New book on the politics of government auditing in emerging economies
The Political Economy of Government Auditing: Financial Governance and the Rule of Law in Latin America and Beyond by Carlos Santiso (London: Routlegde, May 2009) Available from May 18 at http://www.routledgelaw.com/books/The-Political-Economy-of-Government-Auditing-isbn9780415477734
Over the past decade, developing countries have made significant progress in fortifying the institutional architecture for managing public finances in a transparent and accountable manner. Nevertheless, daunting challenges remain to improve government auditing and budget oversight. The key challenge is to ensure that auditing becomes accountability, that the information provided by audit findings is used to bring governments to account for the manner in which they manage public resources.
The Political Economy of Government Auditing examines the contribution of autonomous audit agencies (AAAs) to the fight against corruption and public sector governance, focusing on the experience of Latin America, which combines examples of partial success and pending reforms. It assesses the trajectory and effectiveness of audit agencies in Argentina, Brazil and Chile.
A tale of the fiction of control
There is often a gap between formal and informal institutions. Let’s use an example. In 2000, a corruption scandal erupted in Argentina, involving María Julia Alsogaray, former environment minister under President Carlos Menem between 1995 and 1999. This case is emblematic of the embedded nature of corruption and the incapacity of the control system to deter it. The case erupted in the public domain when a draft audit report by the Argentine audit agency was leaked to the press in January 2000, revealing numerous irregularities in the management of the ministry’s discretionary budget through the use of off-budget trust funds, irregularities in public procurement, overpricing practices and dubious recruitment procedures.
However, the audit process was marred with difficulties. The report had yet to be completed, awaiting the response of the audited ministry before it could be released. The audit investigation was launched while the opposition Radical party presided over the audit agency, as the Argentine audit agency is headed by the opposition. It was concluded in October 1999, days before the general election which resulted in a change of government and of the head of the audit agency. Alsogaray’s party, then in the opposition, therefore assumed the leadership of the audit agency, inhibiting further the investigation.
However, the leakage of the report to the press prompted the Anticorruption Office to seize the case and, in June 2000, to press charges as plaintiff in defense of the interests of the state. Soon the case ballooned as more irregularities were revealed. By the end of 2000, Alsogaray was investigated for fraud and corruption of over US$180 million, involved in 12 court cases and investigated in 12 audit reports. In August 2003, a federal judge finally found her guilty on several counts of corruption. She was nevertheless released on bail in May 2005 and returned to politics with a vengeance, revealing the systematic use of illegal salary complements between 1989 and 1999 to increase the incomes of ministers, senior civil servants, legislators and judges during the administrations of Menem.
Auditing, accountability and anticorruption
This example illustrates potential but also the limitations of audit agencies to deter corruption and anchor integrity in the public sectors. It also underscores the importance of understanding the political context in which AAAs are embedded and which make them work or fail.
AAAs are only a component of the broader system of checks and balances, albeit a critical one. As central “pillars of integrity” and “agencies of restraint”, they are autonomous state organizations tasked with scrutinizing public spending and overseeing government finances. However, while they are amply acknowledged as central actors in the governance of the budget, they are often weak institutions failing to fulfil their prescribed role. In many countries, they are contested, criticized for their inability to curb corruption and reduce waste. Their very relevance is often questioned. This is partly due to the fact that little is known of their effectiveness of and how to measure it.
The Political Economy of Government Auditing addresses some of the critical questions facing reform-minded countries seeking to enhance accountability in government finances. How relevant are AAAs for improving fiscal governance and curbing corruption? What determines their effectiveness? Does the choice of institutional design and the country’s legal tradition matter?
Unlike most analyses of audit systems, this book adopts a political economy approach to comprehend the political and institutional context in which AAAs are embedded and the influence of institutional design on agency performance. It examines the cases of Argentina, Brazil and Chile which illustrate the three models of AAAs for organising the external audit function in modern states: the parliamentary (Argentina), court (Brazil) and independent (Chile) models. It also examines the trajectories of reform of audit arrangements, or lack thereof.
