The legislature’s ex post control of public finances (Part 1)

Democratic governance requires government finances to be administered and supervised well so that public goods and services contribute to the prosperity of the state and its citizens. The legislature plays an important role in the public financial management system as an institution of oversight. Parliamentary oversight of government finances can be separated into two broad phases: consideration and approval of the government’s plans for the raising and spending of revenue ex ante, through the proposed budget; and the monitoring of expenditure ex post, to ensure that it has conformed to the terms which parliament approved. This howtoregulate article will focus on the monitoring of expenditure ex post and the regulatory controls necessary to maximise the effectiveness of parliament’s role.

Part 1 of this article covers substantive questions to consider for the ex post control of public finances by the legislature and the multilateral, international and regional regulations that outline standards for public expenditure scrutiny. Part 2 outlines national reference regulations and interesting provisions for parliamentary control of public finances.

A. Substantive questions for ex post control of public finances

1. Strong parliaments are the cornerstone of democracy and perform three main functions: lawmaking, oversight and representation.1 Public financial management (PFM) cuts across all three functions: lawmaking in designing the PFM regulatory framework, including budget supply laws; holding the executive to account through oversight mechanisms of executive ministries and departments; and representing constituencies in budget debates and allocation of resources.

2. Parliament has substantive rights in performing its PFM role (depending on the constitutional or legislative framework in place), including approving, not approving or amending the budget, and withdrawing budget approval. These substantive rights are supported by empowerments to control public finances, which are discussed at Section II below. However, these rights must be clearly spelled out in the first place, to ensure an effective framework enabling the legislature to carry out its oversight role.

I. Clear legal and administrative framework for public financial management (PFM)

3. The institutional arrangements around public financial management, including parliament’s role, must be clear and designed to facilitate decision making and discipline and scrutiny of those decisions by the appropriate players.2 Usually, parliamentary authority for oversight of public finances can be found in the constitution or legislation. Effective parliamentary oversight of public finances occurs in four major ways:

(a) examining the draft annual budget, modifying it (if it has amendment powers), and approving it as a law;

(b) scrutinising the annual budget after its execution and holding the government to account;

(c) adopting supplementary (or rectifying) budgets during the course of the fiscal year; and

(d) adopting a budget system law (BSL), which could be more than one law, such as a Public Finance Act, a State Budget Law, or a Fiscal Responsibility Law. BSLs elaborate on principles and procedures for annual budgeting that may be contained in the country’s constitution.

Therefore effective oversight of public finances requires parliamentary involvement in the full financial and budget cycle.

4. Where parliament’s oversight role of public finances is unclear, regulatory reform should aim to clarify its role and responsibility over public finances as an important aspect of democratic governance. Any reform projects be they constitutional or legislative should be realistic about what can be achieved, particularly where parliaments are dominated by executive parliamentary members. It is important that where constitutional provisions outline parliament’s oversight in a broad or vague way that legislative acts provide more detail to avoid lengthy debates about what is or is not the power of parliament in public finances.

5. Another consideration for the role of parliament is the balance between flexibility and restraint in the institutional arrangements. A good PFM regulatory framework ought to impose restraints, define flexibility and set, monitor and enforce standards, all of which requires information, transparency and accountability mechanisms.3 Where restraint is absent in the early stages of the policy, planning and budgeting cycle, expenditure management and oversight therein will be difficult. The World Bank states that hard budget constraints are central features of a well-performing public sector.4 Of course any constraint must be realistic and sensitive to the political economy of the state. Identifying where flexibility can be useful in the framework, allows decisions to be made that are responsive to the situation on the ground. However, too much flexibility, without the appropriate checks and balances, has led to rampant corruption.5 For example, where flexibility is permitted in narrow circumstances to enable expenditure outside of the budget that parliament approved, a mechanism should be in place that alerts parliament and provides it with a right to reply.

II. Parliamentary empowerments

6. At a minimum the legislature needs to have empowerments to make enquiries of the executive and the public service in relation to the budget and expenditure. Those enquiries need to include penalties for non-compliance as well as request for information. Empowerments required by the legislature, include:

Aiming at control

  • Obliging recommendations from public expenditure scrutiny to be implemented in the following budget proposal; and
  • Obliging a report back.

Aiming at independence

  • Approving its own budget;
  • Selecting its own personnel and determining their remuneration; and
  • Establishing expert committees, including determining their composition, powers, independence (such as the appointment of an opposition member of parliament as chair, balance between political parties etc), powers to amend and enforcement.

Aiming at enquiries

  • Obliging departmental work plans and implementation reports;
  • Obliging reports of financial irregularities from audit authorities and/or directly from the public service department;
  • Opportunities to question government leaders, ministers, and officials;
  • Obliging disclosure of commitments entered into by public servants;
  • Obliging disclosure of virements made at ministerial and departmental level;
  • Reasonable period for consideration of reports submitted;
  • Compelling ministers and senior public servants to answer questions publicly or in camera where information concerns sensitive government information;
  • Compelling witnesses generally;
  • Receiving complaints or creating mechanisms (eg whistle blowing portals) to receive complaints anonymously;
  • Undertaking programme and policy evaluations; and
  • Establishing automatic electronic systems for reporting and artificial intelligence for identifying irregularities.

