The State Audit Office of Latvia has concluded the annual financial audit of the annual consolidated financial statement of the state (ACFSS) by providing two opinions: 1) on the accuracy of the ACFSS 2023; 2) on a compliance matter, has the information on the results achieved with the budget spent in the reporting year been elaborated, available and monitored in accordance with legislation and best practice. The audit also assessed the progress of the implementation of the previously given recommendations, including how successfully the independence and impartiality of sworn auditors has been strengthened by limiting the right to provide so-called “non-audit services”. This is the first year that both the ACFSS and the opinion on it are drafted one and a half months earlier.
BRIEFLY
- The ACFSS 2023 consists of 73 reports; the balance total was 40.6 billion euros, the consolidated national debt was 17.7 billion euros, revenues constituted 15.6 billion euros, and expenditure totalled to 17.0 billion euros.
- Audit opinion on the ACFSS 2023 is qualified due to significant limitations on scope (2.3 billion euros). The reason for such an opinion is the still unsolved problems in the State Revenue Service’s (SRS) Payment Administration Information System (MAIS) that prevents auditors from obtaining adequate evidence of the information included in the SRS tax report.
- The audit opinion on the compliance matter is also qualified. When assessing how the results management and control system established by the Ministry of Finance and the State Chancellery worked in the practice of the four ministries included in an audit sample, significant inconsistencies with legislation and conceptual guidelines on international public sector accounting standards were detected.
- In cooperation with the Latvian Association of Certified Auditors, the Ministry of Finance must improve control measures for monitoring the provision of audit services to public sector institutions.
“Although the SRS has made improvements to MAIS, including by providing a crucial function for retrieving analytical accounting data of book-keeping accounts, it was not enough for us to obtain adequate audit evidence on the information provided in the SRS tax report. From all the information included in this report, it was possible to gain assurance about only one of the items in the report and not completely, too. We appreciate the efforts of the SRS in solving the problems, however, the pace of improving the quality of the SRS tax report needs to be increased because the recommendation to eliminate deficiencies and errors in the accounting data of state budget payments administered by the SRS has been active since 2021,” indicated Ms Ilze Bādere, Council Member of the State Audit Office of Latvia.
SRS tax report
Since 2021, state budget payments administered by the SRS are accounted for in MAIS following the principle of accrual-based accounting. However, an annual SRS tax report, which is drafted as a result of this accounting, has not been verifiable since its first elaboration in 2021 due to MAIS problems, as it was not possible to obtain analytical data by taxpayers, algorithm errors were discovered, etc.
In 2023, improvements have been made to MAIS, the most important of which was the provision of analytical records. However, in the SRS tax report submitted on 29 March 2024, the State Audit Office of Latvia detected several irregularities, for example: 1) unjustified long-term claims for taxpayers whose debt has been discharged or covered with a contribution; 2) manually made corrections to the ledger without providing analytical records of these corrections; 3) the information specified in the analytical accounting of ledger accounts is not traceable; 4) the total sums of undeciphered entries are included in the analytical accounting of book-keeping accounts for a specific period in the distribution by taxpayers; 5) the debts of wound-up/ deceased taxpayers have not been cleared, including a principal amount, late payment charges and fines, as well as the overpayments of wound-up/ deceased taxpayers have not been cleared; 6) a reduction in the value of claims for the principal amount of taxpayers’ debts, which exceeds the total principal amount of taxpayers’ debts indicated in the ledger, has been made.
The Cabinet Regulation on the annual reporting provides for a possibility to clarify the identified gaps, data inconsistencies or errors from July 1 to July 10. Taking into account the amount of errors found in the SRS tax report submitted on 29 March 2024, the SRS actually continued drafting this report, also continuing the inventory and correcting the identified inaccuracies. According to the explanation by the Ministry of Finance, this situation occurred because the correction of the identified MAIS tax accounting functionality and data inaccuracies was resource- and time-consuming, thus eliminating them until the annual report was submitted on 29 March 2024 was impossible.
However, even after the revised report submitted on 10 July 2024, the SRS pointed out the risks of inaccuracy in the MAIS ledger data and informed that it was continuing to correct the data. Comparing the report submitted for the first time on 29 March 2024 with its second version submitted on 10 July 2024, significant changes were found because the balance total at the end of the reporting period was reduced by 132 million euros. Auditors were able to check only one of the items in the report (and not completely) adequately, that is, the accumulated revenues for taxes, fees and other payments, which listed the documents submitted for the first time for the reporting year (i.e., tax returns of December 2023).
“The situation, when putting an end to the correction of errors found as a result of audit procedures is impossible, prevents auditors from obtaining sufficient and appropriate audit evidence. However, we hope that the findings of the auditors and the questions asked during the audit will help the SRS to improve the MAIS so that the SRS annual tax report can be verified,” explained Ms Bādere.
Reporting on the results achieved with the budget spent during the reporting year
Assessment of budget management practices has been in the attention of the State Audit Office for several years. This time, the audit of ACFSS assessed whether information on the results achieved with the budget spent during the reporting year was elaborated, available and monitored in accordance with legislation and best practice.
“To put it more simply, we wanted to find out whether the public and budget decision-makers had access to high-quality information about what was actually been achieved with the spent budget. Discussions about certain aspects of budget planning, such as the available fiscal space and priority measures, are quite loud and visible. However, we consider that discussions about the next year’s budget lack a review of what was done and achieved in the previous year. That is why we tried to understand whether the problem lies in the established system or in its actual operation,” indicated Ms Bādere.