The research finds that, while the choice of institutional arrangements for government auditing matters, political economy factors ultimately condition the effectiveness of AAAs, as well as the scope for reform. External, rather than internal governance factors have greater explanatory power on agency performance, rooted in broader political factors, the nature of the political system, and the strength of the rule of law. Reforming AAAs must therefore consider the trajectory of state building, the role of law in public administration and the quality of governance more generally. The effectiveness of independent auditing of government finances is linked to the strengths and weaknesses of budgetary systems overall; they are part of a larger puzzle of fiscal integrity in the complex architecture of financial governance.
Research findings
The book presents empirical evidence showing that effective AAAs do improve the credibility of the budget and the quality of governance, in terms of integrity, transparency and accountability. It develops a quantitative index to evaluate the performance of AAAs and gauge their impact on financial governance and fiscal oversight, based on a set of ten Latin American countries.
The research also shows that AAAs are part of the broader system of checks and balances in government financial management. As such, their effectiveness depends on the quality of budget institutions and the legal tradition of the bureaucracy. In Chile, for example, the AAA is embedded in a state with a tradition of adherence to the rule of law and a centralised budget system.
In particular, the book reveals the paradox of independence of AAAs. It suggests that, while independence is critical to guarantee impartiality, it should not be an end in itself. The key question is how much independence is enough to secure credibility and how much is too much to compromise relevance. For example, while in Chile the AAA’s performance is inhibited by its insulation within the public sector, the Argentinean AAA has traditionally suffered from its excessive dependence on the legislature and the political filtering of audit recommendations.
Shortcomings in government financial accountability reflect deeper dysfunctions in the relations between the AAA and the other components of the system of control, in particular, the legislature. Dysfunctional links between audit agencies and their principal, the legislature, is a crucial missing link in the chain of accountability. Furthermore, the structural weaknesses of legislatures in the oversight of the budget and the scrutiny of public finances are further impediments to the effective follow-up of audit findings. Lastly, the book argues that external audit systems are in transition, seeking to redefine their role in fiscal control and their contribution to public management. They are often caught between the liberal concern for restraining government mainly through compliance auditing, and the managerial concern for improving public management through performance auditing.
Policy implications
The research findings presented in the book have important implications for policymakers seeking to strengthen and reform external auditing arrangements.
First and foremost, politics matter to explain the effectiveness of budget oversight and external auditing of public finances. Understanding the politics of the budget and the functioning of the political system helps better understand the gap between formal systems of government auditing and their functioning in practice. Politics often explain how independent auditing can be either encouraged or neutralised. Furthermore, they often are the catalyst or driver for fundamental reform in the arrangements for external auditing, for better or worse. In particular, the relative strength of the opposition is an important factor determining the extent to which audit findings are acted upon. In Argentina, political considerations influenced the radical reforms of external auditing in 1992, leading to its neutralisation. Thus, to build effective AAAs, mobilising political power is often more important than increasing technical capacity. The emergence of a strong opposition in Mexico has led to a more intensive use of audit reports, linked partly to a strengthening of the role of the legislature in budget oversight.
When it comes to the reform of audit arrangements, the book demonstrates that AAAs cannot be strengthened or reformed in isolation, but as part of the broader systems of checks and balances in financial governance. The effectiveness of AAAs ultimately depends on the quality and fluidity of their institutional linkages with the rest of the system of financial governance and budget oversight. In Chile, any reform of the AAA will require adjustments in other components of the system of fiscal control, such as government accounting, internal auditing, and legislative oversight.
Furthermore, stages of institutional development cannot be bypassed; auditing systems must grow from within and evolve gradually. They cannot be created over night. Radical reform of external audit systems, as in Argentina in 1992, is likely to fail. Conversely, gradual reforms within external audit systems, as in Brazil since 1891, are more likely to be successful. Radical reform strategies based on the institutional transplant of exogenous models are thus unlikely to succeed. Any reform of AAAs must take into consideration the past trajectory of institutional change as well as the broader system of public budgeting in which AAAs are embedded.
The book provides practical suggestions on ways to fight corruption by strengthening the institutions of integrity and accountability in the management of public resources. It provides important insights to less developed countries in Africa and Asia seeking to establish, strengthen or reform their own audit arrangements; and thus facing critical choices in the selection of institutional design. It also offers important lessons to international financial institutions and donor governments seeking to strengthen financial governance in developing countries.
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