9. Financial inspection should report to the entity inspected and to the institution responsible for that entity. If the institution responsible for the entity inspected is involved in the FI, the FI institution should report to the next, higher level. The annual FI report should be discussed at government level and published on the FI website. Inspected entities should have the opportunity to comment on draft FI reports.3 The Head of the FI institution should be responsible for the contradictory procedure but he or she should inform his or her superior (e.g. the Minister of Finance) about FI results. In the event the FI report concerns violations on laws or regulations by the head of the inspected entity, the draft FI report should be submitted to the head of the entity to which the inspected entity is subordinated. That principle should apply equally to the next higher echelons. If the head of the main entity or other top-official is involved in the FI, the FI institution should report to the minister; if the minister is involved, the FI institution should report to the Prime Minister. To increase the impact of FI work the annual report of the FI institution should be discussed at Government level, preferably together with the CHU reporting on the development of PIFC. Based on this reporting, the Government should then define an action plan. To foster transparency of the FI activities summaries of the individual FI reports (anonymised) and the annual report should be published on the FI website. 3 In some countries the draft findings are called ‘minutes’ or ‘act’. In this discussion paper, ‘draft FI report’ is equal to ‘minutes’ or ‘act’.
  6. 6. 6 10. Financial inspection requests to eliminate violations of laws and regulations should be followed-up regularly FI institutions should follow up their requests to eliminate violations of laws and regulations. Inspected entities should report to the FI institutions on measures taken to eliminate violations. The FI institutions should set-up and maintain a database with different categories of findings, which could be used for defining follow-up activities and the risk-based programming of requests for FI. Follow-up activities should include checking if the management of inspected entities and next higher echelons did carry out the right actions correctly and if reported cases to Prosecutor’s offices have led to prosecutions and convictions. 11. Financial inspection should co-operate with functional national and international partners FI should not work in isolation. Both, the audit functions and the FI could mutually benefit from each other. The audit and FI functions are complementary. The IA could signal to the FI violations of laws and regulations or mismanagement, which are worthwhile to investigate in depth. Where the IA stops, the FI could start its work. The results of FI could a source for the risk-analyses of the audit institutions. Law enforcement institutions could be other important key-players for FI. FI institutions should be professionally equipped to prepare criminal offences and to assist law enforcement institutions in successfully prosecuting perpetrators of crimes. In relation to irregularities with EU funds, the Anti-Fraud Co-ordination Service (AFCOS) should be the contact point for FI. The FI institutions should report to the AFCOS found irregularities related to spending of EU funds. With a view to the future accession of the EU Enlargement to the EU, the FI institutions could closely co-operate with the EC services and the European Court of Auditors. However, the FI institutions could only be of help to those EU institutions if they have the authority to inspect EU funding to the final beneficiary, which could be a citizen.