When assessing how the results management and control system established by the Ministry of Finance and the State Chancellery operated in the practice of the four ministries included in the audit sample, we concluded during the audit that significant inconsistencies were found with legislation and conceptual guidelines on international public sector accounting standards although in all essential aspects the information on the results was elaborated, available and monitored in accordance with the legislation.
The results management and control system does not ensure uniform, timely reporting of state institutions on progress in achieving their goals in accordance with the general principles of information presentation and quality indicators, namely, whether the allocated budget has been spent according to the policy and operational results planned in the budget explanations.
The procedure for reporting in the laws and regulations and in practice allows for different action scenarios both in terms of a deadline when such information is made public and in terms of the content of the information and the level of detail. For instance, information on the results achieved may be available in an annual report in April or in a public report in August.
“In their reports, the ministries do not indicate how the invested funding affects the quality of services provided to the public, therefore it is impossible to assess whether they have been provided to the public effectively, economically and efficiently, or whether the state institutions’ ability to provide services has improved or deteriorated compared to the previous year, as the conceptual guidelines,” emphasized Ms Ilze Bādere.
A clear connection is lacking between the priority directions of development defined in the law and expenditure according to the budget explanations of the budget departments, as well as the achievable results defined by the ministries have quality deficiencies often, they are not meaningful and coordinated. For example, when evaluating the explanations of the four ministries regarding the law on the state budget for 2023 and the budget framework for 2023, 2024 and 2025, it was found that 71% of the analysed state budget program results were not related to the operational results planned for the relevant programs in the strategy of corresponding state institution although both the legal framework provided for it. In addition, 87% of the assessed policy and resource maps did not include analytical indicators, as required by the legal framework, which would allow determining the effectiveness of the funds spent and costs.
Ensuring the independence of certified auditors and monitoring public sector audit service
The Ministry of Finance is a responsible state institution that develops and implements a national policy in the field of auditing of economic operators, as well as performs national supervision of the Latvian Association of Certified Auditors (LACA). During the audit of ACFSS 2023, we assessed how the Ministry of Finance had progressed with the implementation of the recommendation issued in 2018, namely, to ensure impartiality and independence of certified auditors by restricting the right of municipal certified auditors, auditing companies or members of their networks to provide audited entities with certain separate services unrelated to the mandatory public sector auditing during a specified period.
Ms Bādere admits, “Unfortunately, one must conclude that the action planned for the implementation of the recommendation, that is, to define measures/criteria for identifying conditions that increase the risk of independence in the Quality Control Regulation of LACA Audit Services, is still in process. The deadline for the implementation of the recommendation since its initial term, 2 January 2021, has already been extended six times, and the current deadline is 2 January 2025.”
The Audit Services Law also stipulates that a certified auditor/ a commercial company of certified auditors does not have the right to provide audit services in the same state or municipal institution for more than six consecutive years. However, after the administrative and territorial reform implemented in 2021, the term of service of certified auditors in 28 local and regional governments was recalculated, thus creating risks related to familiarity. In the assessment of the State Audit Office of Latvia, the Ministry of Finance must improve control measures in the supervision of the provision of audit services to comply with the law in cooperation with LACA.
During the audit, the State Audit Office of Latvia detected cases when a commercial company of certified auditors or the same certified auditor provided audit services in one institution for more than six consecutive years, thereby violating the provisions of the law. For example, in two cases, a service provider has not changed since 2010 and since 2011 accordingly. The State Audit Office of Latvia requested the Ministry of Finance and LACA to examine these cases and also suggested that a discussion on the application of the provisions contained in the law and monitoring mechanisms was necessary.
Ms Ilze Bādere emphasises, “Independence of an auditor is one of the basic principles of auditing, which must be followed both before an audit starts and throughout its duration. However, professional independence of a certified auditor may be compromised if an auditor has a long-term relationship with a customer. To improve the monitoring of audit service provision processes, we plan to initiate a discussion on the possibility of assessing the centralization of the organization of procurement of audit services. It can have several benefits such as uniform quality standards, reduction of administrative expenses and so on.”
Public debt
Latvia’s general government debt, which is mainly influenced by the public debt, is still lower than the average in the European Union. However, it has a tendency to increase rapidly in recent years. It has doubled since 2013 by reaching 17.7 billion euros. The increase in public debt since 2020 was caused by comprehensive support measures to mitigate the impact of the COVID-19 outbreak, state support measures to compensate for the rapid increase in energy resource prices and comprehensive political, military, financial and humanitarian assistance to Ukraine from 2022.
The cost determination and financing planning of the Rail Baltica project also creates uncertainty at the moment, which increases the risks for the state budget as a whole and will probably affect the increase of the public debt in the future.
About ACFSS and auditing ACFSS
The purpose of ACFSS is to provide a clear and true picture of the country’s performance in the reporting year and the financial position as of December 31 of the reporting year. The Ministry of Finance drafts ACFSS which contains consolidated 73 reports, that is, annual reports of 14 ministries, 12 central government institutions, the Saeima, the State Audit Office of Latvia, and 43 local and regional governments, a report on the financial accounting of the state budget and a report on taxes, fees and other payments attributable to the state budget administered by the SRS.
The audit on the accuracy of the ACFSS includes examination of a financial statement (including a report on the financial position (balance sheet), a statement on the financial results of the operation, a statement on changes in equity, a cash flow account and an annex to the financial statements with explanations), examination of information on the outturn of the budget and examination of the management report of the Ministry of Finance on ACFSS, and it has been conducted following the international public sector auditing standards.
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.
Additional information
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