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IV.  Independent Assurances of Integrity(continued)

Public and Independent Scrutiny

4.2 Fiscal information should be subjected to independent scrutiny.

164. The Code includes good practices relating to: (1) independent audit; (2) independent assessment of fiscal and macroeconomic forecasts; and (3) the integrity of fiscal statistics.

Independent audit

4.2.1 A national audit body or equivalent organization, which is independent of the executive, should provide timely reports for the legislature and public on the financial integrity of government accounts.

165. This is a basic requirement of fiscal transparency. National audit bodies134 are found in most countries, although precise forms and degrees of independence vary. However, new institutions need to be created in many countries in transition. In francophone countries, such institutions are known as the Cour des Comptes, in Commonwealth countries they are often designated as the National Audit Office or Auditor-General's Office,135 and in Latin American countries as the Contraloría General. Their essential function is to uphold and promote public accountability. Their role can take on added importance in ensuring adequate public accountability as many governments move to devolve decision-making authority. It is a basic requirement of fiscal transparency that a national audit body should be set up under law.

166. The core component of government auditing is the regularity audit. This covers attestation of financial accountability of individual agencies—involving evaluation of financial records—and the expression of opinions on financial statements; attestation of the financial accountability of the government as a whole; and audit of financial systems and transactions, and of internal control and audit functions—including an evaluation of compliance with regulations and statutes.

167. In completing a regularity audit, the auditor expresses a written opinion on his or her findings. An unqualified opinion is given when the auditor is satisfied that: the financial statements have been prepared using acceptable accounting bases and consistently applied policies; the statements comply with statutory requirements and regulations; the view presented by the financial statements is consistent with the auditor's knowledge of the audited agency; and there is adequate disclosure of all material matters relevant to the financial statements.

168. An important feature of national audit bodies is that they should not be under the control of the government of the day. The INTOSAI 1977 Lima Declaration of Guidelines on Auditing Precepts had the chief aim of calling for independent government auditing. The guidelines call for the establishment of supreme audit institutions to be laid out in the constitution, and for their independence to be protected by a Supreme Court.136 Establishment of procedures independent of the executive for the appointment of the chief auditor, and for his or her removal from office, is a common mechanism to assure independence. In a number of countries, however, chief auditors are appointed by the president or prime minister, and report to that official rather than to the legislature. The independence of chief auditors can be strengthened in such cases by ensuring that they are at least appointed by the legislature.

169. The chief auditor should be allowed to report directly to the legislature.137 There should also be a presumption that all reports of the national audit body are automatically publicly available once submitted to the legislature—either immediately or within a specified period of time. In contrast, in some countries the audit office's report on the final accounts is transmitted to the legislature, or to the Speaker of the legislature, but may not be tabled in the legislature and become public information until some considerable time later.

170. One area where external audit reports are often not published is the area of military or security spending. National security considerations may warrant special provisions limiting publication of audit reports. In these situations it is important, however, that all military spending be audited by a nonmilitary authority, and that the results of the audit be presented to a legislative body, such as a public accounts committee.138

171. It is a basic requirement of fiscal transparency that mechanisms should be in place to help ensure that remedial action is taken in response to adverse findings in external audit reports. One mechanism would be a regulatory requirement that the audited agency respond to the findings publicly, in writing, and indicate the actions it will take in response. Another mechanism would be for a public accounts committee to review the public accounts, to consider the chief auditor's report, and to hold the executive accountable for remedying deficiencies exposed through audit.139

172. To ensure that the executive cannot render the national audit body ineffective by denying it adequate funding, by controlling its staffing, or by delaying consideration of its reports—which are problems in some countries—there should be procedural mechanisms for providing a greater-than-usual degree of legislative oversight of the operation of the office. One mechanism would be to assign to a legislative committee the responsibility for proposing the office's annual budget and for setting broad areas of priority for the office, while leaving chief auditors some flexibility to initiate reports on any aspect of concern within their brief. It is important that the national audit body be given full access to all necessary records, documents, and personnel. Legislative requirements to this effect would assist in obtaining the cooperation of audited agencies.

