To streamline the financial auditing by the State Audit Office of Latvia and redirect the saved resources to performance and compliance auditing while ensuring a high level of assurance on public sector financial data, a draft law on amendments to the State Audit Office Law has been elaborated. It has been sent to the Budget and Finance (Tax) Committee of the Saeima (Latvia’s Parliament).
The drafted amendments to the Law stipulating that the State Audit Office of Latvia will henceforth issue a single audit report on the accuracy of an annual consolidated financial statement of the state (ACFSS) instead of 27 separate audit opinions mark a new level in financial audits of public sector. Namely, the State Audit Office of Latvia is forwarding the proposed changes to optimise the resources invested in financial audits, as the results of recent years allow us to conclude that the quality of annual reports drafted by state institutions has improved, for example, a number of unmodified opinions (unqualified opinions) on the accuracy of annual reports and a number of audit reports in which no irregularities in annual reporting have been discovered are stabilising. Improvements have been achieved thanks to the cooperation between state institutions and the State Audit Office of Latvia, that is, approximately 95% of errors detected by the State Audit Office of Latvia are eliminated or corrected already during financial audits, and the State Audit Office of Latvia continues this practice actively. The priority remains to provide a professional and reliable opinion on the “national household”.
The transition to a single audit opinion instead of the previous 27 opinions (14 ministries + 12 central governments institutions + Annual Financial Statement) is included in the Strategy of the State Audit Office of Latvia (2022-2025). “By implementing this project, we will be able to streamline the financial audit processes and direct the optimised resources to performance and compliance audits. We plan to change the approach to financial audit procedures significantly and make appropriate changes to the financial audit methodology. It is also planned to automate the analysis of several financial report items and individual financial audit procedures with data analysis tools. As a result, state institutions that are directly subject to financial audits and the public at large will receive a clearer and more unified message whether an annual report shows accurately and reliably what the Republic of Latvia owns, how much we have spent and how much we have received in taxes and other payments, and what the total government debt is. In its turn, such a single, accessible audit report on the essentials will help the Saeima, government, local and regional governments, and other decision-makers use it more effectively in their work, and such a report format will be more user-friendly in general,” emphasised Auditor General Edgars Korčagins by outlining the essence of the amendments to the Law and the expected benefits.
The intended changes in the work organization of the State Audit Office of Latvia will take place in accordance with the principles set out in the International Standards on Auditing to ensure confidence in public sector financial data. It should be noted that such an approach is also implemented by supreme audit institutions (SAIs) in Latvia’s neighbouring countries, id est, the SAI Lithuania implements it since 2016 and the SAI Estonia implements it since 2017.
Regarding the significance of performance audits, Mr Korčagins points out, “As state budget expenditure increase year by year, public demand for the accuracy of budget spending accounting and assessment thereof also increases, including whether the financial resources spent have helped solve current societal problems and achieve important goals. The main tool that allows us to assess and facilitate the use of public funds to be efficient and provide the greatest possible benefits to the public is performance audits in particular. Therefore, it is natural that their role in the work of SAIs has increased worldwide in recent years.” Also, one of the goals set in the Strategy of the State Audit Office of Latvia (2022-2025) is to assess the aspect of efficiency or performance more in audits.
Although the draft law does not affect the development of society and the national economy directly, an indirect impact will be observed by redirecting part of the resources of the State Audit Office of Latvia from financial audits to performance audits, since the performance audits have the potential to provide the greatest benefit to the public by ensuring that every euro invested provides the greatest possible benefit to citizens. For example, the return ratio of impact of the State Audit Office’s audit recommendations has been 1:5.6 in 2022, which is 5.6 euros for every euro invested in the budget of the State Audit Office of Latvia.
One should note that the approach proposed in the draft law to move from issuing 27 audit opinions by the State Audit Office of Latvia to drafting a single audit report is also logically linked to the work initiated by the State Chancellery and the State Treasury on the establishment of a single service centre in public administration, which envisages the centralisation and standardisation of accounting and human resources functions with the aim of safeguarding a digitalised, standardised and more effectively managed system in the long term.
To switch over to the provision of a single audit report, the State Audit Office of Latvia has already started preparatory work, for instance, by automating the analysis of several financial statement items and individual audit procedures with data analysis tools, as well as working in cooperation with state institutions to standardise accounting data and improve their quality. In this way, the State Audit Office of Latvia will help indirectly to implement the project for establishing a single service centre more successfully, as it will point out the deficiencies in data quality to state institutions in a timely manner.
How will financial auditing be conducted practically after the amendments to the State Audit Office Law are adopted?
- After the adoption of the draft law, when auditing the ACFSS, the State Audit Office of Latvia will not have to provide an audit opinion and audit report on each of the annual reports of 14 ministries and 12 central government institutions, as well as an Annual Financial Statement of the State, and there will be one audit report on the entire amount of an annual consolidated financial statement of the State.
- The State Audit Office of Latvia will continue to perform audit procedures in ministries, their subordinate institutions and central government institutions by sampling, and the information obtained in an audit will be used to express an opinion on the accuracy of the ACFSS.
- Upon completion of the financial audit procedures in the ministries, their subordinate institutions and central government institutions included in an audit sample, the heads of these institutions will be informed of the results of investigations by both indicating the irregularities discovered and providing information on the auditors’ observations, which could help improve an internal control system.
It is expected that the amendments to the State Audit Office Law will take effect on 1 January 2025, and the new procedure will be applied in 2026 for the first time by providing one audit opinion on the ACFSS for 2025.
About the State Audit Office of Latvia
The State Audit Office of the Republic of Latvia is an independent, collegial supreme audit institution. The purpose of its activity is to find out whether the actions with the financial means and property of a public entity are legal, correct, useful and in line with public interests, as well as to provide recommendations for the elimination of discovered irregularities. The State Audit Office conducts audits in accordance with International Standards of Supreme Audit Institutions of the International Organization of Supreme Audit Institutions INTOSAI (ISSAI), whose recognition in Latvia is determined by the Auditor General. Upon discovering deficiencies, the State Audit Office of Latvia provides recommendations for their elimination, but it informs law enforcement authorities about potential infringements of the law.
100 years of AUDIT STRENGTH
On 16 August 2023, the State Audit Law will turn 100 years old. With the adoption of this Law, the State Audit Office from a formal de facto institution founded on 2 December 1918 became a de jure independent, collegial supreme audit institution of the Republic of Latvia. The State Audit Office is one of the independent state institutions enshrined in the Satversme (Constitution) of Latvia. The Constitution was signed by Roberts Ivanovs as the secretary of the Constitutional Assembly, who was then confirmed as the Auditor General. He worked as the first Auditor General for 12 years. His signature confirmed the text of our Constitution alongside that of Jānis Čakste.
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