The State Audit Office of Latvia has concluded the annual financial audit on the annual consolidated financial statement 2024 of the Republic of Latvia (ACFS) and provides an opinion on its accuracy. Unfortunately, the opinion is qualified this time as well. The most crucial reason is an annual tax report (so-called tax balance) of the State Revenue Service (SRS), which is still not auditable.
IN BRIEF
- The ACFS 2024 consists of 73 reports; the total balance sheet amount is 45.1 billion euros, the consolidated public debt is 19.1 billion euros, revenue is 17.2 billion euros, and expenditure is 17.9 billion euros.
- Opinion on the 2024 ACFS includes reservations due to significant limitations of scope (4.5 billion euros). Reasons for such an opinion are as following: still unresolved problems in the SRS Payment Administration Information System (PAIS), which prevent auditors from obtaining adequate evidence about the information included in the SRS tax report, and deficiencies in the accounting of long-term investments of individual local and regional governments.
- Vehicle operation tax (VOT) and corporate light vehicle tax (CLVT) were assessed in more detail, which should be included in the SRS tax report henceforth and recorded on an accrual basis.
- We reviewed the recommendation provided in 2018 for organising the structure of local and regional governments. Local and regional governments need to continue working on this issue, as information on the structure of local and regional governments in various public data sources is different, as it is sometimes outdated, or even contradictory. As a result, there are inconsistencies in drafting annual financial statements.
- We also draw attention to sustainability in public financial management such as the increase in public debt (it reached 19.1 billion euros at the end of 2024), the financing risks of strategic projects and priority areas (Rail Baltica project, airBaltic, energy targets, increased spending on defence) and financial liabilities arising from the aging of the population.
“We have followed and emphasised the importance of PAIS in the preparation of a correct SRS tax report since the ACFS 2015. The development of PAIS was one of the most essential stages of the project for introducing the accrual principle. This system was supposed to ensure the recording and accounting of tax revenues when receiving tax payments administered by the SRS into the unified tax account and applying them to taxpayers’ liabilities at a specific time and in the corresponding reporting period. Although the SRS has made improvements to PAIS, the SRS tax report is still not verifiable. In this audit, the auditors also found that previously discovered errors were repeated, as well as new accounting problems were discovered,” indicated Ms Ilze Bādere, Council Member of the State Audit Office of Latvia.
SRS tax report and progress of the PAIS project
Since 2021, state budget payments administered by the SRS have been recorded in PAIS following the accrual principle. However, the annual SRS tax report, which is drafted as a result of this accounting, has not been auditable since its first drafting in 2021 due to problems with the PAIS, as obtaining analytical data broken down by taxpayer was impossible, algorithm errors were detected, etc.
This year, in addition to auditing the accuracy of this report (i.e., detailed tax transaction checks and verifications on the compliance of tax accounting with laws and regulations), we also assessed the progress of the PAIS project. In total, we reviewed 613 problem reports and change requests, including revealing problem reports that had not been resolved since 2023. However, the most significant criticisms are not about the management of changes to information systems, but about the manner in which identified problems and errors were handled. The State Audit Office of Latvia considers that the SRS is working insufficiently on this issue, including on identification of causes of problems and errors and impact thereof. For example, by eliminating an error at the level of a specific taxpayer but not assessing the likelihood of that error recurring for other taxpayers. This year, auditors also found both information inconsistencies, manually made corrections, and irregularities in analytical accounting. Therefore, this year, there are also significant limitations of scope regarding the SRS tax report (i.e., after the audit procedures performed, it is not possible to determine whether corrections need to be made to the report, and, if so, to what extent).
“To date, 31 million euros have been invested in the PAIS, but we are still not in a situation where we could prepare a verifiable tax report by means of this information system. Therefore, we call for a serious assessment of the development prospects of PAIS, including by considering related issues, for example, to look at opportunities to optimise tax administration processes from the perspective of tax policy elaboration and bureaucracy reduction plans,” called Ms Bādere.
Vehicle operation tax (VOT) and corporate light vehicle tax (CLVT) revenues
All owners or holders of vehicles registered in Latvia pay VOT for the use of the vehicle in road traffic. In 2024, VOT revenue was 102.3 million euros. In its turn, CLVT is a payment made by economic operators for light vehicles in their ownership or use, regardless of the purpose of their use, and CLVT revenue was 28.5 million euros in 2024. Currently, both of these taxes are accounted for on a cash flow basis, i.e., revenue is recognised at the time of receiving the money. The balance sheet does not present information on VOT and CLVT claims and liabilities because the accrual principle is not followed in tax accounting. It means that revenue and expenditure are not recognised in the period in which they arise, regardless of the receipt or payment of money, and there is no identifiable impact on the budget outturn result.
Amendments to the Law on Vehicle Operation Tax and the Law on Corporate Light Vehicle Tax took effect in 2025. As a result, the accrual principle should be introduced for VOT accounting from the next accounting year, but as regards CLVT, the necessary prerequisites should be created to ensure an identical approach. It would allow all tax revenues to be reported in one place by applying uniform accounting principles.