173. Standards of external audit practice should be consistent with international standards, such as those set by INTOSAI,140 which are described in Box 24, or by a regional body. The national audit body should have the necessary core of professionally trained staff, and all staff should be required to exhibit independence in thought and action in the conduct of their duties. The work of the office should be subject to internal assurances of quality and independent appraisal. Some advanced economies give national audit bodies a mandate to report to the public and the legislature on a broad range of issues, including auditing nonfinancial performance information against announced performance targets. Although implementation of the fiscal transparency code has not yet been taken up as a formal audit issue in any country, most of the elements considered under the Code are appropriate subjects for a broad performance audit. It is therefore best practice that a national audit body, or equivalent organization, should report to the legislature and the public on all matters relating to the integrity and transparency of fiscal policy.

Assessment of fiscal and macroeconomic forecasts

4.2.2 Independent experts should be invited to assess fiscal forecasts, the macroeconomic forecasts on which they are based, and all underlying assumptions.

174. As noted earlier, budget estimates should be based on coherent and consistent macroeconomic forecasts, and the fiscal forecasts themselves should be of high quality. Publication of detailed information on the analytical basis of the macroeconomic and fiscal forecasts is a necessary first step that makes possible independent assessment and public debate on the quality of forecasts. This information should be included in summary form in a background paper that is part of the budget documentation. More detailed supporting information should be openly available on request.

Box 24. INTOSAI Auditing Standards

INTOSAI auditing standards consist of four parts: basic postulates, general standards, field standards, and reporting standards.

Basic postulates: the development of adequate information, control, evaluation, and reporting systems within the government will facilitate the accountability process; appropriate authorities should ensure the promulgation of acceptable accounting standards for financial reporting and disclosure relevant to the needs of the government; and each audit body should establish a policy on which INTOSAI standards, or other specific standards, it will follow in order to ensure its work is of high quality.

General standards: individual auditors and the audit body must be independent of the executive, of the individual entity being audited, and of any political influence; they must possess the required competence; and they must exercise due care and concern in complying with INTOSAI auditing standards.

Field standards: auditors should design regularity audit procedures to provide reasonable assurance of detecting errors, irregularities, and illegal acts that could have a direct and material effect on the financial statement amounts; auditors should evaluate the reliability of internal control; and an objective of the regularity audit should be to provide assurance that the budget and accounts are complete and valid.

Reporting standards: following each audit, the chief auditor should prepare a written opinion or report setting out the findings in an easy-to-understand form, including only information that is supported by competent and relevant audit evidence; audit reports should be independent, objective, fair, and constructive (i.e., they should address future remedial action).

 

175. Additional steps should also be taken, however, to facilitate independent assessment. Inclusion with the budget forecasts of a statement of responsibility, which makes it clear which agencies have produced the fiscal and macroeconomic forecasts respectively, would facilitate assessment of the forecasts by making it clear who within the government is accountable for the quality of the forecasts.141 Regular publication in budget background papers of ex post assessments of the fiscal and macroeconomic forecasts to previous budgets against the actual outcomes would contribute to informed discussion. Regular publication by the central bank of its macroeconomic forecasts, including the technical basis underpinning them, would also facilitate informed debate over the robustness of the government's official macroeconomic forecasts.142 Working methods and assumptions used in producing fiscal and macroeconomic forecasts should be made publicly available no later than at the time the annual budget is presented to the legislature, and preferably some time in advance of budget presentation. Advance presentation allows time for the legislature, independent forecasters and analysts, the financial press and the general media to scrutinize and comment on the robustness of the macroeconomic forecasts.143 The public accounts committee of the legislature may have support staff available to assist it to assess the forecasts, and/or it may invite submissions from independent experts.

176. Best practice is that institutional mechanisms should be established to provide the public with independent assurance that fiscal and macroeconomic forecasts are of high quality. This could be include making the fiscal and macroeconomic models available to outside experts.144 The macroeconomic assumptions used in the budget could also be drawn from those produced by private sector forecasters.145 Some countries have put in place mechanisms for formal quality reviews by experts which are made public.146 Others give an independent public agency the task of critiquing and reporting on the quality of forecasts.147

National statistics agency

4.2.3 A national statistics agency should be provided with the institutional independence to verify the quality of fiscal data.

177. The national statistics agency, or other principal official producer of government finance statistics, should be set up under legislation that grants it technical independence in the compilation and publication of official statistics.148 This will enhance the quality and integrity of fiscal and other statistics. In the fiscal area, such an agency would play a vital role by coordinating the collection of basic fiscal data by other official bodies, and by serving as the focal point for the production and dissemination of government finance statistics.