7. The above list of empowerments required by parliament in its oversight role could equally apply to the key institutional mechanisms of accountability that parliament relies, such as:

  • Parliamentary Budget Committee (ex ante control): analyses the budget and makes recommendations as to parliamentary approval or amendment.
  • Parliamentary Budget Office (ex ante control): is a non-partisan, independent institution that produces, assesses and/or endorses macroeconomic or fiscal forecasting, monitors compliance with fiscal rules, policy costing, long-term fiscal sustainability analysis, and supports the legislature in budget analysis.
  • Supreme Audit Institution (ex post control): is an independent institution that conducts audits of government activities by monitoring the use of public funds and reviewing the quality and accuracy of government financial reporting. Often has an anti-corruption role.
  • Public Accounts Committee (ex post control): scrutinise the financial expenditure of the government, make recommendations to ensure public expenditure is best value for money on government spending and deal with the reports produced by the supreme audit institutions.
  • Sector-specific committees (ex ante and ex post control) provide detailed scrutiny in areas where subject-matter expertise is necessary, committee members build up specialised knowledge, and the committees themselves sustain an informed “accountability dialogue” with government ministries and agencies throughout the annual budget cycle, and from year to year.

8. For more information about empowerments generally please see howtoregulate articles “Empowerments (Part I): typology” and “Empowerments (Part II): empowerment checklist”. These two empowerments articles examine the classic situation where empowerments are required to steer citizens or operators according to a policy objective, but might also help to extend the list of empowerments in the given PFM context, if this is wished for.

III. Enforcement

9. PFM enforcement by the legislature usually involves some shortcoming on the part of the executive and can therefore be tricky due to the political context in which enforcement operates. For example if the parliament is not satisfied with the explanation it has received in response to budget expenditure it could delay approval of the following years’ budget. However, enforcement in this way depends on the political make-up of the parliament and where the legislature is dominated by parliamentarians of the ruling political party it is unlikely that the parliament would pass such a vote to delay budget approval. Therefore enforcement aiming at requiring the executive to act in some way would most likely not be effective. With this in mind enforcement that focusses on information and publishing requirements for public recording purposes is likely to be more effective because the voting public may consider the PFM record of political candidates come election time. Examples include:

  • Requiring all instances of over expenditure to be reported publicly;
  • Requiring local government to publish information on public finances;
  • Requiring all requests for information (consistent with privacy laws) about PFM from civil society groups to be provided;
  • Creating alert portals for big expenditure items such as infrastructure or public contracts in education or health for beneficiaries of such expenditure to determine both the delivery of infrastructure or service and the effectiveness, particularly in remote areas with limited government presence;
  • Creating an alert portal on behalf and for the parliament’s budgetary control committee where anybody can post, even anonymously, reports and documents on misuse of funds;
  • Requiring customer satisfaction surveys6 for big expenditure items such as infrastructure or public contracts in education or health;
  • Requiring mandatory systematic external auditing;
  • Obliging an external audit where suspected irregularities are identified;
  • Right to impose sanctions, such as funding cuts in upcoming financial years where ministries or other public entities do not comply with their budgetary obligations; and
  • Right to enforce temporary or definitive bans of controlling officers who fall short of their PFM responsibilities.

10. Another enforcement tool is the creation of a list of entities and the responsible persons of the entitles to be prohibited from participating in public procurement. This list could be a useful enforcement tool for ex post control of the public finances because where an entity and its responsible persons are in receipt of public money, that is connected to a programme that receives an adverse audit report, that entity goes onto the list. This creates an incentive for such entities to not misappropriate public funding or inefficiently use public funding because if they do so they will not win another public contract nor other entities that are managed by the same responsible persons. If such a list were managed by parliament but obliges the executive to not award contracts to those on the list this could be a powerful enforcement tool.

III. Political economy

11. At Section I above it was highlighted the importance of achieving a balance between flexibility and restraint. Determining the correct balance depends a lot on the political economy factors at play within the state and the capacity of the public institutions to provide parliament with the information it needs to monitor and detect irregularities. While technology can help automate much of the information involved, it must be considered whether the information is too technical for the irregularity to be detected and a penalty imposed. Generally, in low resource settings PFM regulation should be as simple as possible and the information generated for parliament provided in a format that can be easily understood. Ideally as a state’s capacity and public institutions strengthen then progressively more sophisticated PFM regulations could be implemented. Evidently, there is no point in having complicated or sophisticated PFM regulation that is largely ignored or impossible to implement without the right people or resources.