Structure of local and regional governments and preparation of annual reports
During the audit, we examined whether the recommendation given in 2018 to local and regional governments to evaluate their established structure, continuation of operations, efficiency and effectiveness has been implemented according to its purpose and essence. As a result of the verification, we concluded that the information available in public registers on the structure of local and regional governments was still different, irrelevant and even mutually contradictory. For example, in the list of public entities and institutions, municipal institutions are registered in inappropriate statuses (as a direct administration institution, another state institution, etc.), there is a discrepancy in information between the list of public entities and institutions and local and regional government regulations, terminated/ reorganised institutions have been identified in the SRS taxpayer register, etc.
Due to insufficient attention to these issues, inconsistencies have also been identified in the elaboration of annual financial statements. Namely, certain state institutions, although they are independent taxpayers, do not prepare a separate annual report, as required by laws and regulations. Therefore, we call on local and regional governments to continue to streamline their institutional structure and clarify information in various public registers, also deciding on the inclusion/ non-inclusion of an institution in the taxpayer register as an independent taxpayer.
Sustainability challenges in public finances
“The basic idea of sustainable development calls for meeting the needs of the current generation by balancing the interests of social welfare, environment and economic development while ensuring compliance with environmental requirements and the preservation of biodiversity, so as not to reduce the opportunities for meeting the needs of future generations,” as stated in the Sustainable Development Strategy of Latvia until 2030. In the ACFS audit report, we draw attention to the most pressing sustainability issues in public financial management: 1) national debt and national credit rating; 2) financing for strategic projects and priority areas; 3) liabilities arising from the aging of the population and the demographic situation.
At the end of 2024, national debt reached 19.1 billion euros, or 8% more than a year earlier, and its servicing costs will increase significantly in the coming years. To maintain investor confidence and credit rating at least at the current level, thoughtful long-term financial planning is required. The latter is hampered by rising defence spending, as well as significant funding challenges in strategically important projects such as the Rail Baltica project and the management of the government investment in the airline airBaltic. The costs of the Rail Baltica project in Latvia have increased almost fourfold compared to the original plan, and a funding gap is expected in the coming years. In the case of airBaltic, however, there is a lack of sufficient oversight over the government investment of more than half a billion euros and the possibilities for its recovery.
Insufficiently effective management of energy policy also poses additional risks. More than 13 billion euros of additional investment is needed to achieve the goals set in the National Energy and Climate Plan by 2030. However, only less than 30% of this amount has been secured at present. There is a significant risk that Latvia will not be able to meet its obligations without additional funding.
The rapid aging of the population is already placing a significant burden on the state budget. In 2024, pension costs required 3.5 billion euros, and this amount is growing every year. In addition to the state pension system, there is also a service pension system, the original purpose of which no longer corresponds to the current situation and which becomes increasingly expensive for future taxpayers. The State Audit Office of Latvia calls for finding solutions for its revision, as well as finally establishing a reserve fund of special social insurance budget to protect the accumulated funds from being spent for short-term political goals. It would reduce the risk of further increasing the national debt.
Recommendations of the State Audit Office of Latvia #PēcRevīzijas
The audit provided three recommendations, after implementation of which: (1) the information systems related to elaboration of a SRS annual tax report will be improved while also reviewing the possibilities for optimising tax administration processes and informing the Ministry of Finance about this; (2) vehicle operation tax and (3) corporate light vehicle tax revenues will be included in the SRS annual tax report by applying the accrual principle in accounting.
About ACFSS and auditing ACFSS
The purpose of ACFSS is to provide a clear and true picture of the country’s performance in the reporting year and the financial position as of December 31 of the reporting year. The Ministry of Finance drafts ACFSS which contains consolidated 73 reports, that is, annual reports of 14 ministries, 12 central government institutions, the Saeima, the State Audit Office of Latvia, and of 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.
The audit on the accuracy of the ACFS includes examination of a financial statement (including a report on the financial position (balance sheet), a statement on the financial results of the operation, a statement on changes in equity, a cash flow account and an annex to the financial statements with explanations), examination of information on the outturn of the budget and examination of the management report of the Ministry of Finance on ACFS, and it has been conducted following the international public sector auditing standards.
From now on, only one audit report on the accuracy of the ACFS
This is the last year when the State Audit Office of Latvia drafts 27 financial audit reports and opinions (14 ministries, 12 central government institutions and the ACFS). From May 2025, the new approach to conducting financial audits is implemented in full by providing only one audit report on the accuracy of the ACFS from now on. A new stage in public sector financial auditing begins.
Additional reading: audit report summary
About the State Audit Office of Latvia
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. Upon discovering deficiencies, the State Audit Office of Latvia provides recommendations for their elimination, but it informs law enforcement authorities about potential infringements of the law.
Additional information
Ms Gunta Krevica
Head of Communication Division
Ph. 23282332 | E-mail: Gunta.Krevica@lrvk.gov.lv