Presentation of Czech SAO - National Report on EU Financial Management

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SUPREME AUDIT OFFICE CZECH
REPUBLIC Audit of state budget finances spent
on the provision of investment incentives and
investment aid
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• Introduction
• Basic details of the audit
• Audit begun.. . 2005
• Audited funds ... CZK 5.5 billion
• Number of auditors .. 17
• Number of auditees . 21
• Shortcomings found . CZK 1.5 billion
• Audit completed. 2006

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• Subject of the audit
• use of state budget finances spent on the
  provision of investment incentives awarded by the
  government and provided on the basis of a written
  Memorandum of Understanding Declaring a Common
  Intention (contract)
• Nature of the audit
• ex post audit

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• Auditees
• ministries (Ministry of Finance MoF and
  Ministry of Labour and Social Affairs MoLSA)
  
• providers of state budget finances spent on
  investment incentives
• public entities
• commercial enterprises
• beneficiaries of state budget finances spent on
  investment incentives
• private entities

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Investment incentives system MoLSA ?
appropriations for new job creation ?
appropriations for employee training
(re-training) MoF ? special-purpose
appropriations and other special-purpose
appropriations concerning legal persons income
tax
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Aims of the audit

• The aim of the audit was determined by its
  subject and by the possibilities for scrutinising
  activities.
• What could be checked?
• Use of state budget finances spent on the
  provision of investment incentives.
• What could not be checked?
• The overall benefits stemming from the provision
  of investment incentives (it is less than 10
  years since they were provided).

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Scrutiny of audited activities
During audit the Office scrutinises and appraises
(Section 4 (1) of Act No. 166/1993 Coll., on the
Supreme Audit Office)
Compliance with the law
Efficiency
Effectiveness
Legal analysis of contract
Some performance audit methods and elements used
Some performance audit methods and elements used
Audit
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Performance audit methods employed

• Preliminary study

• Brainstorming
• used to generate new ideas and techniques and
  for subsequent selection of
• the most suitable method for appraising the
  economy, efficiency and
• effectiveness of the audited activities (3E)
• Benchmarking
• defining individual audited activities and
  specifying standards for their
• monitoring, compiling standards
• Modelling
• used to check the functionality of standards,
  empirical units, ascertainment
• methods and techniques and to fine-tune them
• modelling uses fictitious companies and the
  values measured in them for 3E
• appraisal of the expenditure of state budget
  finances on individual investment
• incentives

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Performance audit methods employed

• Audit programme

• Audit block diagrams
• guideline block diagrams used for scrutiny of
  efficiency and effectiveness,
• scrutiny of measures to eliminate found
  shortcomings and legality check
• Productivity diagrams
• used to express the results of efficiency
  indicator measurement for the public
• expenditure under scrutiny
• Value charts
• used to express the results of effectiveness
  indicator measurement for the
• public expenditure under scrutiny
• Comparative analysis (benchmarking)
• depicts the volume of output generated by input
  sources and makes it
• possible to compare the efficiency and
  effectiveness of expenditure of state
• budget finances on the provided investment
  incentives using measured
• indicators

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Sources used during the audit

• Previous audit
• Preliminary study for the audit
• Audit programme
• Information obtained between the end of the
  previous audit and the start
• of this audit

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Findings from the previous audit

• CZK 1,352 million spent on investment incentives
  provided by government resolution not by act
  of parliament
• the investment incentives manual lacked the
  basic requisites for demonstrating its validity
• the provision of a tax-based investment
  incentive was not tied to a fixed minimum period
  of time for doing business in the Czech Republic
  and to fulfilment of the terms for the provision
  of other investment incentives
• Response
• CZK 12.5 million was returned to the state
  budget in some cases the MoF had not reached a
  decision on the shortcomings by 31.12.2005.

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Preparation of the audit

• Preliminary study
• necessary to prevent errors in the audit
  programme
• brainstorming done in the preliminary study
  stage involved three direct
• participants/heads of audit groups
• modelling of the procedures contained in the
  preliminary study made it
• possible to compile a relatively precise audit
  programme and enabled
• auditors to work efficiently at the auditees

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Audit input and output
Intended for the public
Audit conclusion
Output
Appeal against decisions on objections
Objections to the audit protocol
Audit protocols
Intended for auditors
Input
Previous audit, information obtained, preliminary
study, audit programme
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Audit findings - I

• investments supported by investment incentives
  attained a value of over
• CZK 21 billion by the end of 2005
• (CZK 12 billion more than in the contracts)
• 4,810 new jobs created (1,438 more than
  negotiated)
• 2,481 employees trained (by the end of 2005)
• by government resolution annexes are concluded
  to the contracts with commercial enterprises that
  enable the companies to apply for increased,
  additional special-purpose appropriations related
  to legal persons income tax these increased
  state budget outlays do not widen the range of
  the companies obligations, however
• contract annexes - companies make
  bigger profits
• - the
  state merely incurs increased expenditure,
  with a risk of further increases

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Audit findings II

• under the signed contracts additional
  special-purpose appropriations were
• limited by the size of the appropriation
  disbursed in the first five years
• - the annexes removed this limitation
• - the
  sole criterion is thus the admissible intensity
  of state aid
• the states outlays will be greater than
  originally considered and cannot be precisely
  estimated in five companies where a calculation
  could be made the expected increased expenditure
  amounts to at least CZK 801 million
• provision of investment aid to companies
  operating in the services sector -
• not regulated by law

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Features of the audit

• the audit scrutinised - compliance with the law
• - effectiveness and achieved effects
• the audit - important for parliament
  and citizens
• - performed at the
  right time to maximise impacts
• - effective benefits
  outweigh the cost of resources used in the
  audit (cost of CZK 7 million)
• elimination of risks represents savings in state
  budget expenditure of
• more than CZK 801 million value added is at
  least CZK 794million
• eliminating the detected risks will enable
  better working of the public
• sector
• 
  

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Risks

• under the contract annexes state budget finances
  are not put towards the achievement of a new goal
  risk the expenditure will bring no further
  benefits for the state
• in the contracts the value of investments for
  calculating the admissible public aid intensity
  is not limited either by the size of investment
  or a deadline for investing (it is not possible
  to estimate the total state budget expenditure on
  appropriations)
• risk all additional finances invested in fixed
  assets by companies make it possible to draw down
  larger additional special-purpose appropriations
  than previously envisaged

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• the provider relaxes the new job creation
  condition by allowing the
• companies to include employees taken on before
  the contract was signed
• non-compliance with the terms for appraising
  fulfilment of the obligation to
• create jobs risk of unjustified drawdown of
  state budget finances
• non-existence of legislation governing the
  provision of appropriations to
• investors in the services sector
• - risk of the shortcomings found in the audit
  being repeated

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Recommendations to government

• when concluding annexes to contracts negotiate
  counter-performance from
• the commercial enterprises in return for the
  provided financing
• draft legislation for the provision of
  investment aid in the services sector
• ensure that MoLSA adheres to the precise wording
  of contractual
• provisions when performing control

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Thank you for your attention Vladimír
Ruta vladimir.ruta_at_nku.cz Phone [phone]
www.nku.cz
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