Financial audits 2022 detected 2 groups of problems: priority measures and expenses for remuneration

17.05.2023.

The State Audit Office of Latvia has completed annual financial audits of ministries and central government institutions by providing 26 audit opinions on the annual reports for 2022: 25 unqualified audit opinions and 1 qualified audit opinion to the Chancellery of the President of Latvia due to the limitation of scope. In general, the quality of accounting and annual reporting in ministries remains at the level of previous years and can be assessed as adequate.

During the financial audits in 14 departments, 20 compliance issues specific to these departments were also assessed by investigating the spending of 181 million euros. Unfortunately, the situation has worsened this year, as the number of modified opinions has increased (50 % of opinions provided are modified). It means that significant irregularities were discovered in half of the assessed issues such as inappropriately spent funding, planned results were not achieved, etc.

BRIEFLY

  • In general, the quality of accounting and annual reporting in the departments remains at the level of previous years and can be assessed as adequate. The State Audit Office of Latvia highly appreciates that during the financial audits of the annual reports for 2022, more than 95% of the detected errors were corrected.
  • On the other hand, there are many problems in the planning of priority measures, the absorption of the allocated funding, and the achievement of results such as unbalanced planned measures that also affected the absorption of funding (one third of 145 million euros audited were not used for the initial purpose) and the achievement of goals (the goals were not achieved or achieved only partially in 62 % of cases).
  • Problems also related to expenses for remuneration, for example, significant differences between the monthly salaries determined by the departments.
  • On 8 June 2023, the State Audit Office of Latvia will organise a meeting with the state secretaries of ministries, during which the problems identified during the financial audits will be discussed.

I. The key audit matters when conducting financial audit of the accuracy of annual reports for 2022

When auditing the accuracy of annual reporting for 2022 at the Chancellery of the President of Latvia which had received unqualified opinions until now, there was a limitation of scope in the 2022 audit, which was significant in terms of value, therefore the Chancellery has given a qualified opinion. At the time of the audit, complete, relevant, and timely information was not available, so we could not obtain evidence of the amount of service actually received within the framework of one contract for the purposes of the Three Seas Initiative summit and summit preparation event and the justification of the amount of expenses arising from it. In addition, the Chancellery specified the submitted documents about the amount of service actually received several times during the audit.

In its turn, in the Ministry of Economics, we paid attention to the established control system for the administration of measures to mitigate the consequences of the energy resource price crisis, which was allocated 502.96 million euros in 2022, of which 70% or 351.39 million euros were spent. Considering the importance and uniqueness of this support measure, the State Audit Office of Latvia assumed that the internal control and monitoring system to ensure the administration of this measure should also have been adequate. The audit concluded that the internal control system created during the first support period, which was administered by the Ministry of Economics, was not sufficient to ensure the compliance of the information included in the bills of energy traders with the amount of compensation actually granted to end-users. Therefore, the Ministry of Economics is recommended to carry out follow-up checks for all measures of the first support period. On the other hand, for the second support period, the administration of which was provided by the State Construction Control Bureau (SCCB), one has concluded that a methodology has been established and the SCCB provides follow-up checks to verify the use of the funds allocated to the support. More information is available HERE.

In the scope of the investigations during two audits, in the Ministry of Agriculture and the Ministry of Education and Science, the State Audit Office also included investigations in state scientific institutes, and deficiencies in accounting records, internal control environment, as well as in the general assessment of directors' responsibility were found there.

II. The key audit matters when assessing compliance issues during financial audits

When assessing the accuracy of the annual consolidated financial statement and compliance issues, the State Audit Office identified two problem blocks in which irregularities were found and which were relevant for several departments: (1) planning and use of funding for priority measures and (2) expenses for remuneration in state administration.

