Financial and Effectiveness (performance) Control in Local Administrations

1
Financial and Effectiveness (performance) Control
in Local Administrations

• Modern trends and developments
• The Spanish system
• Jose Fernando Chicano
• Financial Controller
• Municipality of Tarragona
• April 2007

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Summary of presentation

• Introduction to accepted modern international
  principles, concepts and definitions on internal
  control (COSO)
• Controls in public sector internal and external
• The Spanish system of internal control in local
  administration / local public sector. Recent
  trends and developments
• The Spanish system of external control of local
  public sector national Court of Accounts and
  regional public sector audit bodies (Sindicatura
  de Cuentas)
• Conclusions

3
Modern international principles, concepts and
definitions on internal control

• An introduction based on the COSO report

4
International reports and standards on internal
control

• Different reports have been produced about
  Internal Control in several countries COCO
  (Canada) Sarbanes-Oxley (USA) Cadbury (UK)
  Olivencia Aldama (España)), bur none of them is
  as important and relevant as the COSO report
• En 1992 COSO published the Internal Control
  Integrated Framework, a report which establishes
  a common definition of Internal Control and
  provides standards to evaluate and improve its
  control systems.
• INTOSAI incorporates COSOs definition and
  concepts to the Public Sector

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COSO DEFINITION OF INTERNAL CONTROL

• Internal control is a process, effected by an
  entitys board of directors, management and other
  personnel, designed to provide reasonable
  assurance regarding the achievement of objectives
  in the following categories
• Effectiveness and efficiency of operations (O)
• Reliability of financial reporting (F)
• Compliance with applicable laws and regulations(C)

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KEY CONCEPTS

• Internal control is a process. Its a means to
  and end, not an end in itself.
• Internal control is effected by people, Its not
  merely policy manuals and forms, but people at
  every level of an organization
• Internal control can be expected to provide only
  reasonable assurance, not absolute assurance, to
  and entitys management and board
• Internal control is geared to the achievement of
  objectives in one or more separate but
  overlapping categories

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Components of control specified in the COSO
framework

• Internal control consists of five inter-related
  components, these are derivated from the way
  managements runs a business, and are integrated
  with the management process
• Components
• Control environment
• Risk assessment
• Control activities
• Information and Comunication
• Monitoring
• There is synergy and linkage among these
  components forming an integrate system that
  reacts dynamically to changing conditions

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Control Environment

• The control environment sets the tone of the
  organization influencing the control
  consciousness of its people.
• It is the foundation for all other components
  providing discipline and structure
• Include
• Integrity
• Ethical values and competence of entitys
  personnel
• Managements philosophy and operating style
• The way management assigns authority and
  responsibility.
• The attention and direction provided by the board
  of directors

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WHAT INTERNAL CONTROL CAN DO

• Internal control can help an entity achieve its
  performance and profitability targets, and
  prevent loss of resources
• IC helps ensure reliable financial reporting
• IC can help ensure the entity complies with the
  law and regulations, avoiding damage to its
  reputation, and other consequences
• In conclusion, it can help an entity to get where
  it wants to, and avoid pitfalls and surprises
  along the way

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Some of the key changes that have taken place on
internal control

• HISTORIC ROLE
• Policemen
• Financial Focus
• Focus on hard controls
• Focus on tangible assets
• Compliance based
• Functional focus
• Self-sufficient
• Reactive

• MODERN ROLE
• Partners in the organization
• Business focus
• Focus on soft controls
• Focus on intangible assets
• Risk based
• Process focus
• Shares of best practices
• Proactive

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The Spanish system of internal control in local
administration / local public sector

• Recent trends and developments

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Basic features

• Internal Control Model Its the same for all
  Public Sectors local sector (law 39/88)
• Evolution
• Necessary function, reserved to public servants
  holding a specific habilitation (by law)
• Mixed model
• Ex ante Ex post financial control
• Internal audit
• Effectiveness/performance audit
• Key points
• Managerial Accountability
• Functional autonomy
• Dependence on the Head of Administration
• Contradictory procedures
• Capacity and necessity of self-regulation

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Aims and functions
Functions
Aims
INTERNAL CONTROL (Art. 214, 220, 221 TRLHL) Ex
ante Ex post financial control Internal audit
(Effectiveness and Efficiency)

• Compliance with applicable law and regulations
  (C)
• Evaluating whether the public resources are
  managed correctly (o)

• Guarantee the reliability of Financial Reports
  and diffuse it (F)
• Production of Local General Account.
  Safeguarding the integrity, accuracy and veracity
  of those accounts.

