ACFS 2021: although still with objections, a lot has been done to organize the state’s financial records


In accordance with the law, the State Audit has completed an annual financial audit of the Annual Consolidated Financial Statement, issuing a qualified opinion similar to the previous opinion, a lot has been done to organize the state’s financial records. A positive opinion is still not possible due to individual unresolved issues.


  • By introducing the accrual principle, ACFS 2021 includes an annual tax report of the State Revenue Service (SRS) (the so-called “tax balance sheet”) for the first time.
  • However, the untimely preparations for the preparation of the SRS annual tax report, which we drew attention to last year as well, have resulted in multiple corrections of errors and late preparation of this report. This prevented the auditors from obtaining evidence of the accuracy of this report.
  • A number of issues that previously formed the basis of the objections of the State Audit Office have been sorted out. Thus, for example, the Riga City Municipality carried out an extraordinary inventory of transport structures and engineering structures, while the State Treasury organized the accounting of derivative financial instruments.
  • For the second year now, while continuing to evaluate COVID-19 expenses and support measures, we are drawing attention to the government debt and budget deficit. It is important that the level of government debt does not become excessive and that the public is able to ensure stable GDP growth to maintain it, while increasing the budget deficit must be approached responsibly. Therefore, targeted support measures and thoughtful investments will also be the challenge of the next reporting year.
  • The impact of the construction cartel detected last year by the Competition Council on the ACFS for 2021 and next years.

Ilze Bādere, Member of the Council of State Audit Office, reiterates that “ACFS provides information on the results of the state’s operations in the reporting year and the financial position as of December 31 of the reporting year. To provide the users of this report and the public in general with confidence that the information provided by the ACFS is correct and reliable, the State Audit Office conducts an audit of the ACFS annually, after which it issues its opinion. This opinion is important because it is also evaluated by foreign investors and rating agencies, both when determining the country’s credit rating and when making investment decisions”.

Although the accrual principle has been introduced in tax accounting, the annual tax report prepared by SRS for the first time is not verifiable. The most important innovation of the ACFS for 2021 is that it includes an annual tax report of the SRS, or the so-called “tax balance sheet” for the first time implementing the recommendations made by the State Audit Office 16 years ago for the application of the accrual principle in the accounting of state budget revenues. Yet, state duty revenues, fines, and other non-tax revenues are still not presented according to the accrual principle, i.e., information about them is not presented in the ACFS neither as liabilities nor as claims. Such revenues make up 2.4% of the total revenues of the consolidated budget, or 298 million euros.

Remark on the history of 'accrual principle'. Already in 2006, the State Audit Office made a recommendation to introduce the accrual principle in the accounting of state budget revenues. The accrual principle is an accounting principle according to which transactions and other events are recognized when they occur, not just when cash is received or paid. Its implementation would improve the quality of ACFS significantly by providing complete and true information to users of the report. 16 years have passed since the original recommendation. The Ministry of Finance undertook to implement the accrual principle in the accounting of state budget revenues administered by SRS only in 2014, with a decision made in September 2015 to implement it starting from 1 January 2021. In 2016, the Cabinet of Ministers supported aforementioned commitment of the Ministry of Finance.

Although an annual tax report of the SRS has been drafted, the deficiencies identified by the State Audit Office last year in performing the necessary preparatory work have resulted in inadequate quality of this report. Only at the end of December 2021 was the initial posting of documents in the Payment Administration Information System (MAIS) started. The deficiencies in the functionality of MAIS, which we pointed out last year, continued this year as well, and new deficiencies were identified, the MAIS developer delayed the elimination of which in some cases. The report prepared initially (at the beginning of May) and repeatedly (in mid-May) was erroneous, so the correction of errors continued until the middle of August, when the revised SRS report was submitted to the State Treasury for the third time. However, during the audit procedures, we found that the year-end inventory was not carried out for several items; the analytical records were not provided; they were both unreasonably reduced and unreasonably increased. This prevented the State Audit Office from verifying the accuracy of this report. “The SRS understands the importance of this report and is determined to eliminate irregularities as soon as possible. At the end of the audit, we made three recommendations for improving the quality of the SRS annual tax report, which the SRS undertook to implement between April next year and January 2025,” added I. Bādere.

