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November 11, 2011

Budget Oversight: The Challenges of Establishing an Independent Supreme Audit Institution in Developing Countries

Posted by Lewis Kabayiza Murara

What does it take to establish a Supreme Audit Institution (SAI) that is and is seen to be immune from the influence and interference by the executive branch of government that the SAI is supposed to audit? Are great laws and well articulated statements sufficient? What are the practical, day-to-day realities SAIs face in developing countries in exercising their budget oversight role?

The major feature for an independent SAI is to enjoy financial, administrative and operational autonomy (see the 1998 Lima Declaration issued by INTOSAI that has won international acceptance as best practice set of basic principles on SAI independence, powers of examination and enforcement of recommendations). In other words, the SAI’s ability to develop a robust human resource development system to attract and retain good auditors is as vital as its ability to stay away from interference in identifying audit priorities and executing them.

In practice many developing countries have established SAIs and have ensured that the constitution guaranties the SAI’s independence. Most have passed audit laws defining how the SAI’s autonomy would be exercised. In doing so, most developing countries have followed best practices in drafting these pieces of legislation. Despite relatively strong legal frameworks, a number of factors hamper the effective autonomy of SAIs in developing countries. This blog post discusses only four of these key factors: funding, appointing authority, tenure and the “civil servants trap”.

Funding

A particularly delicate issue and perhaps the most controversial one with regard to SAIs independence in developing countries is funding. In most developing countries parliaments leave the SAI to engage in the very subtle process of budget negotiation with the ministry of finance which weakens the SAI and puts it in the uncomfortable position of bargaining with the auditee on what to cut or not. In countries in which the budget is affected by cash rationing, and in which the SAI does not have an independent budget, the SAI is likely to experience unpredictable fluctuations in funding. In reality the executive control over the SAI’s funding is a direct control over the audit scope of the SAI in terms of how much it can audit and how effective it can do it therefore limiting its operational independence, a key feature for a truly independent SAI. Even where parliaments in developing countries are able to take the responsibility of preserving the SAI’s budget as in the case of Pakistan where the budget of the Auditor General is classified as “charged” expenditure, they are constrained by the fact of being heavily dominated by members of parliament belonging to the same political party as the head of the executive. Some SAIs charge audit fees or have laws providing for charging audit fees (e.g. Kenya, South Africa) and are able to generate their own resources with the risk of focusing on those institutions that are able to pay even when they are not the most risky. Therefore this may not necessarily be the best financing mechanism for an SAI. Inappropriate funding also implies that the SAI will not have sufficient mechanisms to ensure enforcement and monitoring of its findings and recommendations.

Appointing authority

In most developing countries as well as in advanced countries, the head of the Executive appoints the head of the SAI, and in others, the head of the Executive proposes the head of the SAI for parliament approval (e.g. Namibia, Rwanda). In countries where this system prevails, the head of the executive also keeps some powers to propose for parliamentary approval, the dismissal or suspension of the head of the SAI. In this case even though by law the SAI may report to parliament, the head of the executive tends to be the de facto appointing authority and may exercise influence on the SAI. This influence may sometimes take forms that are as severe as denying the SAI full access to financial and other relevant information from all government departments and other entities, or putting restrictions on what should be published or not.

In other developing countries, there are more advanced forms of appointment whereby the head of the SAI is either directly appointed by parliament or recommended by Parliament to the head of the executive (e.g. Indonesia, South Africa, Mongolia), or is appointed for an unlimited term with only a fixed retirement age (e.g. Ghana, Guyana), with reporting responsibilities to parliament clearly defined in appropriate laws. Whereas this should work, most parliaments are themselves influenced by the head of the executive due to several reasons including the fact that in most developing countries the political party of the head of the executive wins the majority of parliamentary seats; making the parliament follow the wishes of the executive including with regard to appointing and dismissing the head of the SAI, or directing the SAI what to audit and when.

Tenure

Even with a relatively strong legal framework for the SAI, some developing countries still have very short terms for heads of SAIs limiting the ability of the latter to complete any meaningful reform during their tenure. Others have short but renewable terms but since renewal is never objectively guaranteed, the tendency is for some heads of SAIs to spend most of their time struggling for political survival including bending on some unjustified demands by the executive.

The “civil servants trap”

Most SAIs in developing countries still rely on the public service commission (PSC) to hire (or fire) their staff, or on the ministry of public service where there is no PSC. Similarly they are not able to determine remuneration packages for their auditors, define their career path or put in place other retention mechanisms, but only follow the practice as it applies to civil servants. A parallel could be drawn between the SAI and the national central bank which needs to be established with similar safeguards on independent funding, independence from political control, freedom (and sufficient financing) to set salaries that are delinked from the civil service. Many developing countries have been able to establish independent national central banks but have failed to do exactly the same with SAIs. In some cases SAIs are unable to put in place a structure that suits the nature of their particular business but rely on the ministry of public service to do so on their behalf, including having it approved by cabinet. Such a process results in the executive having the power to drastically limit the SAIs ability to discharge its mandate due to poor structure, poor staffing, poor remuneration and therefore ineffective auditing. The key feature of an independent SAI which is administrative and financial autonomy is therefore far from being achieved in most developing countries due to this trap.

Conclusion

When an SAI does not have full independence including operational, administrative and financial autonomy, its ability to scrutinize government spending is weakened. The risk is that the SAI will not be able to conduct substantial operations that expose how the executive is managing taxpayers’ money. The SAI may find itself doing routine transactions that do not add value in terms of the government’s effectiveness in delivering services, and the efficiency of its spending. The risk of compromising the quality of audits is therefore high. Despite a legal framework defining SAIs full independence, the SAI’s ability to draw its annual audit plan and implement it without interference becomes theoretical if it cannot get the necessary financial resources, hire the necessary staff, fire those who do not perform, remunerate its staff adequately, and change or adapt its structures as needed to enhance its effectiveness. If the scope and depth of the work of the SAI is not adequate due administrative and financial constraints imposed by the executive, government operations may not improve and taxpayers will not get services that represent the best value for their money.

In their role of government oversight, parliaments in developing countries as in other countries need audit reports that are prepared by an independent and capable audit office. Parliaments therefore have a role in ensuring that the SAI gets sufficient financial and human resources necessary for an adequate scrutiny of government spending. It is best practice that given the uniqueness of the auditing business, SAIs need to hire qualified staff with adequate remuneration.

The SAI needs to be viewed as an important element of the checks and balances system in developing countries. Government needs to be held accountable for its spending and for the quality of services it provides to the citizens. Without an independent SAI, that accountability mechanism is weakened. The major challenge for developing countries lies in ensuring that SAIs independence is effectively practiced rather than just having it as a legal provision.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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