12. The Handbook: How to regulate? outlines a universal method for regulating starting with analysis of the sector (Chapter 5), which is an important step for understanding how issues of political economy can affect the regulatory design and ultimately the regulation’s effectiveness. For example where corruption is a problem in the public sector, an analysis of how public officials misappropriate public money would more easily identify ways in which regulations could address the problem. A simple empowerment requiring information about the corporations paid for public contracts, to be provided to parliament on a monthly or quarterly basis, would make it easier to see patterns of concern. Other regulation could require that public contracts be awarded to corporations where the beneficial owners are known, this would require some investment to ensure resources were available to make the checks for ac curacy of records. Together with the prohibition list managed by parliament that excludes entities and their responsible persons from participating in public procurement, indirectly influences control of public finances by ensuring those dealing with public money are using it effectively. These suggestions are given as examples of what could follow from a precise analysis of the respective situation. They do not fit in all jurisdictions.

IV. Information and data

13. In order for the legislature to make decisions as part of its oversight function it needs information and data to be provided in a timely way. The minimum information and data parliament would need to discharge its oversight role effectively includes:

  • financial expenditure reports (both In-Year and Year-End reports), Mid-Year Review and respective audits from all of the departments in the public sector;
  • financial expenditure reports (both In-Year and Year-End reports), Mid-Year Review and respective audits from the ministers;
  • financial expenditure reports (both In-Year and Year-End reports), Mid-Year Review and respective audits from all public owned companies;
  • access to reports or other material used by the above entities as a basis for their evaluation or assumptions in the above reports;
  • audit reports from Supreme Audit Institutions;
  • access to senior public servants;
  • access to beneficiaries of projects of national importance; and
  • reports from third-party experts, particularly in areas where parliament lacks the expertise.

14. Oversight of public finances requires being able to understand technical financial data and using this information to make decisions about various issues such as:

  • Whether the information presented draws the right conclusions?
  • Did those conclusions meet the objective for the allocation of the funding?
  • Was this a responsible use of the public finances?
  • What effect did off-budget or supplementary budgets have on the state’s fiscal situation and debt, is it manageable?

For this reason it is important that parliament has access to technical support by professional administrative staff (a parliamentary service as distinct from the ordinary public service managed by the government) that endure past the mandate of parliament. Parliamentarians are elected to represent the interests of the people in their electorate and may not necessarily have the technical expertise to understand all the documents to be scrutinised. To prevent any collusion or undue influence the parliamentary service should come under separate conditions of service and remuneration framework than that of the ordinary public service.

15. The advances in artificial intelligence (AI) can also help the legislature in its ex post scrutiny of financial data because AI tools can help improve efficiency, detect irregular financial activity and deliver value for money through augmented human decision-making.7 For example the shear volume of financial reports parliament must scrutinise could easily be analysed by AI to identify anomalies or errors, finding any unusual transactions that could indicate fraud or unintentional errors and whether any transactions are missing from the accounting records. However, before the deployment of AI tools it is important that regulations cover this use to ensure that citizen and taxpayer data and sensitive financial information is protected from data breaches. Regulations need to outline how such information and data should be collected and used to avoid unintended bias and mass-scale mistakes. Where machine learning is used the legislature needs to be confident that the results can be explained, particularly where those results may lead to parliament imposing a penalty. For more information about regulations for safe AI use in government see our article “Digital government: regulating the automation of public administration”.

V. Public participation

16. The principle behind parliamentary oversight of public finances is that the executive’s control of finances should have democratic checks and parliament is elected to represent a broad cross-section of society and is best placed to serve this role. Therefore allowing the public to be present to observe parliament’s scrutiny processes of public finances reassures the public about parliament’s role, gives a voice to the public, provides an opportunity to understand the state of public finances and transparency. The media should, at the minimum, also have access to parliament’s oversight role via hearings, meetings, debates etc.

B. Multilateral, international and regional organisations on the role of parliament in public finances

1. Given how globalised the financial system is, several multilateral and international organisations have developed standards around financial management to ensure that national systems and standards are consistent. Standards are mostly voluntary and states seek to conform because it facilitates integration in the global economy and economic cooperation with like-minded states. Some of the following standards are general in nature concerning the parliament’s role and others are very specific in their financial rules.

I. Multilateral organisations

a) World Bank

2. The World Bank and the International Monetary Fund (IMF) manage the Report on the Observance of Standards and Codes (ROSC), which aims to promote greater financial stability through the development, dissemination, adoption and implementation of international standards and codes. The ROSC covers 12 policy areas:

(a) Policy Transparency: standards under this pillar have been developed by the IMF (see paragraphs 5-7 below).

1) Data Dissemination.

2) Fiscal Policy Transparency.

3) Monetary and Financial Policy Transparency.

(b) Financial Sector Regulation and Supervision (standards in these areas have been developed by specialised standard-setting bodies).

4) Banking Supervision (integrated into the Basel Framework, the Core principles for effective banking supervision help countries assess their supervisory systems and identify areas for improvement).

5) Securities Regulation (the International Organisation of Securities Commissions is the international standard-setting body for the world’s securities regulators. Its Objectives and Principles of Securities Regulation guides implementation of internationally recognised and consistent standards of regulation, oversight and enforcement.).

