Reform of inspection functions in the context of internal audit development: Ukraine experience

Reform of inspection functions in the context of internal audit development: Ukraine

experience

Sergey Chernutsky State Financial Inspection, Ukraine

Since Soviet TimeControl and Revision Administration within the MoF Ukraine

1993State Control and Revision Service (CRS) set up

2000 Main CRS – central public administration authority

Since 2004Implementation of new forms of control (audit, inspection of purchases)

2010Main CRS is reorganized into State Financial Inspection

Since 2005Number of supervised institutions expands(enterprises of public and utilities sector)

STAGES OF DEVELOPMENTof State Financial Inspection in Ukraine

Since 2005 Beginning of the PIFC reform

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STATUS of the State Financial InspectionCentral public administration authority, coordinated in its activities

by the Cabinet of Ministers of Ukraine through the Ministry of Finance

Defining priorities for the State Financial Inspection and approving Action Plans

Cabinet of Ministers of Ukraine

Ministry of Finance of Ukraine

Discussing draft procedures developed by the State Financial Inspection and submitting them for consideration to the Cabinet of Ministers

Making recommendations to the Prime-Minister on appointment of the Chair of the State Financial Inspection and its deputies

Approving structure and negotiating the organigram and budget of the State Financial Inspection

State Financial Inspection

Coordinated by means of

Defining the procedures for exchange of information between the State Financial Inspection and the Ukraine MoF; receiving reports on performance of the Service

Issuing orders and assignments on matters within the scope of the State Financial Inspection

Слайд 2

STRUCTURE

State Financial Inspection in the Autonomous Republic of Crimea

State Financial Inspections in 24

Oblasts

State Financial Inspection in Kiev

State Financial Inspection in Sevastopol

Regional subdivisions in districts and cities, or interregional integrated State Financial Inspections in districts and cities

STATE FINANCIAL INSPECTION OF UKRAINE

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SUPERVISED INSTITUTIONS

Ministries and other central and local public administration authorities, budgetary institutions, public funds, enterprises and organizations that

receive funds from budgets of all levels and public funds

Economic entities in public sector, enterprises and organizations that use public assets or utilities (since 2005)

Funds of compulsory public social insurance, as well as enterprises, institutions and organizations receiving means from these funds (since 2011)

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INSPECTION

STATE AUDIT

In form of revisions

2004 – audit of implementation of budget programs

2009 – audit of individual economic operations run by

monopolist enterprises

MONITORING OF PUBLIC PURCHASE

consists in operative monitoring and analysis of tender procedures

2007 – audit of implementation of local budgets

AUDIT OF PUBLIC PURCHASE

consists in analysis of compliance with the law on public purchase

AUDITS IN WORK GROUPSupon a Government decision, by employees of central public

administration authorities

INVOLVEMENT OF SPECIALISTS FROM THE INSPECTION IN CHECKS RUN BY THE LAW ENFORCEMENT AGENCIES

PARTICIPATION IN REVISION COMMISSIONS

of entities with over 50% of state share in their chartered capital

2006 – financial audit of activities of public enterprises and utilities

TYPES AND FORMS OF PUBLIC FINANCIAL CONTROL EXERCISED BY THE STATE

FINANCIAL INSPECTION

Since 2006

Since 2006

Since 2006

Since 2006

Since 2004

Слайд 5

BEGINNING OF THE REFORMS

2005

The Government approves the Concept of development of public internal financial control in Ukraine

State Financial Inspection is in charge of reform in the field of internal control and internal audit

Слайд 6

PREMISES FOR MODERNIZATION OF INSPECTION

Introduction of public internal financial control in Ukraine (reform began in 2005)

Low performance of revisions (improved financial discipline in the state)

Unjustifiable planning of controls and revisions based on regularity principle (once in 2-3 years)

Large labor costs associated with revisions (number of entities reaching about 90,000, while the number of inspectors reaches about 8,000)

Revealing insignificant infringements and deficiencies that do not lead to a loss in resources and are primarily caused by accounting errors

Слайд 7

,

WAYS FOR MODERNISATION OF THE INSPECTION

Making the inspection a tool to reveal substantial infringements and financial frauds by means of:

