GEO

Challenges of public internal financial control in Georgia

29 July, 2014

Partial/complete failure of the public internal financial control across many Georgian public institutions over the years has substantially undermined transparency in and accountability for public spending.

This report looks at the state of public internal financial control in the twelve government ministries and Tbilisi government as well as the challenges and problems the PIFC system faced in 2010-2012 and a number of PIFC developments in 2013. We singled out the worst and best performing ministries to illustrate problems on the one hand and best practices on the other.

Some of the report’s key findings are:

  • A number of public spenders are grossly negligent about inventorying their financial as well as non-financial assets, which puts these assets at an extremely high risk of abuse. 
  • There are severe delays in response by law-enforcement bodies to the cases of misappropriation referred to them by the Internal Audit Units (IAU-s) of a number of government agencies. 
  • Rationality in public procurement: In 2012 the Ministry of the Environment and Natural Resources bought GEL 144,096 worth of dinner party catering services for a three-day environmental conference; the Ministry of Economics and Sustainable Development bought GEL 20,886 worth of lunch/coffee break catering services for a single event.
  • Lack of detail in the budget programs: the fact that programs of public spenders give no detail of how they can deliver on what they promise, or measure outputs and outcomes detracts from the effectiveness of internal audit and makes it impossible for IAU-s to assess risks, which is a function of the clarity of how a public spender is going to achieve what they intend to achieve.
  • Internal Audit Units (IAU-s) of even the best performing public spenders find it very hard to identify risks and controls. There is no risk register or coordination between organizational units of a public spender, no risk assessment procedures, none of the targeted institutions identifies acceptable levels of risk. 
  • Public spenders are plagued by overlapping duties, when their different organizational units are performing the same tasks: e.g., given the poor coordination between the departments of the Ministry of Labour, Health and Social Affairs, the latter fail to see about 75% of the risks they would be able to see if the coordination were to improve.
  • Eight government ministries and Tbilisi government violate the PIFC and financial accountability legislation on a regular basis.
  • There are numerous gaps in the public internal financial control and financial accountability legislation, e.g. 1. gaps in the regulation of inventory checks, which undermine both the custody of and accountability for the assets 2. auditees are not responsible for identifying risks and putting related controls in place 3. internal audit units are not responsible for the assessment  of risks and related controls.
  • Accounting is done manually (the Ministry of the Environment and Natural Resources, for instance), which is a very serious risk.
  • Contractors of many government agencies that we targeted fail to make good on their contractual obligations without being held to their commitments, which is a totally neglected risk factor in the public sector.

The research shows a distinctly different picture of the PIFC across the targeted public spenders in 2010-2012. We found the best performing public internal financial control system in 2010-2012 at the:

1. Ministry of Foreign Affairs

Custody of assets at the Ministry of Foreign Affairs sets a good example for the other public spenders to replicate. The Ministry of Foreign Affairs is the only targeted public spender that discovered illegally incurred expenses, established the identities of the employees of the diplomatic missions responsible for the unlawful spending and held them responsible for restoring the funds to the Ministry and followed up the execution of its recommendations, which is an unprecedented example of custody of assets.

2. Ministry of Finance

The Internal Audit Department highlights problems with the public internal financial control that stand out for their severity, which the internal audit reports/conclusions of most of the other ministries do not touch upon, in particular that:

  • accounts receivable/payable are written off the balance sheet without taking comprehensive measures to recover them
  • auditees do not examine the correspondence between the fair value of works completed and the actual payments for the works.
  • auditee do not look at money-saving opportunities.
  • illegally incurred expenses should be restored to the Ministry 

3. Ministry of Economy and Sustainable Development

Despite the emphasis on inspections, the Ministry of Economy and Sustainable Development’s 2010-2012 internal audit reports, in particular the United Transport Administration’s audit report, are a good example of custody of assets. The reports show that the assets are taken care of in a proactive manner and attempts are made to limit the factors that prevent the Ministry from achieving its aims, which is not the case with most of the other IAUs that we looked at.