6) Insurance Supervision (the International Association of Insurance Supervisors is the international standard-setting body responsible for the implementation of principles, standards and other supporting material for the supervision of the insurance sector outlined in the Insurance Core Principles).

(c) Institutional and Market Infrastructure.

7) Crisis Resolution and Deposit Insurance (Core Principles for Effective Deposit Insurance Systemsas developed by the International Association of Deposit Insurers and the Basel Committee on Banking Supervision).

8) Insolvency and Creditor Rights.

9) Corporate Governance.

10) Accounting and Auditing.

11) Financial Market Infrastructures (Principles for Financial Market Infrastructures as developed by the Committee on Payments and Market Infrastructures and the International Organisation of Securities Commissions).

12) Market Integrity.

States participate voluntary in the ROSC evaluations, which are publicly available and are used by countries to improve their financial and institutional systems.

3. The Public Expenditure Management Handbook provides a framework for studying how governments can attain sound budget performance and gives guidance on the key elements of a well-performing public expenditure management (PEM) system. Insights identified in the Handbook include:

  • The budget affects three levels of public sector outcomes: 1) aggregate fiscal discipline, 2) resource allocation and use based on strategic priorities, and 3) efficiency and effectively of programmes and service delivery. These three levels can be reformulated into the following functions: 1) control of public resources, 2) planning for the future allocation of resources, and 3) management of resources.

  • Institutional arrangements, both formal and informal, influence the quality of outcomes. The Handbook operates on the premise that resource allocation is fundamentally political and that budgeting plays a key role in disciplining decisions making – from the political to the managerial.

  • The budget will only function effectively on the three levels if decision making and management systems and processes are performance oriented.

  • Regulatory design and the roles of various players in the PEM system reflect a concern for what is known as the agency problem. Agents to whom authority is delegated face incentives that are different from those of their principals. This can contribute to outcomes at variance with those sought by principals, particularly considering the inevitable information asymmetries.8

4. The Public Expenditure and Financial Accountability (PEFA) is a programme developed by the World Bank, the IMF, the European Commission and the governments of France, Norway, Switzerland, and the United Kingdom, which harmonises PFM assessment across the partner organisations. The PEFA provides a framework for assessing and reporting on the strengths and weaknesses of public financial management using quantitative indicators to measure performance across seven pillars:

  • budget reliability;
  • transparency of public finances;
  • management of assets and liabilities;policy-based fiscal strategy and budgeting;
  • predictability and control in budget execution;
  • accounting and reporting; and
  • external scrutiny and audit.

b) International Monetary Fund (IMF)

5. The IMF has established international good practice in the area of public expenditure, which covers the responsibilities of parliamentary oversight of the budget. Together with the World Bank, the IMF hosts the Parliamentary Network which engages law makers on issues of good governance and poverty in both their home countries and abroad though exchanges at annual meetings, workshops and sharing resources via the Network’s online portal.

6. IMF ROSC standards and codes covering the policy transparency pillar, include:

7. Other important IMF public finances texts include-

  • Guidelines on Public Expenditure Management: Key points relevant for ex ante control of public finances by the legislature include:

    • Acknowledging expenditures in supplementaries than resorting to “off-budget” transactions, this underscores the basic concept that the parliament should approve all expenditures.

    • Importance of a genuinely independent audit (eg. an audit body reporting to the legislature rather than the executive, including timely audit of the annual accounts provided to the legislature.

    • Clearly defined and comprehensive roles for the government sector, not only central government but also state/local governments and government financial and non-financial operations should be separately identifiable, as well as the respective roles of the executive, legislative, and judiciary which should also be clearly defined and widely understood.

    • The true extent of government quasi-fiscal activities and the contingent liabilities of government should be identified and monitored by governments, with oversight by the legislature and judiciary.

  • Fiscal Transparency Handbook: provides detailed guidance on the implementation of the Code’s principles and practices, specifically:

    • Fiscal reports should provide a comprehensive, relevant, timely, and reliable overview of the government’s financial position and performance.

    • Budgets and their underlying fiscal forecasts should provide a clear statement of the government’s budgetary objectives and policy intentions, and comprehensive, timely, and credible projections of the evolution of the public finances.

    • Governments should disclose, analyse, and manage risks to the public finances and ensure effective coordination of fiscal decision making across the public sector.

c) Organisation for Economic Development (OECD)

8. The OECD has set several standards for budgeting and public expenditure, including:

  • The Best Practices for Budget Transparency are a reference tool for governments to use in order to increase the degree of budget transparency in their respective countries. The Best Practices have been endorsed by the OECD Council recommending Member States to:

    • Manage budgets within clear, credible and predictable limits for fiscal policy.

    • Closely align budgets with the medium-term strategic priorities of government.

    • Design the capital budgeting framework in order to meet national development needs in a cost-effective and coherent manner.

    • Ensure that budget documents and data are open, transparent and accessible.

    • Provide for an inclusive, participative and realistic debate on budgetary choices.

    • Present a comprehensive, accurate and reliable account of the public finances.

