Information included in the annual reports of local governments is incomplete and does not provide precise details on long-term investments of local governments (including the land under public waters they possess), liabilities of local governments (including loans, special budget and general budget), income from donations and local government members’ monthly salaries.
That was concluded by the State Audit Office when carrying out it carried out an audit on 2017 Annual Report of the Republic of Latvia on State Budget Execution and Local Government Budgets. As in the previous years, several significant discrepancies have been identified in the 30 local governments included also in this audit. Taking into account the conclusions of audits from previous years, this year special attention was paid to property inventories, lawfulness of received donations and gifts and local government members’ remuneration issues.
What do local governments really own?
Although the State Audit Office has been drawing attention to long-term investment accounting of local governments for several years, significant discrepancies and inaccuracies still have been identified. Besides, the State Audit Office has concluded in this audit that there is no uniform procedure in the state on how to keep accounts of the land under public waters which has been transferred into the possession of local governments and the total cadastral value of which is more than 107 million Euros. Local governments have different approaches, information is often incomplete and difficult to compare. As a result of that, the information on land under public waters transferred into the possession of local governments and on the land the state owns in total which was provided in the annual reports of local governments and therefore also in the state report of the financial year is not true, comparable nor understandable for the user.
The State Audit Office believes that the different approaches cause a risk that local governments unjustifiably increase the value of their assets and results of financial activity in their accounting records. Auditor General Elita Krūmiņa explains: “The weak record keeping system affects also the overall view on what the state really owns, how rich are the local governments. It causes a risk for qualitative decisions, for example, on how to plan the budget of a local government and how much money a local government can afford to loan, in order to finance the dealing with a field which significant for the public. We have recommended to the Ministry of Finance to establish a clear accounting methodology in order to avoid such mistakes.”
General budget and special budget should be combined
Also the current local government budget system – the division into general budget and special budget and the different approaches of each local government for the use of this division – does not provide a clear understanding of the financial activity of local governments, it lowers the possibility to carry out an objective analysis and comparison both on local and national level and therefore impedes qualitative decisions. The State Audit Office is of the opinion that there is no need to divide local government budget into general budget and special budget any more, and that ending this division would also reduce the administrative burdens for both the local governments and to information collectors. Therefore, the State Audit Office believes that the Ministry of Finance should adjust the regulatory framework on division of local government budgets so that it is clear and understandable for the public and so that it meets the everyday needs of local governments and is appropriate for their decision making.
Violations in acceptance of donations – non-compliance with the law and triangle schemes
By evaluating the lawfulness of donations and gifts to local governments, the State Audit Office has concluded that the information provided in local government annual report explanations is not complete nor true. Not all donations are shown, they are not accounted for correctly, and such income is shown in the donations budget which even the local government itself does not recognise as a donation. It has also been concluded that some local governments have accepted donations violating the Law on Prevention of Conflict of Interest in Activities of Public Officials.
Ventspils local government has included in its annual report of 2017 a donation in the amount of 2.5 million Euros from SIA “”Ventspils nafta” termināls”, which according to law is not a non-involved entity. The local government itself does not see this income as a donation, however it accounted for it as a donation. The State Audit Office believes that this contradictory information shows that financial means have been received in non-compliance with the Law on Prevention of Conflict of Interest in Activities of Public Officials, or that because of classifying income incorrectly, the summary of local government budget is affected which is part of the state report of the financial year.
The State Audit Office has informed the Corruption Prevention and Combating Bureau about this situation but the Ministry of Finance has been requested to explain whether such income is acceptable, how it should be accounted for In the budget and whether it is necessary to improve income classification.
Jelgava and Liepāja
In the audit it was found that the local governments of Jelgava and Liepaja act as intermediaries between private companies and societies in reception of donations and gifts, thus violating the legislation. In accordance with the concluded agreements on donations, in the years 2016 and 2017 Jelgava local government received donations from different legal entities in the amount of 249 thousand Euros but Liepāja – 64 thousand Euros for the needs or purposes of third parties. Shortly after receiving donations, local governments have transferred them further to societies or sports clubs laid down in donation agreements. In the case of Liepaja local government, the donor is also the the sponsor of the society that received the donation and of its sports team. With the help of this scheme, donors (entrepreneurs) are given the opportunity to receive a corporate income tax relief in the amount of 85% of the donation, which they would not receive in case of donating to societies without the status of a public benefit organisation. However, if a society has the status of a public benefit organisation, such through local government received donations are classified as grants which do not have rules for reporting and restrictions as strict as it is in case of donations.
A year ago, the State Audit Office identified the above described triangle scheme in Tukums local government, therefore in this audit increased attention was paid to the issue of local government donations to societies.
During the audit, the State Audit Office informed the State Revenue Service about its conclusions and for six entrepreneurs the payments of corporate income tax into the state budget in the amount of almost 13 thousand Euros have already been additionally calculated.
In several local governments, the State Audit Office found grants given to societies and endowments without a justification compliant to local government functions, without sufficient supervision of use of the given grant and without provision of equal attitude towards other potential recipients of grants. For example, Jurmala local government has paid for food services of the participants of the card game “Zole” championship in a restaurant but it has paid the co-financing of the marathon to the society based on incomplete information and on payment documents from entrepreneurs related to the societies.
In this audit, the State Audit Office did not evaluate grants given to societies and endowments by the Riga local government because a separate audit of the lawfulness, expediency and efficiency of grants given to societies and endowments by Riga City has already been started.