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May 22, 2013

Can an “Independent” Public Body be Truly Independent?

Posted by Richard Allen

Independent central banks in many countries are under threat from governments that want to bring them under a tighter rein. Independent fiscal councils have been abolished by governments that see their independence as an unacceptable threat. Independent auditors are having their autonomy and remits curtailed by governments that are concerned about opening themselves up to scrutiny. Does this signal that governments, while paying lip service to the ideas of transparency and accountability, only accept these ideas on their own terms, and suitably diluted for public consumption? What are the failures of the executive branch—inadequate public accountability, for example—that independent public entities are deemed to fill? How well have the entities concerned filled these perceived gaps?

These are legitimate and complex questions but are the subject of several research studies, including an ongoing study of fiscal councils by FAD. In this article we focus on a narrower question: what do we mean when we say that a public sector entity is “independent” and how can we measure its degree of independence? It seems fair to say that, for entities operating in the public sector such as central banks, audit institutions, accounting standards boards, and fiscal councils, there can be no absolute standard or guarantee of independence. “Independence” is a relative term, and one that depends for its legitimacy on the quality of political institutions and public perceptions, as well as legal and financial considerations. It is possible nevertheless to set out the conditions that make it more likely that an institution such as a fiscal council or an accounting standards board is able to operate independently of the government.

1.  Legal status. It is preferable that the entity be recognized in an international treaty or the constitution, rather than in an ordinary law or regulation. In many countries, bodies such as the central bank, the external auditor, and the attorney general are recognized as “independent” entities in the constitution. The fact that the fiscal council is required under EU law, and thus has the status of a treaty in the national law of EU member states, is helpful in this context.

2.  International recognition. It is preferable that the work carried out by the entity and the entity’s independent status be recognized by an international body. In the case of external audit, for example, there is a professional standard setting body, the International Association of Supreme Audit Institutions (INTOSAI), which has defined the basic principles of independence in the so-called Lima Declaration of Auditing Precepts (1977).  The Lima Declaration is a model of its kind, touching on issues of political, administrative and financial independence.  A similar international standard setting body exists for internal audit, namely the Institute of Internal Auditors (IIA).

3.  Administrative independence.  It is important that the entity be separated from the executive branch of government to the maximum degree possible. But this separation cannot be absolute because at the end of the day senior appointments such as the president and members of the fiscal council must be approved at the political level by the council of ministers, or in some countries by the parliament (e.g., in the U.K. the auditor general is formally an officer of the parliament, with no link to the executive branch).

4.  Financial independence. Principles that would gather general acceptance—drawing on the Lima Declaration—are that (i) the entity should be provided with a continuous source of income that enables it to carry out its functions; (ii) the entity should be able to apply for the necessary resources through the state budget process; and (iii) a separate “protected” budget heading should be provided from which transfers of funds to other parts of the budget cannot be made. Arguments have continued to flow, however, as to how such general principles should be interpreted and applied in practice. Most commentators would agree that the financing of independent public bodies should be part of the general budget process and be approved by the parliament. If so, however, should the budget of such entities be immune from cuts that are part of a general policy of fiscal retrenchment that has been approved by the parliament? Again, financial independence is not absolute since the entity cannot entirely exempt itself from the political bargaining that characterizes the budget process.

5.  Competence.  Members of the independent entity should have the necessary competence to carry out their functions efficiently and effectively. This depends mainly on the existence of a nomination and selection process that is clear, transparent, and based on merit. The nomination of unprepared and unqualified members can easily undermine the independence of the entity concerned, as has happened, for example, with Courts of Account in some African countries. 

6.  Accountability. The more “independent” is an entity the more important it is to ensure that it be held accountable for its policies and operations. Accountability should be to the parliament—as the representative of the people in a democratic system—and to the wider public, through wide access to reports and other information.  Such accountability, however, may become reduced or tainted in situations where the parliament itself is not politically independent of the executive or the president. 

7.  External perceptions.  If the entity is perceived by commentators outside government as having independence, this may compensate to some degree for imperfections in the formal legal basis or administrative processes of the institution. The entity may operate de facto as an independent body even if such independence can be challenged on a de jure basis. An example may be the Office for Budget Responsibility (OBR) in the U.K. which has built up a reputation for producing reports that stand up well to external scrutiny, even though questions have been raised about the extent of the Office’s independence from the Treasury (to offset such criticism the treasury committee of the parliament now has an effective veto of senior level appointments to the OBR).  

Finally, independence should be viewed as a means to an end not an end in itself. Meeting the preconditions noted above does not mean that the entity will necessarily achieve its goals. Its role and purpose may be misunderstood or misconstrued. Politicians may find ways and means of undermining its legitimacy and authority. Its leadership and staff may not be adequate to the task. It may lack a constituency for its reports, which go unread, and its recommendations not acted upon. If such problems arise, and the entity is unable to attract the leaders and staff it requires, it will end up hobbled and ineffective.

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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Comments

This is an illuminating contribution by Richard Allen on the concept of independence and the sometimes unreasonable growth of independent fiscal institutions, which overlooks the importance of the interlinkages between them.

Take the debate on the independence of audit offices. There are two important controversies in the theory and practice of accountability institutions and audit agencies. These center on whether audit agencies are independent or autonomous, and whether they are oversight institutions or accountability institutions (Santiso 2009). Undoubtedly, audit agencies should be as autonomous as “independent fiscal institutions” (Kopis 2011), revenue agencies (Taliercio 2004), central banks (Boylan 2001), and some legislative budget offices (Johnson and Stapenhurst 2007). However, they are “embedded” in the architecture of the state and the system of checks and balances in public budgeting. The question is not whether audit agencies ought to be totally independent as “islands of efficiency” (Evans 1995), but rather how much independence is enough and how much might be too much. Independence should be viewed as a means to an end not an end in itself, as Allen aptly notes. From this perspective, the most critical consideration is not so much one of absolute independence, but rather one of impartiality and competence of external auditing and independence from government interference.

Audit offices are part of a broader system of checks and balances and what is key to their effectiveness is the agility of their linkages with the other elements of the systems of oversight and accountability, in particular their relations with parliaments. Audit agencies occupy a critical juncture in the relations between the executive and legislative branches of government. The principal-agent framework highlights the symbiotic relation between audit agencies and parliaments in the oversight of government, whose effectiveness is contingent on the quality of its linkages between the “agent” and its “principal”. This why I prefer to refer to supreme audit institutions as autonomous audit agencies: they ought to be impartial, capable and competent, but are inserted in the broader governance of the budget and the systems of checks and balances.

If audit agencies are to be effective, they can very rarely function in isolation. As O’Donnell (1999:39) underscores: “effective horizontal accountability is not the product of isolated agencies but of networks of agencies. In particular, their ultimate effectiveness depends on decisions by courts and legislatures to enforce government accountability.” From this perspective, there is or should be a symbiotic relation between audit agencies and parliaments and part of the “accountability gap” in public budgeting is due to coordination failures between them. These two institutions are more effective acting in concert than acting in isolation (Santiso 2009).

There is nothing called being fully independent in the checks and balances based democratic systems; 'reasonable independence' (with clear mandate and TOR's) and accountability should be fine. It is the intent and functioning in practice that would make them 'near independent'to perform it's functions of the 'Fiscal Ombudsman'!

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