1. Organizational and structural changes.

2. Transition to risk-oriented planning and inspection.

3. Aiming to reveal substantial infringements and abuses.

4. Development of procedures, making corrections to competences of the State Financial Inspection.

5. Respective training for the inspectors.

Слайд 8

State Financial Inspection Main Control and Revision Administration

reorganized into

Reorientation of functions of the Inspection

64 units of institutional control eliminated in all ministries and other central public administration authorities (about 1,500 persons)

Слайд 9

REDUCTIONNumber of regional units (at district level) Number of public employees

State Financial Inspection agencies

Public Control and Revision

Service agencies

State Financial Inspection agencies

Public Control and Revision

Service agencies

165483 59938192- 65,8 % - 26,8 %

6.6 integrated divisions per oblast on average

19.3 divisions per oblast on

average

Reorientation of functions of the Inspection

Слайд 10

Risk-oriented approach to planning

•There is an independent unit for monitoring of risk operations created within the State Financial Inspection

•Methodology for accumulation and assessment of risks was developed within the World Bank project “Modernization of public finances”

•Concept for risk-oriented selection of audited entities was approved while planning control and revision activities

•An electronic database is built which accumulates information on activities of audited entities received from different sources

•Analysis of database for presence of most risky entities and economic operations

•An internal disposition of the State Financial Inspection provides that only those entities shall be selected for audit who show some risks of infringements, which can lead to losses of public resources

•Reporting on performance of the State Financial Inspection agencies and approaches to assessment of their activities have been amended

Слайд 11

Amount of budget allocations (appropriations)Amount of budget allocations (appropriations)

Cash expenditures on capital repairs, reconstruction and restoringCash expenditures on capital repairs, reconstruction and restoring

Cash expenditures on capital construction Cash expenditures on capital construction ((purchasepurchase))

Public purchase from one actor Public purchase from one actor / / economic entities – private individualseconomic entities – private individuals

Primary cost of fixed assets Primary cost of fixed assets ((houses and buildings, machinery and houses and buildings, machinery and equipment, transport vehiclesequipment, transport vehicles))

Growth in stocksGrowth in stocks ( (materials and food stuff,materials and food stuff, little-value and wearing articles, little-value and wearing articles, and other stocksand other stocks) ) compared to the previous yearcompared to the previous year

Risks for budgetary institutions, part І

Слайд 12

Risks for budgetary institutions, part 2

Lower cost of non-negotiable assets Lower cost of non-negotiable assets ((sold, transmitted free of chargesold, transmitted free of charge, , discarded as discarded as useless, etc.useless, etc.))

Accounts payableAccounts payable / / receivablereceivable

Own revenuesOwn revenues ( (payment for services offeredpayment for services offered))

Information from law enforcement agencies on the amount of supposed material Information from law enforcement agencies on the amount of supposed material damage damage ((lossloss) ) or interactions with seemingly fictitious economic entitiesor interactions with seemingly fictitious economic entities

Information from other external sources on amount of supposed material damage Information from other external sources on amount of supposed material damage (loss) (loss)

Information from structural units of the State Financial Inspection on the amount Information from structural units of the State Financial Inspection on the amount of supposed material damage (loss) of supposed material damage (loss)

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Risks for economic entities (non-budgetary institutions)

IncomeIncome ( (proceedsproceeds) ) from marketing of products from marketing of products ((goods, works, servicesgoods, works, services))

Net loss Net loss

Primary cost of fixed assets Primary cost of fixed assets

Lower cost of assets due to their loss, elimination, reappraisal, losses from Lower cost of assets due to their loss, elimination, reappraisal, losses from lower utility, other changeslower utility, other changes

Ratio of other operational incomes Ratio of other operational incomes ((i.e. from activities other than main onesi.e. from activities other than main ones) ) within the total amount of incomes from operational activitieswithin the total amount of incomes from operational activities

Capital investments Capital investments ((capital construction, capital repairs, purchase capital construction, capital repairs, purchase ((manufacturingmanufacturing) ) of fixed assets, etc.of fixed assets, etc.))