For the second year in a row, the State Audit Office assessed the use of funds allocated for overcoming the consequences of the spread of the COVID-19 infection and support measures. There was the spending of 1.64 billion euros checked, which was 69% of the 2.36 billion euros allocated for this purpose (or 85% of the actually spent 1.92 billion euros), generally concluding that they were requested reasonably, used in accordance with the allocation objectives and administered in accordance with laws and regulations. We reported on the irregularities found in individual cases by concluding financial audits in ministries and central government institutions. In its turn, to help decision-makers evaluate the current support for mitigating the consequences of COVID-19 and to learn from the experience, we conducted an in-depth study of the situation regarding support schemes for businesses and employees, the results of which we published. At the same time, the audit of COVID-19 expenses and support measures raises questions related to the resilience of state finances. Similar to 2020, the need to provide financial resources promptly to mitigate the impact of the COVID-19 pandemic and implement economic support measures resulted in a significant increase in the government debt and general budget deficit also in 2021. The government debt increased by 2.8 billion euros last year, and its nominal value was 15.3 billion euros on 31 December 2021, which is 819 million euros more than the maximum government debt at the end of the year originally set in the Law on the State Budget for 2021. In its turn, the total budget deficit reached 1.8 billion euros or 5.6% of GDP in 2021 (for comparison, the total budget deficit was 117 million euros or 0.4% of GDP in 2019). Ilze Bādere states, “We must remember that we are using borrowed funds to overcome the COVID-19 pandemic. Although Latvia has a relatively low level of government debt among the EU Member States, the State Audit Office has repeatedly called on the government while observing the downward trend of the population to follow up so that the level of government debt does not become excessive and the public is able to ensure stable GDP growth in order to maintain it. The State Audit Office considers that targeted support measures for the least protected groups of population and thoughtful investments that would help reducing the risks of economic recession will also be the challenges of the next reporting period under conditions of high inflation and uncertainty when it is difficult to predict the impact of geopolitical situation and the increase in energy prices on the economy.”

The impact of the cartel detected by the Competition Council on both the ACFS 2021 and subsequent ACFSs. Last year, the Competition Council detected a long-standing prohibited agreement of 10 commercial construction companies on the conditions of participation in public and private procurements in Latvia, as a result of which public funds were affected, including efficient, fair and legal use of EU and other foreign financial assistance funds. The State Audit Office concluded that the decision of the Competition Council (30 July 2021) on finding a violation and imposing a fine had a significant impact on several state administration institutions and derived public entities (and their state-owned enterprises), as a large part of the 35 construction sites affected by this decision, had been financed from public funds. In addition, these transactions will have an impact on ACFS financial indicators in the future as well, because for the customers: (1) one applies financial corrections of 18.4 million euros to 18 construction sites, which are co-financed from the EU and the state budget program for Emission Trading System instruments as of 31 December 2021, (2) an increase of 22.3 million euros in the cost of construction works and other expenses related to the violation might have occurred as a result of the violation of the Competition Law. “Taking into account that the Cabinet of Ministers instructed the responsible and co-responsible institutions to implement measures for reducing the risk of violation of the Competition Law and their implementation is planned until 1 January 2024, the State Audit Office will continue to monitor their progress and the government’s future decisions to reduce this risk, as well as to the appropriate disclosure of the information in the annual reports of budget institutions,” stated I. Bādere.

