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January 07, 2008

Eyes wide shut? Understanding the politics of government auditing

He who lives outside the budget lives in error.
            Carlos Fuentes, La Silla del Águila, 2003.

Posted by Carlos Santiso (AfDB)

In the second generation PFM reform, strengthening transparency and accountability in public finances is a defining challenge for emerging economies seeking to foster fiscal responsibility and curb corruption. There is thus renewed interest in those oversight agencies tasked with scrutinizing public spending and enforcing horizontal accountability within the state.

Recent research by Carlos Santiso, titled Eyes Wide Shut? The Politics of Autonomous Audit Agencies in Emerging Economies, explores the external oversight of public finances. It models and measures the effectiveness of autonomous audit agencies, developing an index to evaluate their performance, and assesses their reform over time. It examines the institutional trajectory of the AAAs of Argentina, Brazil and Chile, which illustrate the three models for organizing the external audit function in modern states and three distinct trajectories of reform (or lack thereof).

Autonomous audit agencies (AAAs) are autonomous state organizations tasked with overseeing government finances. Often referred to as ‘pillars of integrity,’ they provide critical checks and balances in financial governance, as part of the system of democratic fiscal control. However, in many developing countries, they often fail to fulfill their prescribed roles. Little is known on what explains the effectiveness of AAAs. What explains the effectiveness of autonomous audit agencies (otherwise know as supreme audit institutions) in emerging economies? How relevant are they for improving fiscal governance and curbing corruption? How to measure this?

This research suggests that, while the choice of institutional arrangements for government auditing matters, political economy factors condition the effectiveness of AAAs and shape their reform. It argues that the contribution of AAAs to fiscal control and financial accountability is hampered by structural factors linked to the political economy of government auditing, in particular the dysfunctional linkages among government auditing, legislative oversight and judicial control. Through an analysis of independence, credibility, timeliness and enforcement, Santiso considers the effectiveness of the AAAs in 10 countries in Latin America, summarized in the Figure below.

     Figure: Indicator of Effectiveness of Autonomous Audit Agencies in Latin America (2005)

Aaa_effectiveness_2

This research provides the following five main policy conclusions:

  1. Budget institutions cannot be strengthened in isolation. Regrettably, there is no magic bullet. Ultimately, the effectiveness of audit agencies depends on the broader political economy of executive-legislative budget relations in which they are embedded. It also hinges upon the quality of their insertion in the national system of fiscal control and budget oversight, which include internal control systems, government accounting and legislative budget oversight. Improving government auditing required tackling the incentives for inter-institutional cooperation. It is therefore important to have realistic expectations.
  2. Reform strategies based on radical reform or institutional transplant of exogenous models are likely to fail. Stages of institutional development cannot by bypassed. The example of the radical change of external audit model in Argentina in 1992, which changed from the court model to the collegiate model overnight, constitutes an example of reform failure. Gradual approaches based on incremental adjustments and piecemeal changes, such as those of Brazil since the creation of its AAA in 1891 are likely to bear greater, more sustainable results. These findings underscore the limits of institutional design and institutional importation as effective reform strategies. While radical reform is sometimes warranted, it requires carefully crafted and politically astute reform tactics, both in the design and implementation of the reforms considered. More importantly, it requires moving away from technical approaches to institutional reforms and a deep understanding of the political economy context.
  3. Effective reform requires enhancing the institutional and functional linkages between autonomous audit agencies and the other components of the systems of fiscal control. The effectiveness of AAAs largely depends on the quality of their insertion in the national systems of integrity. Three linkages are of critical importance: with the legislature to enforce political accountability; with the judiciary to enforce judicial accountability; and with civil society to enforce societal accountability. Improving these inter-institutional linkages is likely to enhance external scrutiny of government finances. More effective linkages between AAAs and parliamentary oversight committees, in particular public accounts committees, are particularly important. Similarly, more efficacious links between civil society and oversight agencies are likely to bear significant results.
  4. Institutional independence is not an end in itself but a guarantee of impartiality and credibility. Therefore, independence ought to be approached as a continuous rather than a dichotomous variable. AAAs also need to be accountable to their ‘principal.’ Indeed, this research reveals a paradox of independence: while AAAs ought to be sufficiently autonomous to act independently, they need to develop effective functional relations with those institutions tasked with enforcing government accountability. Who would guard the guardians?  The Chilean Contraloría General de la República (CGR) is a highly independent and respected institution. However, its excessive independence in the architecture of fiscal control and the lack of effective linkages with the other components of the system of budget oversight diminish its ultimate effectiveness. It also renders reform particularly difficult; the Chilean audit office has indeed failed to gradually reform and adjust itself to the modernization of financial management systems.
  5. Conceptually and practically, it is important to distinguish more sharply oversight agencies from accountability institutions. Accountability institutions are necessarily grounded on the separation of powers and consist of the legislature (for political accountability) and the judiciary (for judicial accountability). They are legally empowered to directly enforce accountability on the executive. In contrast, oversight agencies, it is suggested, can only enforce accountability indirectly by referring the cases to accountability institutions. They are generally auxiliary bodies to accountability institutions, either the judiciary (in the court model) or the legislature (in the other models). Their main contribution is, therefore, to support the accountability functions of the legislature and the judiciary.

Ultimately, politics matters in explaining the unexpected, the success or failure of public financial management reform. This research underscores the critical need to increase citizen’s demand for accountability to effectively dent corruption, from both formal and informal institutions. Strengthening the institutions of legislative budget oversight and the agencies of public finance integrity is undoubtedly a critical challenge.

The full paper is available for free download from: Carlos Santiso, Eyes Wide Shut? The Politics of Autonomous Audit Agencies in Emerging Economies (Buenos Aires, Argentina: CIPPEC Working Paper, May 2007)

A shorter version can be found in: Carlos Santiso, “Auditing, accountability and anti-corruption: how relevant are autonomous audit agencies?” in Transparency International, Global Corruption Report 2007 (Oxford: Oxford University Press, 358-362)

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