Long-term financial investmentsLong-term financial investments

Ratio of reserve of doubtful debts in the total amount of receivablesRatio of reserve of doubtful debts in the total amount of receivables

Public purchase from one actor or from economic entities – private individualsPublic purchase from one actor or from economic entities – private individuals

Слайд 14

Risk Information source Risk criteria Degree of risk Score

Cash expenses on capital repairs, reconstruction and restoring

Report on inflow and use of resources from the general fund (form no. 2д)The indicator is defined as a total for 3 years

Over 5 mln Hryvna High 5

1 - 5 mln Hryvna Middle 0.5

Less than 1 mln Hryvna

Low 0.05

Cash expenses on capital construction (purchase)

Report on inflow and use of resources from the general fund (form no. 2д)The indicator is defined as a total for 3 years

Over 10 mln Hryvna High 5

3 - 10 mln Hryvna Middle 0.5

Less than 3 mln Hryvna

Low 0.05

When the amount of scores is the same, the priority for inclusion in the plan is given to that institution where the number of high risks is the biggest

Public purchase from one actor Bulletin of public purchaseThe indicator is defined as a total for 3 years

Over 3 mln Hryvna High 5

500,000 - 3 mln Hryvna

Middle 0.5

Less than 500,000 Hryvna

Low 0.05

Table of risks

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Sources of information on Sources of information on risks of probable financial risks of probable financial

infringementsinfringements

Letters from citizens

Databases of public administration

authorities

Information from law enforcement and other

agencies

Hot-line

Analysis of previous audits

Laws and procedures concerning financial or licensing matters

Mass

Media

internet

Reports from the

institutions

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Most information is collected and analyzed by hand. This process is not automated.

There is an established form of query for information from a supervised institution (for budgetary and non-budgetary

institutions and revisions of local budgets), which defines a typical list of documents to be used while planning control and

revision activities

HOW TO ACCUMULATE INFORMATION ON RISKS

Слайд 17

OPPORTUNITIES FOR ANALYSIS OF ADDITIONAL RISKS

Provided that the process is automated, one could use the following risks:

Presence of precious assets on the books, which are not connected with the main activities of an institution (or not used)

Complex regulations for inflow and outflow of resources

Involvement in state programs and programs financed from other financial sources

Presence of foreign economic activities

Benefitting from direct state support, means from the central or local budgets

The institution either benefits from a monopolist status, or is on a strategic list important for the state

Слайд 18

USE OF INFORMATION OF INTERNAL CONTROL AND AUDIT

• CHU information on quality assessment of internal audit units

• Information on reliability of internal control system

Low quality of IA activities, unreliable IC

Risk for an inspection

Слайд 19

Number of reviewed institutions

80,1

60,652,5 52,7 47,3

37 34,628,7 28,3 31,9

16,6 15,6 15,3 14,3 12,5

0

10

20

30

40

50

60

70

80

90

100

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

тыс. ед.

Уменьшение количества контрольных мероприятий

Audit performance

12 473

14 333

12 830

11 633

95,7

75,5

10 000

11 000

12 000

13 000

14 000

15 000

2010 год 2011 год

количество

0

20

40

60

80

100%

количество охваченных контролем объектов

количество объектов, на которых выявлены финансовые нарушения, что привели к потерям

удельный вес предприятий, учреждений и организаций, на которых выявлены нарушения, что привели к потерям

11,4%

37,6%

52,4% 53,3%

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

40,0%

45,0%

50,0%

55,0%

2009 год 2010 год 2011 год январь-апрель2012 года

Ratio of financial infringements leading to losses in the general amount of infringements

15,5%

9,7%

5,3%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

16,0%

2009 год 2010 год 2011 год

Ratio of low-performance audits in general number of audits

RESULT OF RISK-ORIENTED SYSTEMСлайд 20

Within the World Bank project “Modernization of state finances”, to create an automated data base to accumulate risks

of probable infringements

To make amendments to the legislation in order to eliminate current restrictions, according to which an unscheduled revision

can only take place subject to a court award

FURTHER STEPS

Слайд 21

Sergey Chernutsky Sergey Chernutsky [email protected]@dkrs.gov.ua