    • Actively plan, manage and monitor budget execution.

    • Ensure that performance, evaluation & value for money are integral to the budget process.

    • Identify, assess and manage prudently longer-term sustainability and other fiscal risks.

    • Promote the integrity and quality of budgetary forecasts, fiscal plans and budgetary implementation through rigorous quality assurance including independent audit.

  • The Budget Transparency Toolkit is a practical guide that brings together all the standards and codes of the Global Initiative of Fiscal Transparency Network (OECD, IMF, World Bank, International Budget Partnership, International Federation of Accountants and the Public Expenditure and Financial Accountability Programme), it signposts materials from Network, while also reinforcing some key practical messages about budget and fiscal transparency.

  • Principles for Independent Fiscal Institutions concern the design and governance of independent fiscal institutions (independent parliamentary budget offices or fiscal councils) codifying lessons learned and good practice. The 22 principles cover local ownership, independence and non-partisanship, mandate, resources, relationship with the legislature, access to information, transparency, communications and external evaluation.

  • The Recommendation on Budgetary Governance sets out ten principles which provide concise overview of good practices across the full spectrum of budget activity and aim to give practical guidance for designing, implementing and improving budget systems to make a positive impact on citizens’ lives.

  • The Recommendation on Principles for Public Governance of Public-Private Partnerships, aims to help governments ensure that new public-private partnerships add value, and prevent ill-designed projects from going forward. The Principles focus on how to align the different parts of the public sector to ensure success: institutional design, regulation, competition, budgetary transparency, fiscal policy and integrity at all levels of government.

II. International organisations

a) The Commonwealth

9. The Commonwealth is a voluntary association of 54 states, who have agreed to shared goals like development, democracy and peace, and uphold the values and principles outlined in the Commonwealth Charter. Although most member states had ties to the former British Empire, today any state can join the Commonwealth. The Commonwealth (Latimer House) Principles highlight the importance of the separation of powers between the legislature, the executive and the judiciary to ensure effective governance and democracy. The Latimer House Principles provide guidance on the role of the separation of powers in the Commonwealth, its effectiveness in providing democratic governance and the role of civil society. Section III of the Latimer House Principles state:

Independence of Parliamentarians: (a) Parliamentarians must be able to carry out their legislative and constitutional functions in accordance with the Constitution, free from unlawful interference.

10. The Commonwealth Parliamentary Association (CPA) is a Commonwealth organisation concerned with respect for the rules of law and individual rights and freedoms, and the pursuit of positive ideals of parliamentary democracy. Over 180 legislatures make up the CPA covering nine geographic regions of the Commonwealth. The CPA has developed a minimum standard for how a parliament should be constituted in the Recommended Benchmarks for Democratic Legislatures, which reinforces the belief that effective parliaments are one of the principal institutions of any functioning democracy. Section 7.2 of the Benchmarks covers financial and budget oversight benchmarks, such as:

  • Budget approval and scrutiny procedures shall be clearly specified in the rules of procedure, the constitution or relevant legislation.
  • The legislature shall have a reasonable period of time in which to adequately scrutinise and debate the proposed national budget.
  • Oversight committees shall provide meaningful opportunities for minority or opposition parties and independent members of parliament to engage in effective oversight of government expenditures.
  • In addition to the draft annual budget, the legislature shall receive and assess medium-term and annual budget strategies and be informed of the main assumptions that underlie the annual budget’s revenue and expenditure projections.
  • The legislature shall receive regular in-year budget reports and an audited annual financial statement from the government within 12 months after the end of the fiscal year.
  • The legislature shall have access to sufficient financial scrutiny resources and/or independent budget and financial expertise to ensure that financial oversight is conducted effectively.
  • There shall be an independent, non-partisan Supreme or National Audit Office whose reports are tabled in the legislature in a timely manner.
  • The Supreme or National Audit Office shall be provided with adequate resources and legal authority to conduct audits in a timely manner.
  • All reports of the Supreme or National Audit Office shall stand referred to the Public Accounts Committee, or a designated Committee, for further report.

11. In most Commonwealth parliaments, standing Public Accounts Committees (PACs) are a crucial mechanism for ensuring transparency, accountability and honesty in government by:

  • scrutinising the financial expenditure of the government and taxpayer’s money;
  • ensuring transparency and accountability within government; and
  • making recommendations to ensure taxpayer’s receive best value for money on government spending.

The CPA has created the Commonwealth Association of Public Accounts Committees (CAPAC), which helps the PACs of Commonwealth parliaments to promote good governance and implement the declaration on PACs contained in the 2013 Communique of the Commonwealth Heads of Government Meeting:

Heads of Government further reaffirmed that strong and independent Parliamentary oversight plays an important role in preserving the trust of citizens in the integrity of government, through Public Accounts Committees that are effective, independent and transparent”.

