The provisional parliamentary commission found the work of the State Audit Office in 2013 to be unsatisfactory and gave the Parliament a recommendation to that effect.

On May 30, 2014 Transparency International Georgia published a report examining the audits conducted by the State Audit Office in 2013. We found that the number of thorough and comprehensive audits in 2013, all of which were marked by the depth of inquiry, is the highest in a single year in the history of the Chamber of Control, SAO’s predecessor. In 2013 SAO conducted twice the number of audits as in 2011-2012. Therefore, 2013 stands out not just in terms of the number of audits, but also in terms of audit quality.

The depth and breadth of SAO audits in 2013, which, we believe, are crucial to improving the government’s accountability and transparency in public spending, call into question the findings of the provisional parliamentary commission.

Below we give a brief assessment of the commission’s major findings: 

1. Parliamentary Commission: The State Audit Office did not have the audit plan for 2013, which could significantly decrease the impact of political conjuncture on SAO’s auditing activity.

Transparency International Georgia: Our examination of audits conducted by the State Audit Office in 2013 did not show the impact of the political conjuncture on audits. Although, the State Audit Office did not have an approved plan for 2013, a 2014 audit plan has already been put together.

The audit plans had been severely manipulated before 2008 -- those responsible for drafting the documents had been bribed by government agencies trying to elude audit scrutiny, which prompted the SAO to discontinue the practice of drafting the plans in 2008. We believe rather than scrap the audit plans altogether the risk of these venal practices between 2008 and 2013 must have been dealt with otherwise. However, despite not having formally approved plans, the State Audit Office did carry on planning its audits

2. Parliamentary Commission: The State Audit Office does not do pre-audits, which prevents government agencies from proactively engaging with the SAO to avoid violations, which constitutes a serious breach of SAO’s audit responsibilities.

Transparency International Georgia: Countries still doing pre-audits are currently a minority. Numerous countries discontinued/never did preventive pre-audits because: 

1. preventing potential violations/losses may well develop into interference with government responsibilities.

2. the government should take responsibility for cost-benefit analysis of its own decisions. The assumption that the executive should be assisted by the supreme auditor is absolutely irrational. 

3. this will slow down activities of the government and require human resources that are not available and should not be available to the supreme auditors either in Georgia or elsewhere, since pre-audit, both in substance and form, goes beyond the scope of audit and into evaluation, which requires auditors to have additional qualifications and assume overall responsibility for outcomes

4. According to the Lima Declaration of the International Organization of Supreme Audit Institutions (ISSAI 1), pre-audit is not an obligation of the supreme audit institutions.

5. According to the Law on State Audit Office (Article 24), pre-audit is the SAO’s right rather than an obligation. Therefore, what the parliamentary commission requires the State Audit Office to do is not obligatory by either the Georgian legislation or international standards.

Not only is the State Audit Office giving a preliminary opinion highly questionable but also SAO examining draft executive budgets, of which SAO reports are presented to the Parliament every year. We believe the fact that the SAO does not conduct pre-audits is not a serious breach of SAO’s audit responsibilities.

We believe it is necessary to distinguish between a preventive pre-audit and a risk assessment pre-audit. The risk assessment pre-audit requires site visits to an auditee to assess the risks of (material) misstatements and inaccuracies in the financial reporting. The purpose of this engagement is to decide whether or not a given audit is worth the resource it requires rather than prevent potential violations/losses. These preventive pre-audits, which the parliamentary commission requires the SAO to do, have been rejected by the majority of the world countries. Although both these types of audit are known as pre-audit they differ in essential ways.

The supreme audit institution exercises its proactive function through a post rather than pre-audit with the audited entity improving on the reporting in the subsequent period. We believe introduction of pre-audits will derail the reform that should see the State Audit Office become an effective supreme audit institution. Therefore, we believe it is absolutely impossible to see the fact of the SAO not conducting pre-audits as a fundamental neglect of its audit responsibilities.

3. Parliamentary Commission: In its risk-based sampling the State Audit Office does not use internal audit findings.

Transparency International Georgia: In-depth examination of the state of public internal financial control, including internal audit, which we conducted across twelve government ministries and Tbilisi government in 2013, showed that internal audit reports of the majority of the targeted spenders are flawed to an extent that makes it is impossible to put those to any use. According to the International Standard of Supreme Audit Institutions 1610, external auditor uses the work of internal auditors when it is adequate for purposes of the audit. 

4. Parliamentary Commission: Qualification requirements for Head of Department for Audit of Social Spending, Head of Department for Audit of General State Services, Head of Department for Audit of Defence, Order and Security Spending are at variance with the applicable legislation. The Auditor General should within the shortest period of time advertise vacancies for these positions, revise recruitment and appointment procedures for heads of other structural units, as well as  responsibilities of SAO staff responsible for the procedures.

Transparency International Georgia: The Law guarantees independence of the State Audit Office. This harshly-worded recommendation for the Auditor General is an absolutely unacceptable attempt to interfere with the responsibilities of the State Audit Office.

5. Parliamentary Commission: Staffing changes and recruitment in 2013 were done in violation of the applicable legislation, since the SAO failed to establish correspondence of the candidates’ professional and personal skills and qualifications and abilities with the job requirements.

Transparency International Georgia: The Commission gives no example to support the claim.

