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Financial Inspection in the Public SectorSvilena Simeonova

1. Overview of the main features of the Financial Inspection function

2. Different views and models of Financial Inspection in the EU Member States

3. Common ground and differences between Financial Inspection, External Audit and Internal Audit

4. How to keep Financial Inspection compatible with modern PIC?

5. Development of Financial Inspection in Bulgaria

6. Relationship between Financial Inspection, External Audit and Internal Audit - good practices and challenges

7. Looking ahead

CONTENTS

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Centralized independent institution: external to the inspected entity

Usually carries out compliance control for legality

Ex post activity

The main goals are to detect, investigate and penalize the responsible persons and institutions

Mainly operates on the basis of complaints or signal from the public, requests from public institutions

1. OVERVIEW OF THE MAIN FEATURES OF THE FINANCIAL INSPECTION FUNCTION

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Financial Inspection (FI) exists in about half of the EU Member States.

In the majority of the 13 newest Member States – Bulgaria, Croatia, Hungary, Poland, Romania, Slovak Republic

FI is established separately from Internal Audit. FI is deemed necessary until decentralized internal control and internal audit becomes fully embedded in administrative culture. FI usually reports to the Minister of Finance.

As well as in Belgium, France, Greece, Italy, Portugal and Spain Financial Inspection is an important part of the control system and employs many staff. Where the supreme audit institution is organized as a Court of Accounts with judicial powers, Financial Inspection also has to report any detected irregularities to that Court.

2. DIFFERENT VIEWS AND MODELS OF FINANCIAL INSPECTION IN THE EU MEMBER STATES

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2. DIFFERENT VIEWS AND MODELS OF FINANCIAL INSPECTION IN THE EU MEMBER STATES

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Specific characteristics Member StatesNo central Financial Inspection function Denmark,

Finland, Sweden, Estonia, Latvia, Lithuania, Austria, Germany and UK

Financial Inspection and Internal Audit exist – but IA is clearly separated

The majority of the 13 newest members of the EU

Financial Inspection and Internal Audit are under one roof in one central institution, or the central unit for coordination of Internal Audit is a part of the Financial Inspection body

Belgium, France, Spain, Portugal

FI does not impose sanctions. That is a duty of the SAI – of the Court type

France, Italy, Portugal and Spain

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3. COMMON GROUND AND DIFFERENCES BETWEEN FINANCIAL INSPECTION AND NATIONAL AUDIT OFFICE (1)

SIMILARITIES:

From outside (External)

Ex post activities

Covers all public sector

Sanctioning power (where exists)

Mandate to fight fraud and corruption

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DIFFERENCES FINANCIAL INSPECTION NATIONAL AUDIT OFFICE

Position in the state structures and reporting line

Subordinated to the Minister of Finance.Reports to the Minister of Finance and to the Government

Reports to the Parliament and to the public

Initiation of the activity

Acts on complaints and requests from citizens and other institutions

Works according to the Annual plan and requests from the Parliament

Aims and scope of work

Focus on legality Legality, but also Efficiency, Effectiveness and Economy. Also verification of the financial statements of the budget organizations

3. COMMON GROUND AND DIFFERENCES BETWEEN FINANCIAL INSPECTION AND NATIONAL AUDIT OFFICE (2)

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DIFFERENCES FINANCIAL INSPECTION NATIONAL AUDIT OFFICE

Approach Investigations of particular cases of irregularities, legal violations, fraud and corruption - inspection

Analysis of implementation of the government policy as intended

Types of checks

Inspection: legality check Financial, compliance and performance audits

Consequences of the activities

Imposing sanctions, referring cases of fraud to the prosecutor's office, giving mandatory instructions

Recommendations for improvementUsually not (with exceptions) sanctions

3. COMMON GROUND AND DIFFERENCES BETWEEN FINANCIAL INSPECTION AND NATIONAL AUDIT OFFICE (3)

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3. COMMON GROUND AND DIFFERENCES BETWEEN FINANCIAL INSPECTION AND INTERNAL AUDIT(4)

SIMILARITIES:

