The UK’s National Audit Office, the United States’ Government Accountability Office and France’s Cour des comptes may all have different names, but as Supreme Audit Institutions (SAIs), they carry out the same mission in their respective countries: ensure good governance. However, not all SAIs operate in the same way, nor in the same political and economic environment.
SAIs are essential for good governance in any country. In addition to holding their government to account by scrutinising the legality and accuracy of public accounts, many western national audit institutions are also responsible for performance audit: determining if public funds have been used economically, efficiently and effectively. It’s certainly possible for governments to spend money legally, but still waste it, either by doing the wrong thing or doing the right thing the wrong way. There’s also an increasing international call for SAIs to factor equity into their evaluations, to ensure public funds are spent equitably both regionally and among different groups of the population.
SAIs that follow a Legislative-Parliamentary (Commonwealth) system, such as the UK, link the work of the SAI closely with that of parliamentary accountability. In this system, it’s common to have a public accounts committee of parliament to review audit evaluations and report back to legislators. In the Commonwealth, SAIs are generally called the ‘Office of the Auditor General’ or ‘National Audit Office’ and are usually headed by a single person, the ‘Auditor General’. These SAIs are staffed by accountants and auditors, who focus primarily on financial audits, to indicate whether they show a true and fair view, as well as performance audits.
For institutions that follow a Legislative-Congressional (United States) system, work is more closely related to the legislative obligations of government with reports presented to the Speaker, Governor and relevant agencies. In these contexts, SAIs are often called ‘the Office of the Public Auditor’ and are headed by the ‘Public Auditor’. These SAIs focus mainly on performance and forensic audit work, while financial audit responsibilities are contracted out to the private sector. Staff tend to have investigative and generalist backgrounds rather than being professional accountants. Legislative-Congressional SAIs report either to the legislature or a public oversight body.
Under the Judicial (French) system, the SAI is an integral part of the legal system, operating independently from the executive and legislative branches of government. The SAI is usually known as the Court of Accounts (or Audit) and its members are judges, typically appointed for an unlimited time. The work of a Judicial SAI focuses on financial and performance audits with specific attention paid to the legality of the transactions. As a result, most staff have legal or generalist backgrounds. In this particular model, the court itself holds officials to account and can impose penalties on audited officials.
Confusingly, many former Soviet countries call their SAIs ‘courts’ when in reality they are more akin to the Legislative-Parliamentary System. However, all SAIs hold a crucial national function and are integral to strong public financial management and good governance. In order to maximise the value and benefit of less developed national audit agencies, and to strengthen the quality of public finances globally, several distinct challenges must be addressed.
The International Organization of Supreme Audit Institutions (INTOSAI) sits under the umbrella of the United Nations, and was developed to set standards for public sector audit, promote good governance within member nations and support SAI capacity development. INTOSAI’s founding principle is the Lima Declaration of 1997 (INTOSAI – P #1) which calls for independent government audit and indicates that rule of law and democracy are essential for independent government audit. The Lima Declaration is equally significant for all SAIs, no matter where they are located, what development they have undergone, how they are integrated into the system of government or how they are organised. INTOSAI’s main core principle is the Mexico Declaration of 2007 (INTOSAI - #10) which defines the requirements of the Lima Declaration in more concrete terms, identifying eight principles for the independence of external government audit.
Most countries are members of INTOSAI, but fully implementing its prescribed international standards continues to be a significant obstacle for many member nations. This challenge is visible in many countries. Post-Soviet states, autocracies and developing nations are just a few examples of where we often see SAIs, though established, unable to fully perform their intended functions. In these contexts, the main issues in SAI development revolve around the lack of financial and operational independence of the agency.
An important characteristic included in INTOSAI’s guidance is that the independence of an SAI should be enshrined in the country’s constitution. This ensures the government audit function is viewed as a core public institution. It’s worth noting that challenges to SAI independence can also be found in countries within the western sphere of influence. We’ve seen this recently with new legislation that jeopardizes the independence of the Hungarian Állami Számvevöszék and Polish Najwyższa Izba Kontroli. For government officials using public funds inappropriately, an independent national audit office is a huge threat to personal and professional gains that can, and often do, arise from unaudited activities.
INTOSAI also calls for a strong national audit act, which includes the nomination of an auditor general, or Collegium, by some combination of the nation’s parliament and president. A democratically appointed auditor general accountable to the public for the accurate and independent scrutiny of government accounts can greatly help further the independence of a SAI. Additionally, without strong audit-specific legislation in place, SAIs can have their needs and competencies may overlooked. For example, some development projects have shown us that SAI professionals can be vastly under-trained and teams under-staffed. In extreme cases, there are even some post-Soviet states where public auditors are unaware that external audit exists and that it should be an active part of their day-to-day work.
To effectively strengthen those weaker SAIs, overcoming the inertia of the status quo and proper change management is key. Understanding the need to change business as usual and knowing how to change public audit practices is one thing, but getting the accompanying legal text adopted into law is another challenge. Often any legal changes to public audit that are adopted by government will be incremental. Even if the necessary legal steps are small, they’re in the right direction – towards the true and fair evaluation of public expenditure.
Put simply, the government audit function reports back to the people who pay taxes to the government, so that citizens receive feedback on how well or how badly their tax money is being used. Some countries have more developed, stronger national audit agencies that work diligently to provide accurate and objective evaluation of government accounts. Others still have a long way to go to fully align their nation’s SAI with the guidance and best practice put forward by the international standard setter. Much progress has been made around the world, but it’s up to the international accounting community to continue this strategic push to ensure that progress continues for the benefit of public finance globally.
This article first appeared in Accountancy Age.