178. To build confidence among users of official statistics, transparency of the practices and procedures of the national statistics agency is also required. Among other things, this means that the statistics agency should be provided with all the basic data it requires; it should compile fiscal data on an impartial basis; it should be entitled to comment on erroneous interpretation and misuse of the information; and it should reveal any government access to fiscal data prior to their release. In addition, terms and conditions under which fiscal data are produced and disseminated should be available to the public, and guidelines for the behavior of the staff of the statistics agency should be clear and well publicized. One way to promote these aspects of quality is through observance of the UN Fundamental Principles of Official Statistics—see Box 25 below—and by meeting the standards for data integrity contained in the SDDS/GDDS.

Box 25. The UN Fundamental Principles of Official Statistics

The following features of the UN Fundamental Principles are particularly important in fostering the integrity of fiscal statistics:

  • official statistics are to be compiled and made available on an impartial basis by official statistical agencies;

  • methods and procedures for the collection, processing, storage, and presentation of fiscal data are to be determined solely by the head of the statistical agency according to professional considerations; and

  • statistical agencies are to be entitled to comment on the erroneous interpretation and misuse of statistics.


134 These are also known as supreme audit institutions. The national audit body is the highest level audit body in a country.
135 The main elements of institutional independence have been established for the Audit Office in Uganda. See the ROSC for Uganda, Fiscal Transparency Module, paragraph 29, at http://www.imf.org/external/np/ rosc/uga/index.htm
136 See http://www.intosai.org/2_LIMADe.html.
137 In India, an independent comptroller and auditor general reports only to the parliament. It should also be noted that state governments have their own accountants general-working under the comptroller and auditor general-who provide audit reports directly to state legislatures.
138 In Pakistan, for instance, defense appropriation accounts are provided to the Public Accounts Committee, but circulation of the documents is restricted for security reasons. See the ROSC for Pakistan, Fiscal Transparency Module, paragraph 30, at http://www.imf.org/external/np/rosc/pak/fiscal.htm.
139 For example, in the United Kingdom, the Public Accounts Committee reports its findings both to parliament and to the treasury, and the treasury must subsequently report back to the committee on actions taken or not taken in response. The Public Accounts Committee in India plays the same role.
140 See INTOSAI (1995).
141 The OECD best practice guidelines (item 3.2) go further by requiring that each fiscal report should contain a statement of responsibility by the finance minister and the senior official responsible for producing the report.
142 The Bank of Norway regularly publishes its internal staff macroeconomic forecasts. The Swedish Riksbank publishes macroeconomic forecasts sanctioned by its policymaking body, not just by the staff, which further aids transparency. Publication by the central bank on a specified schedule of a report on the evolving macroeconomic situation is a requirement of the monetary and financial transparency code (item 2.4.2).
143 In South Africa, the macroeconomic assumptions on which the budget forecasts are based are presented to parliament in a Medium Term Budget Policy Statement three months before budget day. See Folscher (1999) at http://www.idasa.org.za/.
144 In Australia, for example, the Treasury Macroeconomic Model can be viewed at http://www.treasury.gov.au/ and purchased from the Australian Bureau of Statistics. In the United Kingdom, the treasury is required by law to make the macroeconomic model publicly available.
145 In Canada, the average of private sector economic forecasts is used as the basis for the economic assumptions underpinning the budget. See OECD (1999).
146 In France, for example, the macroeconomic forecasts are reviewed by the National Economic Commission, chaired by the minister of economy and finance and including twenty two members chosen for their economic and financial expertise. The National Economic Commission is supported by a technical group, which reviews macroeconomic forecasts prepared by key independent institutes and banks. See the ROSC for France, Fiscal Transparency Module, paragraph 20, at http://www.imf.org/external/np/rosc/fra/index.htm. In the Czech Republic, twice a year and before the budget forecasts are released, a panel of experts, including individuals from the private sector, scrutinize the macroeconomic assumptions. See the ROSC for the Czech Republic, Fiscal Transparency Module, paragraph 19, at http://www.imf.org/external/np/rosc/cze/fiscal.htm.
147 In the United States, the Congressional Budget Office, which reports directly to the legislature, prepares a complete set of macroeconomic and fiscal forecasts to be considered alongside those contained in the president's budget proposal.
148 In a number of countries, most notably those in Latin America, fiscal data are produced and disseminated by the central bank rather than by the national statistics office.

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