Among 20 assessed compliance issues were related to priority measures. Although the State Audit Office of Latvia has already indicated in 2018 that financial management should be improved, that is, improve the planning of funds and monitoring of their spending carefully, problems have been identified in the priority measure planning, the use of allocated funding, and the achievement of the priority measures planned results in several cases this year. Irregularities in funding planning create difficulties in using priority measures funding for the original purpose of allocation. In general, it was established that one third or 49.29 million euros from the investigated 144.51 million euros were not used for initial purpose of allocation. In addition, even though the allocated budget funds have not been used for their initial allocation purpose and have been redistributed to other measures, the results planned for 2022 have not been achieved or have been partially achieved in most of the investigated cases (8 out of 13 or 62%). Taking into account the financial audit findings about the planning and execution of priority measures, the State Audit Office of Latvia invites the Ministry of Finance to assess priority measure applications more carefully in the context of limited fiscal space during the budget development stage to facilitate the availability of balanced state budget funding for development priorities or departmental needs.

Examples where adverse opinions on compliance issues have been given in connection with priority measure funding:

  • Ministry of Health because with the 0.84 million euros allocated additionally to the priority measure to provide state-paid healthcare services for children with autism spectrum disorder (ASD), the planned results have not been achieved. Namely, 0.69 million euros (82%) were redistributed to other healthcare services, providing services for children with ASD in a significantly smaller amount than planned, and their availability outside Riga was very limited. More information is available HERE.
  • Unfortunately, when assessing implementation of propriety measures by the Ministry of Health, the State Audit Office has already detected a similar situation in previous years as in 2022 when the Ministry of Health does not achieve its set performance indicators and a part of the allocated but unused funding is redistributed to the provision of other state-paid healthcare services.
  • Ministry of Economics because planned results have not been achieved regarding the number of supported large investment projects from 41 million euros of priority measure funding granted to the Ministry of Economics in 2022 to ensure the availability of finance for large investment projects for economic recovery after the crisis caused by COVID-19. Although financing of the priority measure was transferred to JSC Development Finance Institution Altum at the beginning of 2022, the issuing of loans to economic operators was not started last year. When submitting the priority measure application, the Ministry of Economics did not assess duration of loan granting process from the announcement of the program to the conclusion of contracts carefully enough.
  • Ministry of Welfare Because when requesting funding of 9.8 million euros for increasing the remuneration of caregivers in institutions of long-term social care and social rehabilitation, reasonable assumptions have not been made and the actual situation has not been identified so that absorbing funding would be possible in accordance with the proposed criteria. Therefore, only 6.1 million euros (62%) have been spent as intended to increase the remuneration of caregivers and to introduce a position of senior caregiver. In their turn, unused 3.6 million euros were spent for the needs of other social care centres not related to the purpose of priority measure. The lack of human resources and the low remuneration of those employed in social care centres are still one of the challenges of the welfare sector, which has not been allocated sufficient funding for years. For 2023, the lowest monthly salary offered by the Ministry of Welfare for caregivers is only 9 euros more than the national minimum monthly salary (620 euros). Since this funding for increasing the remuneration of caregivers is also planned for 2023, the Ministry of Welfare must find a solution to use it according to the purpose.

Examples where, qualified opinions on compliance issues in connection with priority measures are issued:

  • Ministry of the Interior because, although priority measure funding of 20.7 million euros for increasing remuneration in the services of the interior was spent properly in general, 3.1 million euros (15%) were redistributed to other purposes related to payment of remuneration, even though the goals of priority measure were not fully achieved. Although equalising monthly salaries of most officials of the Ministry of the Interior was possible, there are still significant differences in the highest monthly salary groups. In connection with strengthening the capacity of the State Border Guard, it has not been possible to increase the proportion of filled positions, as well as the new special bonuses for border guards have been paid in a significantly smaller amount than planned. The goal of ensuring that the monthly salary of investigators matches the monthly salary of district (city) prosecutor has not been achieved either. More information is available HERE.
  • Public Electronic Mass Media Council (PEMMC) because of initially allocated funding of 801,400 euros for the priority measure last year, only 10,726 euros (1.3%) has only been spent for the purpose.

In its turn, in connection with inappropriately used funding (not PP) on compliance issues, an adverse opinion was given to the Ministry of the Interior because only 24% or 2.8 million euros from the 11.7 million euros allocated for the purchase of uniforms for the officials of the Ministry of the Interior with special ranks were used appropriately last year, but the rest of the funding was redistributed and spent for other purposes. The use of funding in accordance with the purpose of the allocation has been hindered by the fact that the Ministry of the Interior has not been able to complete procurement procedures and conclude contracts for the purchase of uniforms successfully. The redistributed funding was used to cover the increase in the price of utility services and fuel, to pay overtime for employees of the State Police, for foreign business trips of employees of the State Border Guard and the State Fire and Rescue Service, etc. In the following years, additional funding for the new design uniforms is intended only for the State Police, which means that they will not be fully implemented in the services of the interior for several more years.