6. Parliamentary Commission: The State Audit Office conducted a compliance audit of the 2012 spending by the central office of the Ministry of Regional Development and Infrastructure and financial audit of 2013 spending but failed to audit the Regional Development and Infrastructure spending before 2012. According to the Commission, the failure to audit previous periods is a basis for a modified opinion.

Transparency International Georgia: We believe the conclusion is unwarranted because:

1. the SAO needs to put priority on the audit of the latest rather than previous periods, while audited entities can still use auditors’ recommendations to put public funds to better use.

2. The Law on State Audit Office does not prohibit skipping a period.

3. Skipping a period does not preclude an auditor from obtaining sufficient and appropriate audit evidence through substantive testing, analytical or additional procedures.

7. Parliamentary Commission: The SAO did not make criminal referrals to the law enforcement bodies based on the findings of the Financial and Compliance Audit of LELP Security Policy Department of the Ministry of the Interior (2010-2013) and 2012 Financial Audit of the Ministry of Education and Science.

Transparency International Georgia: The State Audit Office forwarded us copies of the letters confirming that the SAO had sent audit materials of both the Security Policy Department and the Ministry of Education and Science to Lasha Natsvlishvili, First Deputy Main Prosecutor, and Archil Kbilashvili, Main Prosecutor.

8. Parliamentary Commission: During 2013 the State Audit Office incurred GEL 60,515 of representation expenses, viz., GEL 12,300 for meals for foreign guests, GEL 20,000 for services provided by the Kazbegi hotel, GEL 14,500 for souvenir watches, GEL 13,200 for mineral waters, tea, coffee and other gifts and related services. Although the representation expenses were incurred in compliance with the threshold established by the law, the SAO might do more to put public funds to more reasonable use.

Transparency International Georgia: Other public entities spent much more during a given year, which of course, was far from an acceptable practice. Although rationalizing public spending is very important annual representation expenses of GEL 60,515, we believe, does not call the rationality of spending into question and even less so against the extravagance by other public agencies, e.g. on October 20, 2013 the Ministry of Economy and Sustainable Development paid Georgian Hotel Management Ltd (Radisson Blue Iveria) GEL 20,886 for lunch and coffee break of a single event.

9. Parliamentary Commission: 114 entities to be audited as listed in the 2014 audit plan were not selected through risk-based sampling. The SAO should use risk-based sampling.

Transparency International Georgia: To be able to check whether or not the State Audit Office included potentially high risk public spenders in its audit plan, the Commission should have checked how the SAO followed each step as prescribed by the 2011 financial audit manual for the purpose. As for risk-based sampling, we totally agree with the Commission: the SAO should both elaborate on its risk-based sampling as detailed in the comprehensive 2011 financial audit manual and make better use of it.

10. Parliamentary Commission: The Public Audit Institute (PAI), a legal entity of public law under the State Audit Office, should not be providing audit services to public institutions, as these audits are conducted by the same SAO Auditors, who get additional pay for performing their professional duties, which they are paid for by the SAO. Even if there is a demand for commercial audit services in the public sector, these audits should not be performed by a public spender at the rates that it sets on its own.

The Public Audit Institute (PAI) was allowed to offer audit services without competitive bidding, which made it easier for the Institute to offer its services to public spenders.

Transparency International Georgia: Providing audit services by the SAO’s Public Audit Institute (PAI) requires a better regulation and solving of a range of controversial issues. We believe it is necessary to set out a vision for the PAI to shed its role as auditor and become the audit regulator. However, we do agree with the commission that the PAI services should be procured through competitive bidding. Even so, provision of audit services by the PAI are not at variance with either law or rationality:

1. both the Georgian legislation and the IMF Government Finance Statistics Manual 2001 allow public institutions to both receive and pay for audit services (Order # 672 of the Minister of Finance on Budgetary Classification, August 25, 2010).

2. The State Audit office cannot and should not audit all public spenders. Our examination of public internal financial control showed that quite a number of public spenders do need external audit, even though some of them may not be in a position to appreciate that need. According to the SAO, in 2014 alone 191 public spenders advertised procurement of audit services. First, the SAO does not have the capacity to meet the demand. Second, many of the public spenders that require external audit may not find their way into the annual SAO audit plan.

3. The PAI certifies auditors for public sector audit, which is a quality assurance measure. With numerous audit firms that are ready to offer public spenders cheap but totally inadequate audit services, there are very real risks in the Georgian audit market. Therefore, giving private audit firms access to the market of external audit in the public sector requires strict regulation. The private audit firms that have PAI certified auditors do have access to the market. However, the demand for external audit services will take some time to build up. Once the demand is stronger, the PAI may evolve into the audit regulator.

4. The PAI subsidies decreased from GEL 800,000 in 2012 to GEL 400,000 in 2013 and GEL 50,000 in 2014. Starting 2015 the SAO does not plan to use any budget subsidies.

5. Starting next year the Office plans to cross-subsidize its operations including certifications and trainings off the income generated through audit services.

Therefore, we believe founding of the Public Audit Institute, its trainings and certification and provision of audit services to public spenders did move Georgia’s PFM reform forward. Discontinuing the practice would be an obvious step backwards.

We believe the assessment by the provisional parliamentary commission shows clear signs of an unwarranted interference with the independence of the country’s supreme auditor.