Other key findings and prevented deficiencies

  • State funding for the implementation of the Administrative and Territorial Reform (ATR). 7.69 million euros in total used for the intended purpose under law and regulations. However, the State Audit Office draws attention to the spending of the targeted grants awarded under Cabinet Regulation for the development of projects of territorial development planning documents, and the unreasonably used form of company contract by local and regional governments in cases where a bonus should be paid to employees.
  • Centennial celebration expenses. The compilation promised 5 years ago has been completed, which confirms the risk already identified by the State Audit Office that the amount of self-financing of the government agencies foreseen in the original budget would be exceeded because this trend was observed throughout the celebration and self-financing has been used by 13 million euros more in total than originally planned (39 million euros instead of 26 million euros). According to the calculations of the State Audit Office, the total expenses of the Centenary celebrations reached at least 67 million euros (instead of the originally planned 59 million euros).
  • The most significant deficiencies eliminated: (1) While eliminating the deficiencies identified by the State Audit Office already in 2015, Riga City Municipality carried out an emergency inventory of transport structures and engineering structures, as a result of which 182 fixed assets were excluded from the inventory, while 15 fixed assets were merged and/or their names were corrected; (2) The State Treasury has ensured adequate accounting of derivative financial instruments, which we drew attention to in the audit of the ACFS for 2018.

“Upon completion of the audit of the ACFS, we emphasize every year that we will provide a qualified opinion until the deficiencies we have identified have been eliminated. And there are few of them left such as an annual tax report of the SRS must be prepared accordingly, contingent liabilities resulting from the obligation to cover post-employment benefits of participation in international organizations must be estimated, and one must hope on soon solution of the legal proceedings in the so-called “Lielvārde Promissory Note” case. By eliminating these irregularities and resolving unclear issues, while not creating new errors and uncertainties, we will have a basis for giving a positive opinion on the ACFS,” added I. Bādere.

Additional information

About ACFS and audit of ACFS

  • The purpose of the ACFS is to provide a clear and true picture of the state’s performance in the reporting year and the financial position as of December 31 of the reporting year. The Ministry of Finance drafts it and it contains 73 consolidated reports such as annual reports of 13 ministries, 13 central government institutions, the Saeima, the State Audit Office and 43 local and regional governments, a report on the financial accounting of the state budget and a report on taxes, fees and other payments attributable to the state budget administered by the SRS.
  • ACFS 2021 in numbers: the total amount of the balance sheet is 36.3 billion euros, revenues are 13.7 billion euros, expenditure is 15 billion euros, and consolidated government debt is 15.2 billion euros.
  • The audit on the accuracy of the ACFS includes the examination of financial report (including the state’s consolidated accounting balance, the report on the state’s consolidated debt and the report on the outturn of consolidated total budget) and the management report of the Ministry of Finance on the ACFS, and is performed in accordance with international public sector auditing standards.

About the State Audit Office

The State Audit Office of the Republic of Latvia is an independent, collegial supreme audit institution. The purpose of its activity is to find out whether the actions with the financial means and property of a public entity are legal, correct, useful and in line with public interests, as well as to provide recommendations for the elimination of discovered irregularities. The State Audit Office conducts audits in accordance with International Standards of Supreme Audit Institutions of the International Organization of Supreme Audit Institutions INTOSAI (ISSAI), whose recognition in Latvia is determined by the Auditor General.

100 years of AUDIT STRENGTH

On 16 August 2023, the State Audit Law will turn 100 years old. With the adoption of this Law, the State Audit Office from a formal de facto institution founded on 2 December 1918 became a de jure independent, collegial supreme audit institution of the Republic of Latvia. The State Audit Office is one of the independent state institutions enshrined in the Satversme (Constitution) of Latvia. The Constitution was signed by Roberts Ivanovs as the secretary of the Constitutional Assembly, who was then confirmed as the Auditor General. He worked as the first Auditor General for 12 yearsHis signature confirmed the text of our Constitution alongside that of Jānis Čakste.

Additional information

Mrs Signe Znotiņa-Znota

Head of PR and Internal Communication Division

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