Generally ex post checks

Independence

Full access to information

Competence to give recommendations as a result of engagement performed

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DIFFERENCES: FINANCIAL INSPECTION INTERNAL AUDIT

Position and reporting Outside of the organization Reports to the Minister of Finance and the Government

Inside of the organizationReport to the Head of the organization and to Audit Committee

Initiation/basis for the activities

Complaints and requests from citizens and other institutions

Risk-based annual plan

Aims Detecting violations and corrective actions

Assessing Internal Control system and recommending improvements Assurance and consulting function

Scope Mostly financial transactions and procedures: legality

All activities and aspects of the Internal Control System; legality and performance

3. COMMON GROUND AND DIFFERENCES BETWEEN FINANCIAL INSPECTION AND INTERNAL AUDIT (5)

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DIFFERENCES: FINANCIAL INSPECTION INTERNAL AUDIT

Perspective Focused on individuals, conclusions on legal compliance

Focused on the system

Direction of the results To the past - to find the facts towards financial and budgetary discipline

To the future - to help management to improve the system

Responsibilities in dedicating and investigating fraud and corruption

Detection, investigation, sanctioning Prevention, detection of indicators

Methodological ground No generally accepted standards International standards of the IIA

3. COMMON GROUNDS AND DIFFERENCES BETWEEN FINANCIAL INSPECTION AND INTERNAL AUDIT (6)

4. FINANCIAL INSPECTION AND PIC CONCEPT

Main pillars of the PIC model

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• Strengthening decentralized managerial accountability and internal control

• Establishment of independent Internal Audit within public sector organizations – different practices

• Establishment of Central Harmonization Unit(s) for Internal control and Internal Audit

• Financial Inspection (as fraud and corruption investigation function) in the most of the EU countries exists as central separate entity (institution) or together under the same head with Internal Control or Internal Audit coordination function

Cuts across the managerial accountability of budget holders

Administrative burden on the entity under inspection/audit

Possible difference of conclusions and opinions on the subject matter

Additional resource cost to the public sector

Possible overlapping and duplication of tasks

Lack of mutual respect and mistrust based on lack of understanding of the roles and poor communication

4. FINANCIAL INSPECTION AND PIC CONCEPT (2)

Challenges where centralized and separated Financial Inspection exists

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In the case of separate functions and institutions it is important to ensure:

GOOD COMUNICATION AND COOPERATION BY:

A clear mandate for each function and institution

Coordinating work programs and findings

Regular meetings and joint trainings

Systematic exchange of information

4. FINANCIAL INSPECTION AND THE PIC CONCEPT (3)

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Until 2000 - State Financial Control under the Minister of Finance

Main characteristics:

• 1200 staff in central and local level;

• one and only institution for control and inspection (the NAO has been established in 1995, Internal Audit does not exist);

• close relations with the prosecution office;

• type of control – ex post inspection;

• rights to investigate and impose administrative and financial sanctions;

• sweeping powers over the central and local administration and the enterprises.

5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA

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After 2000 – reforms in two stages:

2000 – 2006 :• PIFC Policy Paper

• New legislation

• Introduction of PIFC concept (and COSO elements) and introduction of Internal Audit function – centralized

• Institutional changes – Public Internal Control Agency (as a model similar to French and Spanish system)

• Internal Audit function is mixed with imposing sanctions(fines) for law violation

5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA(2)The system through the time

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2006 – to present day• Three new laws in force – Financial Management and Control in

the Public Sector Act, Internal Audit in the Public Sector Act, State Financial Inspection Act

• Segregation of Internal Audit and Financial Inspection

• Decentralization of the Internal Audit function (Internal Control and Internal Audit goes close to the Anglo-Saxon model)

• Establishment of Central Harmonization Units for Internal Control and Internal Audit in the Ministry of Finance

• Development of national standards, based on the IIA Standards

• Training and certification system for internal auditors

5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (3)The system through the time

Establishment of State Financial Inspection Agency Legal framework - State Financial Inspection Act, Regulation for

implementation of the law, Regulation for the structure of the Agency; Status – Agency subordinated to the Minister of Finance; Administrative capacity – 190 inspectors and administrative staff

(for comparison -National Audit Office - 520 auditors and administrative staff, Internal auditors in the public sector - 440 in the 173 organizations);