4. Ministry of the Environment and Natural Resource Protection

Internal audit reports document:

  • how the Ministry’s contractors meet their obligations
  • follow-up monitoring of the internal audit recommendations, which most of IAU-s fail to do
  • custody of the assets on the Ministry’s balance-sheet
  • comprehensive assessment of inventory reconciliation 

We found the worst performing public internal financial control system in 2010-2012 at the:

1. Ministry of Regional Development and Infrastructure

The audit reports of the ministry’s departments covering the period from January 1, 2011 to January 1, 2012 are descriptions of the departments’ activities rather than audit reports. 

  • IAU does not raise issues of significance for the audit, even when instances of state budget spending whose purpose should obviously be called into question appear on the IAU’s radar, e.g. in exchange for fulfilling what obligations by the beneficiary (D. Tabatadze) did the ministry and Mtskheta-Mtianeti’s Governor’s Office pay the costs of a private citizen’s master’s studies, when that the objectives of neither of the two institutions include support for higher education
  • Recommendations and conclusions in the audit reports are a mere rubber-stamp for the Ministry
  • It is noteworthy that starting November 2012 the IAU made a number of criminal referrals to the law-enforcement bodies

2. Ministry of Culture and Monument Protection

In 2010-2012, the IAU did nothing to help the ministry achieve its goals through lawful, transparent, economical, effective and productive use of public funds -- the Ministry was entering into fictitious agreements with its suppliers to steal public funds, which, following the change of power in late 2012, were referred to the law enforcement bodies:

  • Financial documentation of a contract signed with COSMO Organization Tic. Ltd. Sti for Euro 282,235 for an event organized on May 22, 2010 in Oslo by the Ministry of Culture and Monument Protection to mark the 19th anniversary of Georgia’s independence.
  • Financial documentation of the Chris Botti and Sting concert in Batumi on July 3, 2011, a contract signed with Eastern Promotions Ltd for USD 750,000.
  • Financial documentation of the “Georgia Without Occupation” project, a contract signed with the NGO Georgian De-occupation Center for GEL 350,000 
  • On October 25, 2012, a GEL 389,959 service contract was signed with Formula Proesko Production for filming of a 45-second clip promoting the country. A work completion certificate was issued the very same day the contract was signed, October 25, 2012. The certificate of completion was cancelled on November 2, 2012 in an agreement with the contracted party. The latter did not object to the cancellation, which points to the fact that no expenses had been incurred.
  • At At the time when the Ministry was entering into these fictitious agreements with its suppliers to steal public funds the ministry’s internal audit reports focus on minor violations. 

3. Ministry of Energy

We believe there is effectively no internal audit in the Ministry of Energy because:

  • The Ministry’s internal audit reports from 2010-2012 do not give a single finding or recommendation concerning improvement of any process or practice; furthermore, there is nothing that could be considered the result of an audit, inspection, or even a superficial examination.
  • In 2010, the IAU did not do the planned checks, including a comprehensive examination of the operations of the State Agency of Oil and Gas. The Ministry of Energy does not have a more important subordinate agency than the State Agency of Oil and Gas.
  • The Internal Audit Unit does not have information about what system the Ministry uses to purchase fuel; specifically, the IAU is not aware that approximately three years ago, the Ministry of Energy switched from a fuel voucher system to a strict accounting system.

Since November 2012, indications of increased activity have become apparent in the IAU-s of the Ministry of Education and Science, Ministry of Regional Development and Infrastructure, Ministry of Labor, Health and Social Affairs, and Ministry of Culture and Monument Protection.

We believe the Georgian government needs to act on the findings and recommendations presented in this report. Therefore, we urge the government to engage with us in a constructive discussion of the findings and recommendations presented in the report, which, we believe, can help move the system of public internal financial control forward. 

 

 

The report was prepared with the financial support by the Swedish International Development Cooperation Agency (Sida). Any views or opinions presented in this report are solely those of Transparency International Georgia and do not necessarily represent those of the donor. The Swedish International Development Cooperation Agency (Sida) is not responsible for the content of the report.