The CAPAC have created an online portal as a learning hub for those working in or with PACs to share ideas and best practice on issues relating to public financial oversight. The portal serves as a platform for engagement and includes videos, checklists, procedural briefings, infographics and ideas to assist PACs in scrutinising government spending, promoting accountable leadership, and engaging varied stakeholders to achieve outcomes that are equitable and sustainable. Users can easily post or follow topics of discussion on PAC-related content, such as procedural questions or tips for interacting with witnesses.

12. Although not focused on public financial management, the Model Law for Independent Parliaments contains useful information about parliament’s oversight role by highlighting the importance of an independent parliament. The Model Law helps empower parliaments to take control away from the executive to ensure it has the administrative, operational and financial resources it needs to function effectively, and independently. The Model Law is designed as a Parliamentary Service Commission Bill which seeks to create a parliamentary corporate body to oversee the institution of parliament.

b) International Organisation of Supreme Audit Institutions (INTOSAI)

13. The INTOSAI is a non-governmental organisation that is autonomous, independent and non-political operating as an umbrella organisation for the external government audit community. Both the Lima Declaration and the Mexico Declaration, emphasised the importance of supporting supreme audit institutions (SAI) in their efforts to perform independent audits. The Lima Declaration called for independent government auditing:

  • Independence: should be established by constitution for the SAI and its members, and include the financing of its activities. Relationship to parliament, government, and the administration: should be clearly specified in the constitution.
  • Powers of SAI: should include power of investigation, enforcement of findings, and the use of SAI’s expert opinions; regulation for accounting procedures should be agreed to with the SAI. Audit methods, audit staff, and freedom to establish international exchange of experiences: should have the capacity and independence to self-determine its working program, methods of recruitment, and training of its staff.
  • Reporting: should be empowered to report its findings to parliament and to the public.

14. The Mexico Declaration outlines the core principles on SAI independence as:

  • The existence of an appropriate and effective constitutional/statutory/legal framework and the de facto application provisions of this framework.
  • The independence of SAI heads and members of collegial institutions, including security of tenure and legal immunity in the normal discharge of their duties.
  • A sufficiently broad mandate and full discretion, in the discharge of SAI functions.
  • Unrestricted access to information.
  • The rights and obligation to report on their work.
  • The freedom to decide the content and timing of audit reports and to publish and disseminate them.
  • The existence of effective follow-up mechanisms on SAI recommendations.
  • Financial and managerial/administrative autonomy and the availability of appropriate human, material and monetary resources.

15. The professional standards for public sector auditing developed by INTOSAI are outlined in ISSAI 100, Fundamental Principles of Public-Sector Auditing, defining the basic principles and concepts of public-sector auditing and its three main auditing types — financial, performance, and compliance. The Fundamental Principles outline the following-

Elements of public-sector auditing include:

  • the three parties (auditor, responsible party and intended users);
  • subject matter, criteria and subject matter information;
  • types of engagement (attestation and direct reporting); and
  • confidence and assurance in public-sector auditing.

Principles of public-sector auditing:

  • organisational requirements-

General principles:

  • ethics and independence;
  • professional judgement, due care and scepticism;
  • quality control;
  • audit team management and skills;
  • audit risk;
  • materiality;
  • documentation; and
  • communication.
  • Principles related to the audit process:

  • planning an audit;
  • conducting an audit; and
  • reporting and follow-up.

c) Open Budget Survey

16. The Open Budget Survey is the world’s only independent, comparative and fact-based research instrument to measure the essential aspects of governance and accountability in the public sector budget system. The survey is organised by the International Budget Partnership, an international non governmental organisation dedicated to ensuring that governments are responsible stewards of public funds. The survey is based on a rigorous objective methodology subject to independent peer review. First launched in 2006, subsequent surveys were concluded in 2008, 2010, 2012, 2015, 2017 and 2019. The survey measures governance and accountability according to the following:

  • Transparency: is comprehensive budget information from the central government available to the public in a useful time frame?
  • Participation: are there formal and meaningful opportunities for the public – including the most disadvantaged – to engage in the national budget process?
  • Oversight: are oversight institutions – the legislature, the national audit office, independent fiscal institution(s) – in place and enabled to function properly?

III. Regional organisations

a) European Union (EU)

17. The EU’s ex post budget scrutiny process is known as the discharge procedure. Article 319 of the Treaty on the Functioning of the EU provides that the European Parliament (representing EU citizens), acting on a non-binding recommendation of the Council (representing governments of Member States), shall give a discharge for the execution of the EU budget. In deciding whether or not to grant discharge, the European Parliament (EP) considers the Integrated Financial Reporting Package along with the European Court of Auditors’ (ECA) Annual Report on how the budget has been spent.

