When assessing whether the actions of the Rēzekne City Municipality in terms of budget and financial management complied with legislation during an audit, it was concluded that several violations were committed in the development of its budget for 2023. As a result, the State Audit Office of Latvia issues an adverse opinion by stating the following main reasons: (1) insufficient assessment of the current situation, (2) reliance on the availability of funding, and (3) fragmentation of the budget management and accounting process.
“Financial stability of Rēzekne raised several questions in the public space, including who is to blame for this situation and who should take responsibility. The focus of the audit of the State Audit Office of Latvia was precisely the responsibility of Rēzekne City Municipality, both in ensuring a solid “backbone” of financial management, that is, accounting and control and in ensuring budget management in accordance with legislation, transparent, based on reasonable forecasts and realizable plans. The audit results show that it is in Rēzekne’s own hands that such a situation does not happen again,” as Ms Ilze Bādere, Council Member of the State Audit Office of Latvia, Control Council, summarised the auditing in the Rēzekne City Municipality.
BRIEFLY
- The budget for 2023 was approved without expenditure and resources to cover them for at least three months, without planning at least 8.68 million euros.
- Deficiencies in accounting and control, e.g., the report does not show potential liabilities of 13.7 million euros.
- Fact: Rēzekne City does not have a contract with a sworn auditor for the audit of the annual report for 2023 currently.
- Heating tariffs: when reviewing them only after the end of state support measures, according to auditors’ estimates, the government paid at least 4.55 million euros more to Rēzeknes siltumtīkli Ltd than it would have been after the tariff revision.
- Weaknesses in the management of investment projects: generally formulated medium-term priorities, insufficiently evaluated project economy and effectiveness, and insufficient actions for project prioritization.
Budget management – fragmented “black box”
The consolidated budget of the Rēzekne City Municipality consists of the budgets of nine institutions, which each of them drafts and submits it to the Rēzekne Financial Board for consolidation and verification separately. In its turn, the development of the budget is ensured by the Capital Investment Program and Budget Process Management Group (Budget Management Group), whose tasks include: (1) review and acceptance of revenue forecasts; (2) examination and acceptance of expenditure control figures; (3) determination of investment priorities; (4) acceptance of the summary of a draft budget and progress for approval, and the Finance and Budget Committee (Finance Committee), one of the tasks of which is to review and approve a municipal budget before it is forwarded for approval at a City Council meeting.
In the development of the 2023 budget from the initial request of the institutions to the approval of the budget at the City Council meeting on 10 February 2023, the draft budget was evaluated several times in the Budget Management Group. The audit found that despite the available information on the lack of budget funds in several items, the budget expenditure control figure, which was set at the level of 2022, was reduced by another 8%. As a result, the budget for 2023 was advanced and approved without expenditure and resources to cover them for at least three months, or without planning at least 8.68 million euros. At the same time, the Finance Committee, which must review and approve the budget before it is forwarded for approval at a City Council meeting, is not involved in the review meetings of the draft budget when budget options are decided (e.g., determining control figures or making decisions on linear reduction of expenditure), so all members of the Finance Committee might not have complete information about the budget needs of municipal institutions.
The audit also found significant deficiencies in the budget outturn and control process, including the process of drafting and approving amendments to the budget. The most important issue: although the Ministry of Finance has stated repeatedly that receiving new loans is impossible, and the Central Finance and Contracting Agency (CFCA) has suspended at least 3.00 million euros for several projects financed by EU Structural Funds this year (about what the Rēzekne City was informed already in 2021), neither the Budget Management Group, nor the Finance Committee, nor the City Council adjusted the budget accordingly for previously planned but not received loans of 7.77 million euros. As a result, the real situation regarding the lack of financial resources is not indicated.
Already since May of this year, when the Ministry of Finance drew Rēzekne’s attention to the large undertaken commitments and instructed to draft an action plan to stabilize the financial situation, it was critically important to obtain correct financial information. Unfortunately, we detected both the inconsistency of the action plan drafted by the Rēzekne City with the budget amendments, as well as significant shortcomings in the Rēzekne stabilization plan during the audit. In a situation where there is no assurance of correct and reliable data, it is impossible to estimate the true amount of liabilities. The cause can be found both in an incomplete internal control system and in the organization of the accounting function. Namely, even though the City Municipality has a uniform accounting procedure (one accounting software OZOLS and system iOZOLS; uniform accounting account, code, and classification plan), each of the nine municipal institutions manages it separately. Also, each institution submits reports separately.
“Trying to find fine details in a thick fog knowing that it will be impossible, it is how we can characterize the situation with the finances of the City Municipality when looking back at the audit process. Currently, it is critical for municipal management to create and maintain a financial system with clear and transparent processes that would provide reliable information to decision makers. At the end of the audit, we invited the responsible representatives of Rēzekne to centralize the accounting function, and this recommendation of the State Audit Office has been accepted with a clear understanding of its importance, which we are pleased about,” stated Ms Bādere.
