- State Audit Office of Latvia - http://www.lrvk.gov.lv/en/ -

Confusion over the Accounting of Municipal Authorities and the Delegation of Administrative Tasks to Commercial Companies

One can find information on municipal bodies, authorities, and enterprises in various public sources. However, it is distinctive and often misleading. One can observe different understanding of the law requirements in different local governments when they entrust commercial companies with some of their functions.

Requirement-compliant action in the provision of territory management services alone would save at least 0.6 million euros annually in 24 audited local governments.

The true number of municipal authorities and the activities of capital companies are unclear

It is not possible to obtain information about the structure of a local government in the list of the Register of Enterprises without further explanation, it is not found in one place, and it is not easily accessible. The State Audit Office considers that this issue is relevant in the context of the planned administrative and territorial reform. If one uses false or incomplete information on the structure of local government at the time of evaluation, there is a risk of making unjustified decisions. One shall assess the administrative burden and efficiency of the performance of municipal functions in the process of transforming local governments. To evaluate the efficiency of the use of resources, special attention shall be paid to the structure of the local government and its relevance to the needs of the local government.

At the same time, the audit found that the information published on the municipal websites about capital companies, where local governments are shareholders, is incomplete and does not provide a clear picture of economic activities of the capital companies and their potential impact on the annual report of the local governments.

Wrongly concluded delegation agreements may result in tax overpayment of at least half a million

After analysing the terms and conditions of 78 delegation agreements concluded by 24 local governments included in the sample of the State Audit Office, one discovered that different financing procedures were applied to the execution of the same delegated tasks in the local governments. They pay for services or award grants. For example, in some municipalities, commercial companies performing their orders and tasks are considered recipients of grants, in other municipalities, contractors of the procurement contracts or service providers, thus VAT payers, which increases the amount of municipal expenditures.

Pursuant to the valid legislation and the opinion of State Revenue Service (SRS), commercial companies performing certain administrative tasks delegated by local governments are not considered to be taxable entities under certain conditions.

According to estimates of the State Audit Office, evaluating and arranging delegation agreements with capital companies for only one task, that is, to ensure the improvement of municipal administrative territory and sanitary cleanliness, and financing it in the form of a grant would result in the municipal expenditures be at least 0.6 million euros less.

Action by local governments is ahead of legislation

Although a part of local governments have centralised their accounting in accordance with the principles of efficiency and good governance and are already preparing a single annual report for all their municipal authorities, while some local governments are still on the path to the centralisation of accounting, the legislation still requires preparing an annual report for each authority. The State Audit Office has established that in 1,656 municipal authorities or 74% of all municipal authorities, no separate annual reports have been prepared, although information on them is included in the consolidated annual report of the local government.

Changing existing practices and fragmenting of the reports drafted up to the level of authority will only lead to unnecessary consumption of municipal resources and increase the risk of potential errors. Therefore, we have urged the Ministry of Finance to consider the necessary changes to the laws and regulations by reducing the bureaucratic burden on local governments.