Scope of inspected entities – budget organizations – ministries; agencies; municipalities; state and municipal enterprises; other;

Types of activities – ex post inspections, checks for compliance with the laws, focus on assets, expenditures, public procurement procedures;

Variety of Inspection activities: according Annual Plan – only public procurement procedures

5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (4)

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On the requests of the Council of Ministries, Minister of Finance, Prosecution Office and other public institutions

Complaints and signals from the citizens

Responsibility and powers Written mandatory instructions

Recommendations to the competent bodies

Collecting evidence for the Prosecution Office

Administrative (fines) and civil sanctions/penalties (the penalized persons have a right to appeal the sanctions to the court)

Active communications with other institutions

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5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (5)

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5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (6)

437 / 70.6%

86 / 13.9%

72 / 11.6%

21 / 3.4%

3 / 0.5% Requests for financial inspections2013

Signals from citizens and NGOs

Information from NAO and Pub-lic Procurement Agency

Decrees of the Prosecurtor's of-fice

Requests by the CoM or the Min-ister of Finance

Signals from AFCOS - Protection of the European Union Financial Interests Directorate

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5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (7)

138

47

13150

15

115

Distribution of the 478 financial inspections accord-ing to type of the entities 2013

MunicipalitiesState budget spending unitsMunicipal budget spend-ing unitsState or municipal commercial companiesMinistriesOther

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5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (8)

State

commerci

al co

mpanies

Municipal

commerci

al co

mpanies

Others

Municipali

ties

State

budget s

pending units

Ministrie

s

Other m

unicipal

budget s

pending units

0

100

200

300

400

500

600

700

800

900800

471 464 434

18294

39

308 287

389

206138

18 30

Inspected 2 484 public procurement procedures and 1 376 identified violations 2013

Inspected public procurement proceduresPublic procurement procedures in which violations are identified

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5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (9)

Distribution of the identified amount of violations of the budget and finance discipline according the type of

entity 2013

MunicipalitiesMunicipal budget spending unitsState budget spending unitsState commercial companies Municipal commercial com-panies Others

Other facts of the Financial inspection Activities in 2013

Total number of conducted inspections - 478

Number of conducted procedures concerning public procurement – 2484, number of established violations - 1376

Number of other violations of the budget discipline

Number of acts engaging administrative liability – над 2000

Number of acts engaging civil liability – 18

Over 1800 findings sent to other competent authorities, a total of 63 written instructions served

170 reports sent to the prosecution office

5. DEVELOPING OF FINANCIAL INSPECTION IN BULGARIA (10)

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Good relationships are necessary for achieving cost-effective Public Control System as a whole;

The laws stipulate exchange of information; other types of communication are outlined in specific agreements or are informal;

The international standards for Internal and External Audit (IIA and INTOSAI) also set out models for coordination and using the work of the other auditors and assurance providers;

Important part of the communication is a common language and terminology;

Challenges – mistrust and even jealousy, immaturity of the systems, no appropriate methodology, lack of reforms, different opinion on the same cases, administrative burden on the organizations under control.

6. RELATIONSHIPS BETWEEN FINANCIAL INSPECTION, EXTERNAL AUDIT AND INTERNAL AUDIT - GOOD PRACTICES AND CHALLENGES

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Cooperation Agreement• Parties of the agreement 2011• Objectives• Contents• Implementation

Common Activities • Analysis of the State Budget execution 2014

Organization Performance Reporting

6. RELATIONSHIPS BETWEEN FINANCIAL INSPECTION, EXTERNAL AUDIT AND INTERNAL AUDIT - GOOD PRACTICES AND DIFFICULTIES(2)

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Continual improvement of the Public Sector inspection and audit systems; improving the methodology

More clear mandate for each function, written procedures for interaction

Active position of all parties Transparency and publicity of the common activities and the results Building a network for common understanding and language – regular

meetings, trainings Possibility for reliance to one another’s work and findings

Coordinated, cost-effective and useful Audit and Inspection System in the Public Sector

7. CHALLENGES FOR FUTURE IMPROVEMENT

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THANK YOU!!!

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