Accounting records and control with irregularities
Significant inconsistencies in accounting and control of the municipal liabilities were recorded because the auditors found a series of inconsistencies with regulatory enactments, which were not mentioned in the opinion of the sworn auditor or in the report to the management, including that adequate control was not ensured in the accounting records either. The most critical issue is that the report (sub-balance sheet) does not show potential obligations regarding the signed contracts for future long-term investments, which was 13.7 million euros according to the municipality’s information, excluding guarantees. The auditors also found deficiencies in the 2022 inventory. “The most worrying fact at the moment is that the Rēzekne City Municipality does not have a contract with a sworn auditor for the audit of the annual financial statement for 2023 which, in its turn, will mean additional work for the State Audit Office as the auditor of the group to gain confidence in the accuracy of the annual financial statement for 2023,” indicated Ilze Bādere.
For information: The State Audit Office of Latvia uses the work of sworn auditors when auditing the Annual Consolidated Financial Statement of the state (ACFSS) regarding local and regional governments in cooperation with the sworn auditors invited by the local and regional governments included in the audit sample.
Thermal energy tariffs: the City Municipality could have done more for the supervision of Rēzeknes siltumtīkli Ltd.
When submitting a thermal energy supply draft tariff for consideration to the Public Utilities Commission (hereinafter referred to as the Regulator) on 11 November 2022, “Rēzeknes siltumtīkli” Ltd (Rēzekne Heat Network) did not provide sufficient information on the economic justification of the submitted draft tariff and compliance with the actual costs in a timely manner. Therefore, residents and entrepreneurs of the City Municipality paid for heat supply services according to the tariffs approved by Regulator in the heating season of 2022/2023, although the justification for the costs had already changed. As a result, the City Municipality used the state budget funds intended for state support not only for the intended purpose, that is, to provide support to financially disadvantaged population groups (to reduce the impact of the increase in energy prices and general inflation), but also to increase the profit and funds in current accounts of Rēzeknes siltumtīkli Ltd.
In general, Rēzeknes siltumtīkli Ltd received 8.33 million euros from the state budget for the provision of state support measures in the heating season of 2022/2023. Since the tariff was revised and approved only after the end of the state support measures, according to the auditors’ estimates, the government has paid at least 4.55 million euros more to Rēzeknes siltumtīkli Ltd than it would have been after revision of the thermal energy supply tariff.
In the opinion of the State Audit Office of Latvia, the Rēzekne City Municipality could have done more for the supervision of Rēzeknes siltumtīkli Ltd to protect the interests of public service users and to reduce the payment burden for the residents of the City Municipality.
Deficiencies in investment project management
When assessing the investment projects, deficiencies were found in the planning, implementation, and financing of the infrastructure development projects of Rēzekne. For example, investment projects are not always included in development planning documents in such a way that the necessary funding for their implementation in a given budget year can be planned in time. Also, the economic and effectiveness aspects of investment projects have not been evaluated sufficiently, which would allow identifying the future maintenance expenses of these infrastructure sites. In its turn, when attracting funding for projects from EU Structural Funds, for instance, projects supported by EU funding for the restoration of degraded areas are developed, although no document or assessment has been developed in Rēzekne on the possibilities of using undeveloped land and degraded territory.
Besides, for example, the Rēzekne City Municipality has not assessed the technical condition of roads and streets and has not determined the roads and streets to be maintained as a priority according to their economic and social significance in documents.
In general, the implementation of Rēzekne investment projects has not been determined in a priority order to find the best solution for the needs of the residents and the municipality in conditions of limited resources.
Recommendations of the State Audit Office #PēcRevīzijas
In the interim audit report, the Rēzekne City Municipality is given three recommendations to improve the management of the budget and fiscal management system and to ensure the transparency of financial processes, as well as accounting control.
Additional information
- The State Audit Office of Latvia uses the work of sworn auditors when auditing the ACFSS regarding local and regional governments in cooperation with the sworn auditors invited by the local and regional governments included in the audit sample. Considering the identified risks in the ability of the Rēzekne City Municipality to fulfil its undertaken commitments and solve the financial problems, the State Audit Office of Latvia included the City Municipality in the auditing of ACFSS for 2023 to assess the compliance of its municipal budget management with laws and regulations and the completeness of its liabilities.
- The interim audit report of the State Audit Office of Latvia analyses the period from 1 January 2022 to 14 November 2023 basically, but the work of the participating state institutions on identifying and stabilizing the financial situation of the Rēzekne City Municipality continues. The purpose of the State Audit Office of Latvia is to provide an independent and impartial assessment regarding the budget management process in the Rēzekne City Municipality during the mentioned period and draw attention to the identified irregularities whose elimination would have a positive impact on the budget management in the City Municipality.
- Although local and regional governments draft, approve and execute their budgets independently and state institutions may not interfere in the development and execution of municipal budgets (unless it is provided for by law), there are a number of requirements and conditions that local and regional governments have in drafting, approving, and executing their budgets, as well as in financial management that should be followed generally.
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.
100 years of AUDIT STRENGTH
On 16 August 2023, the State Audit Law turned 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 years. His signature confirmed the text of our Constitution alongside that of Jānis Čakste.
Additional information
Ms Signe Znotiņa-Znota
Head of PR and Internal Communication Division
Ph. + 371 67017671 | M. + 371 26440185 | E-mail: signe.znotina-znota@lrvk.gov.lv