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

The State Audit Office Expects from the Treasury More Than Just an “Accounting” Approach to the Preparation of Annual Reports of Authorities

Latvia is the only Baltic State, where state accounting is managed in a decentralised manner without using the opportunity to save budget funds. The implementation of financial accounting standardisation and accounting centralisation projects has virtually come to a halt.

Weaknesses in the process of preparing the annual report reduce the reliability of the reported data. In their turn, deficiencies in government debt management can lead to higher servicing costs thereof, with a negative impact on the fiscal space. 

Usually, the State Audit Office points out weaknesses in the planning and execution of budgets by ministries and local governments in its audits of the annual report. In this audit, they paid special attention to the Treasury, the authority ensuring the preparation of the state annual report.

“The idea of centralising ​​supporting functions such as accounting, HR management, and procurement organisation has existed in public administration for more than 10 years, while one has not managed to centralise even such highly regulated function as accounting at the national level. In our view, the implementation of a centralisation project is an example of poor project management, characterised by a lack of a focused and calculation-based approach. Until the basic issues have been arranged and explained to the authorities and the real benefits have been demonstrated gradually, authorities lack the motivation to engage in centralisation quite justly,” admits Auditor General Elita Krūmiņa.

To centralise accounting, one requires standardising financial accounting processes at the national level first by reducing the costs of public administration. This was the original purpose of the projects. However, in reality, the work on the standardisation project has been limited to increasing the financial reporting compliance with international public sector accounting standards, but the efficiency and standardisation of the own management processes have not been addressed. In its turn, the project of accounting centralisation has been reduced to the centralisation of accounting of the authorities of the Ministry of Finance.

One has not identified actual project costs during both project planning and implementation, whereas no one has monitored project implementation, and new activities are being ‘planned’ up, such as the creation of a previously unexpected centre of excellence and the management of changes to the eReports, as well as deadlines have been extended by more than three years. Consequently, it is impossible to determine whether the activities carried out so far in the projects have resulted in any budget savings. Nonetheless, generous bonuses have been paid to project executors.

The Treasury acknowledges the mistakes made, while the State Audit Office could not receive information on the strategic vision from the Ministry of Finance regarding project implementation activities and deadlines. Therefore, the State Audit Office was forced to set a deadline until the end of this year, when specific proposals for implementation of recommendations are expected from the Ministry of Finance.

The auditors also pointed out several shortcomings in the preparation of the annual report to the Treasury inter alia duplication of information, non-compliance with the reporting framework, for instance, misrepresentation of expenditure, disclosure of revenue not indicating the sources of income, and unnecessary actions in the report drafting process by recommending to review the actions be carried out critically and give up the excessive ones.

At the same time, we found shortcomings in the financial accounting of the Treasury, including state guarantees and financial derivatives. State guarantees for healthcare institutions and for the construction of sports facilities are not shown as loans, although they are actually repaid from state budget resources, and the amount of those loans is shown to be 33 million euros less than it actually is. There is no order in the accounting of other state guarantees either, it is not evaluated whether the report should indicate state guarantees as explicit or only contingent state liabilities.

During the audit, the State Audit Office also detected significant deficiencies in the accounting of financial derivatives used for the management of government debt leading to the fact that the future costs on servicing government debt might be higher than forecasted ones. The Treasury uses a method to determine the value of financial derivatives, which is not used in international financial institutions after the 2007-2009 global financial crisis anymore. Similarly, the Treasury does not assess the efficiency of financial derivatives by internationally accepted methods, so we cannot be sure that the annual report provides true and complete information on all revenues and expenses associated with the use of those financial instruments. We also found significant shortcomings in the forecasting of the costs of servicing government debt service, as the calculations are not traceable and their documentation is incomplete.