ACCOUNTANCY (Art. 203 a 206 TRLHL y
ICAL) ACCOUNTANT AND BUDGET CONTROL
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Accountancy Control
Scope
Public Agencies Public enterprises companies
Municipality Autonomous Agencies
Financial Accountancy Monitoring of budget cycle
Accountancy Inspection
Aims
Management
Control
Analysis and communication
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Internal audit / auditors

• Autonomy of internal audit
• Functional independence of internal auditors
• Technical assistance
• Legal assessment

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Proposals President of Spanish Court of Accounts
(Supreme Audit Institution-SAI)

• To develop the internal control in its full
  meaning
• ( financial control, and internal audit )
• To develop a special statutary regime for the
  civil servants with national local habilitation
  similar to internal auditors of State (autonomy).
• To restrict free recruitment (to guarantee
  independence and imparciality)
• To modify the law to achieve segregation of
  functions
• Encourage suport and collaboration of SPAs for
  little municipalities

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GENERAL OUTLINE OF INTERNAL CONTROL IN SPAINs
LOCAL ADMINISTRATIONS
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Internal Financial control
Internal control
Internal audit
(Effectivenes Control)
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INTERNAL FINANCIAL CONTROL
Scope
Municipality Autonomous Agencies
Expenditure
Revenues
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Revenues
Internal financial control
accountancy
Ex ante internal limited financial control
Ex ante internal financial control
Ex post financial control (Internal Audit)
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Expenditure
Not submitted to ex ante internal financial
control
Ex ante limited internal financial control
Ex ante internal financial control
Payment with posterior justification
Procedures
Objection
Discrepancy
A Priori
Omission
Ex post internal financial control
Special system of ex post financial control
A Posteriori
Internal Audit
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Internal Audit
(Effectiveness Control)
Economic Agencies
Grants
Spending units
Public Local Enterprises Companies
Instrumental Entities
Outsourcing
EU co-financed projects
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Public Local Enterprises Economic Agencies
Regularity Audit
Accountancy
Trusteeship
Inspection accountancy
Compliance audit
Aggregate acounts of LGA
Financial Audit
Loan
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GRANTS
Not subject to internal audit (C. 2.2 LGS)
Subject to Internal control
Municipalitys bodies
Private audit
Different ways to justification
Non governmental organisations (NGOs)
Special procedures
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Instrumental Entities
Consortiums
Agrements
Foundations
Other
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Outsourcing
Participates enterprises
Concerts
Other different way of management
Share risk
Concessions
Public Domain
Publics works
Public services
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Ex ante financial control
Expenditure
Ex post Financial Control (Internal audit)
Ex ante limited financial control
Financial Control
Ex ante financial control
Revenues
Accountancy
Ex ante limited financial control
Internal control
Economic Agencies
Grants
Spending units
Internal audit
Public Local Enterprises Companies
(Effectiveness Control)
Instrumental Entities
Outsourcing
EU co-financed projects
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The Spanish system of external control of local
public sector

• National Court of Accounts and regional public
  sector audit bodies (Sindicatura de Cuentas)

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CURRENT SYSTEM OF EXTERNAL CONTROL

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EXTERNAL PUBLIC SECTOR AUDIT INSTITUTIONS IN
SPAIN COURT OF ACCOUNTS Regional Audit Offices
Audit function (Fiscalización)
Functions in "accounting proceedings
Special term for the public sector auditing in
Spanish Fiscalización
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REGIONAL AUDIT OFFICE (Regions public sector)
Central administration offices in the region (by
delegation of nat. Court of Accounts-SAI)
Regional government and administration
Local administrations
Autonomous agencies
Autonomous Agencies
Public enterprises companies
Public enterprises companies
Regional Audit office reports to the regional
Parliament
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WHAT ARE REGULARITY AUDITS ?(Regional audit
office)

• Auditing the financial activities of Regionals
  public sector.
• Checking on compliance with laws and regulations.
• Auditing the use or application of
• Grants and subsidies
• Loans and monetary assistance granted by
  governmental entities from their budgets
• Tax exemptions granted by public sector entities
  within Region.
• Auditing contracts entered into by the Regional
  Government.
• Auditing the financial position and changes in
  the assets of the Regional Government.
• Auditing the budget life-cycle.
• Examining and verifying the "General Account" of
  the Region
• Producing the "Local Government General Account",
  the aggregate accounts of all local government
  organisations in Region.

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WHAT IS PERFORMANCE AUDITING? (Regional audit
office)

• Performance auditing, known sometimes as
  value-for-money auditing or auditing of the three
  Es (economy, efficiency and effectiveness),
  involves
• Analysing the use of available resources against
  efficiency criteria (economy and efficiency
  audits).
• Making proposals in order to improve the delivery
  of services by Regions public sector (efficiency
  audits).
• Assessing to what extent stated objectives, as
  laid down in the various budgetary programmes and
  annual reports, have been met (effectiveness
  audits) and pinpointing the reasons for failure
  to meet objectives.

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Relationship between external internal control

• Weaknesses
• Lack of links between external internal control
• Lack of references
• Jurisdictional role (internal control could be
  responsible)
• Desirable changes
• Support / assessment
• Guidelines for Internal Control Standards
• Definition of performance indicators
• Coordination
• Collaboration and distribution of roles
• To avoid duplications
• To unify skills procedures

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Conclusions

• Heterogeneous public local sector
• Internal control (financial (ex ante ex post)
  and audit)
• Tendency towards ex post and audit controls
• Necessity to improve the professional
  qualification of internal auditors
• The links between external internal control
  must necessarily be stronger
• Support of the highest management levels
  crucial!
• Internal auditors work in isolation
• Adequate resources
• Lack of Internal Control Standards and
  Harmonisation for the local sector
• At the moment. Control systems are in transition

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THANK YOU FOR YOUR ATTENTION