18. Regulation (EU, Euratom) 2018/1046 concerns the financial rules applicable to the general budget of the EU, including the procedural details for all aspects of public financial management. Aspects of EP’s ex post control on obliging reports are contained in Title XIII on annual accounts and other financial reporting. Article 246 provides that EU institutions are required to send their final accounts to the EP (as well as the Council, ECA and accounting officer of the Commission) by 1 July. By 31 July the Commission shall send by electronic means the final consolidated accounts to the EP, the Council and ECA. Article 247 requires the following information to be communicated to the EP by 31 July:

  • the annual management and performance report providing for a clear and concise summary of the internal control and financial management achievements referred to in the annual activity reports of each authorising officer by delegation and including information on key governance arrangements in the Commission as well as:

    • an estimation of the level of error in Union expenditure based on a consistent methodology and an estimate of future corrections;

    • information on the preventive and corrective actions covering the budget, which shall present the financial impact of the actions taken to protect the budget from expenditure in breach of law; and

    • information on the implementation of the Commission’s anti-fraud strategy.

  • a long-term forecast of future inflows and outflows covering the next five years, based on the applicable multiannual financial frameworks and Decision 2014/335/EU, Euratom.

19. Each month the EP also receives annual statements and reports on budget implementation, for both revenue and expenditure covering all available appropriations. These reports are required to be made available within 10 working days of the end of the month via the Commission website. Article 250 concerns reports on financial instruments, budgetary guarantees and financial assistance to be provided to the EP. Article 251 concerns status reports to be provided on current risks noted, general trends observed and where identified by the ECA information on recoveries.

20. The EP has a standing committee for budgetary control (CONT) and its responsibilities include:

  • The control of the implementation of the budget of the EU and of the European Development Fund, and the decisions on discharge to be taken by the EP, including the internal discharge procedure and all other measures accompanying or implementing such decisions;
  • The closure, presenting and auditing of the accounts and balance sheets of the EU, its institutions and any bodies financed by it, including the establishment of appropriations to be carried over and the settling of balances;
  • The control of the financial activities of the European Investment Bank;
  • Monitoring of the cost-effectiveness of the various forms of EU financing in the implementation of the EU’s policies, involving, upon the CONT’s request, the specialised committees and acting, upon the CONT’s request, in cooperation with the specialised committees for the examination of special reports of the ECA;
  • Relations with the European Anti-Fraud Office, consideration of fraud and irregularities in the implementation of the budget of the EU, measures aimed at preventing and prosecuting such cases, the strict protection of the EU’s financial interests and the relevant actions by the European Public Prosecutor in this field;
  • Relations with the ECA, the appointment of its members and consideration of its reports; and
  • The Financial Regulation as far as the implementation, management and control of the budget are concerned.9

21. Generally, the EP has a right to inquiry as per Decision 95/167/EC, Euratom, ECSC on the detailed provisions governing the exercise of the EP’s right of inquiry. Article 2 provides that the [EP may] at the request of one quarter of its Members, set up a temporary committee of inquiry to investigate alleged contraventions or maladministration in the implementation of Community law which would appear to be the act of an institution or a body of the European Communities, of a public administrative body of a Member State or of persons empowered by Community law to implement that law. This broad power of inquiry applies to both natural and legal persons and includes:

  • determining the composition and rules of procedure of such temporary committees of procedure (Article 2);
  • enabling public hearings and testimony (Article 2);
  • carrying out inquiries necessary to verify alleged contraventions or maladministration in the implementation of Community law under the conditions laid down below (Article 3); and
  • requesting any person to give evidence before it (Article 3).

22. The Interinstitutional Agreement of 16 December 2020 between the EP, the Council and the Commission sets additional rules on budgetary discipline, on cooperation in budgetary matters and on sound financial management, as well as on new own resources, including a roadmap towards the introduction of new own resources. The Agreement obliges the Commission’s annual report to the EP to cover:

  • assets and liabilities;

  • revenue, expenditure, assets and liabilities of the various Funds, and other possible future mechanisms;

  • expenditure incurred by Member States in the framework of enhanced cooperation, to the extent that it is not included in the general budget of the EU;

  • climate expenditure, for monitoring climate spending and its performance with a view to achieving an overall target of at least 30 % of the total amount of the EU budget and the European Union Recovery Instrument expenditures supporting climate objectives, and differentiating between climate change mitigation and adaptation, where feasible.

    • Where there is insufficient progress towards the climate spending target in one or more of the relevant programmes, the Institutions will consult each other on appropriate measures to be taken to ensure EU spending on climate objectives over the entire Multiannual Financial Framework (MFF 2021-2027) corresponds to at least 30 % of the total amount of the EU budget and the European Union Recovery Instrument expenditures;

  • expenditure contributing to halting and reversing the decline of biodiversity, on the basis of an effective, transparent and comprehensive methodology set out by the Commission, in cooperation with the EP and with the Council, with a view to working towards the ambition of providing 7.5% in 2024 and 10% in 2026 and in 2027 of annual spending under the MFF to biodiversity objectives, while considering the existing overlaps between climate and biodiversity goals;

  • the promotion of equality between women and men as well as rights and equal opportunities for all throughout the implementation and monitoring of the relevant programmes, and the mainstreaming of those objectives as well as gender mainstreaming, including by strengthening the assessment of gender impact in impact assessments and evaluations under the Better Law-Making framework; and

  • the implementation of the United Nations Sustainable Development Goals in all relevant EU programmes of the MFF 2021-2027.