The second block of issues was irregularities were detected while assessing compliance issues and which are relevant for several ministries, is related to expenses for remuneration. Last year, the reform of the remuneration system was launched in state administration to improve the efficiency, quality, and competitiveness of state administration's work, and among other things, it envisages changing a proportion between permanent and variable part of salary by increasing salaries and reducing the amount of bonuses. No additional funding was allocated for the initial stage of the reform (for 2022), and institutions had to find additional resources for increasing remuneration in their budgets when carrying out internal reforms. The minimum of new monthly salary scale must be reached in all state and municipal institutions by 1 January 2027. The State Audit Office of Latvia paid special attention to remuneration issues in certain departments, for instance:

  • The Corruption Prevention and Combating Bureau was allocated 2 million euros for the priority measure which was spent in accordance with the goal of the remuneration reform, but the opportunity to set a higher monthly salary for those CPCB officials who were involved in investigative work in particularly complicated, serious or especially serious interregional or international crime cases has not been used. However, it was precisely the uncompetitive monthly salary of investigators that was the reason for allocating additional funding to increase the monthly salary of CPCB employees. Namely, it was possible to determine a monthly salary of up to 3,016 euros for investigators (corresponding to the monthly salary of a district (city) prosecutor) in 2022, but the monthly salary for positions of this category in the CPCB did not exceed 2,159 euros for senior inspectors and 2,738 euros for chief inspectors. Although the purpose of amendments to the Remuneration Law was not only to increase the competitiveness of remuneration but also to change the proportion between permanent and variable part of remuneration, the CPCB continues its usual practice by determining regular bonuses for almost all employees, which make up about a third of the total expenses for remuneration.
  • The Ministry of Finance received 4.5 million euros with the aim of long-term implementation of a competitive, motivating, and result-oriented remuneration policy which it spent appropriately. The priority measure application was submitted in compliance with statutory procedure stipulating that the ministry could submit updated priority measure applications after the government's decision on supported priority measures, including those not previously submitted to the government, however, the fact that the priority measure application was not assessed according to the general procedure does not contribute to the transparency of the state budgeting process.

Regarding expenses for remuneration compensation, one should mention audit findings in the departments of the Ministry of Justice: in 2022, several institutions had many employees whose monthly salaries were lower than the minimum of the monthly salary scale. Although according to the remuneration reform, it should be aimed at up to 70% of employees in the state administration receiving monthly salaries corresponding to the midpoint of the monthly salary scale, only up to 4% of employees received monthly salaries at this level in 7 departments out of 14 institutions of the Ministry of Justice last year. IT might affect the quality of the institutions' work negatively, as well as pose significant risk of employee turnover and the risk of qualified personnel leaving the field of justice.

A qualified opinion was also issued to the Ministry of Culture when assessing the program of measures to support creative people. Although 502,167 euros allocated to it were spent appropriately, there are significant inconsistencies in the observance of the principle of equality among creative people of different groups, people who have reached retirement age, as well as among self-employed people. Namely, creative people who have reached retirement age have advantages compared to other creative people and to other people who have reached retirement age. The State Audit Office of Latvia considers that the support grant for creative people who have reached retirement age to ensure living conditions is essentially a social benefit, and by providing additional support to creative people who have reached retirement age to cover medical costs and utility payments, a double social support system is created in the country.

In total, five audit reports reveal facts about the detected violations, which should be reported to the competent authorities for liability assessment.

The State Audit Office of Latvia highly appreciates that more than 95% of the detected errors were already corrected during the financial audits of annual financial statement for 2022, like previous years.

State Audit Office recommendations #PēcRevīzijas

There are 35 recommendations issued to departments and ministries in financial audits. One recommendation has already been implemented during the audit, 25 recommendations will be implemented by the end of the next financial audit, 7 recommendations will be implemented within two to three years, and 2 recommendations - until 2027.

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.

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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