b) African Union (AU)

23. The Pan African Parliament (PAP)/African Parliament, is the legislative body of the AU, which exercises oversight, and has advisory and consultative powers, for a five year term. The PAP was created by the Abuja Treaty and Sirte Declaration and the Protocol Establishing the PAP outlined the governing principles. The PAP has three main bodies:

  • the Plenary is the main decision-making body of the Parliament. The Plenary consists of the delegates from the member states, and is chaired by the President. It is the body which passes resolutions.
  • the Bureau is the leadership group of the PAP and consists of the President and four Vice-Presidents. Each member of the Bureau represents a different region of Africa.
  • the Secretariat assists in the day-to-day running of the PAP, undertaking duties such as minuting meetings, organising elections and managing staff. The Secretariat consists of a Clerk, two Deputy Clerks and other support staff

The PAP also has ten permanent committees and the Committee on Monetary and Financial Affairs covers financial management of the AU (2004 Rules of Procedure, Rule 26, 2), specifically:

  • examine the draft estimates of the PAP budget and submit to the PAP;
  • discuss the budget of the AU and make appropriate recommendations;
  • examine and report to PAP on the problems involved in the implementation of the annual budget; and
  • assist PAP to execute its role of establishing sound economic, monetary and investment policies.

c) Southern African Development Community (SADC)

24. The SADC is a regional economic community comprising 16 Member States, including: Angola, Botswana, Comoros, Democratic Republic of Congo, Eswatini, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Tanzania, Zambia and Zimbabwe. The Protocol on Finance and Investment 2006 commits Member States to achieve economic growth and balanced intra-regional development, compatibility among national and regional strategies and programmes, to develop policies aimed at the progressive elimination of obstacles to the to free movement of capital labour, goods and services, and of the residents of the Member States, improve economic management and performance through regional cooperation, and to create appropriate institutions and mechanisms for the implementation of programmes and operations in the region. The Protocol in particular requires Member States to ensure with respect to their legislatures that:

  • legislatures ratify the appointment of the Governor and Deputy Governor of the Central Bank, to ensure operational independence (Article 4, paragraph 3d);
  • legislation should stipulate the extent and frequency of financial and operational disclosures by Central Banks to parliament or a committee of parliament, and also to the public at large (Article 4, paragraph 4b);
  • the remuneration and benefits of Governors, Deputy Governors and members of the Board should be disclosed to parliament annually (Article 4, paragraph 4c); and
  • assist the legislatures with the drafting or amending of legislation that is compliant with international standards, specifically those objectives and principles recommended by the International Organisation of Securities Commissions, International Association of Insurance Supervisors (see above Section I, paragraph 2 under World Bank for the standards set by these two organisations) and International Organisation of Pension Regulators and Supervisors (Article 6).

d) Association of South East Asian Nations (ASEAN) Inter-Parliamentary Assembly (AIPA)

25. ASEAN’s Inter-Parliamentary Assembly is a regional parliamentary organisation that encourages understanding, cooperation and close relations among Member Parliaments as well as Observer Member Parliaments and other parliamentary organisations. It also promotes ASEAN policies with the people of South East Asia to accelerate the realisation of an ASEAN Community by 2025. The Economic Committee is one of six standing committees of the AIPA, which focusses on economic development and cooperation among Member States. The Draft Resolution on Fostering Inclusive Development in ASEAN is a proposal from AIPA parliamentarians for more participation in dealing with unequal development problems and to support a more inclusive approach in the budget consideration. The Draft Resolution outlined the concerning direction of economic policy and the extension of budget deficit problems in ASEAN, problems identified included:

  • government spending to create wealth and prosperity in order to gain short-term popularity instead of saving money and adopting a balanced fiscal policy;
  • offering special loans outside the fiscal budget;
  • rise in public debt, which could expand to an economic crisis in the future;
  • unbalanced budget allocation; and
  • social injustice due to uneven distribution of resources in the society.

This article was written by Valerie Thomas, on behalf of the Regulatory Institute, Brussels and Lisbon.

1 Agora Portal for Parliamentary Development, Parliamentary Institution, https://www.agora-parl.org/resources/aoe/parliamentary-institution.

3  Ibid. pp. 20-21.

4  Ibid.

5  Ibid. p. 23.

6  Ramkumar, V., “Our money, our responsibility A Citizens Guide to Monitoring Government Expenditures”, International Budget Project, p. 72, https://www.internationalbudget.org/wp-content/uploads/Our-Money-Our-Responsibility-A-Citizens-Guide-to-Monitoring-Government-Expenditures-English.pdf.

7  Atalla, G. and McDonald, M., “How AI can help governments manage their money better”, Ernst and Young, 19 Nov 2019, https://www.ey.com/en_gl/consulting/how-ai-can-help-governments-manage-their-money-better.

9 EU Parliament , 9th Parliamentary Term Jun 2021, Rules of Procedure Article V, https://www.europarl.europa.eu/doceo/document/RULES-9-2021-01-18-ANN-06_EN.html .

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