Auditing and controls are essential parts of any public financial management (PFM) system. In many countries, Supreme Audit Institutions (SAIs) now play a visible role in PFM and support to strengthen these institutions has amplified. Other forms of internal and external controls, financial reporting, and controls by parliaments and judiciaries are also critical PFM foundations.
The main weakness of public auditing and financial control systems is that state institutions with this mandate can be subject to political interference, politicisation, and wing-clipping.
The SAIs, for example, need other state institutions to act upon their findings. Although some SAIs, like the courts of audit, have the power to prosecute and can impose penalties, SAIs generally depend on the parliament, ministries, and courts to follow up on their findings and recommendations. Auditor Generals are usually appointed by and act on behalf of the parliament, therefore, SAIs can only act to the extent that parliament allows.
Government institutions of audit and control are dependent on political will and backing to exercise and implement their mandate. The Auditor General can be a political appointee with loyalty to the president and/or ruling party, and little power to go beyond limited post-fact financial or attest audits and accuracy and regularity of accounts statements.
In the absence of a mechanism to ensure auditors’ recommendations are followed up, public SAI reporting alone has been found to be insufficient (Chêne 2018: The role of supreme audit institutions in fighting corruption). In some cases, the SAI has even been used to intimidate the incumbent’s rivals and opponents. In other words, SAIs will be no more effective than the overall level of democratic checks and balances in the country.
The state institutions involved in the auditing and financial control aspects of the public financial management system are: the institution itself (internal control), the Supreme Audit Institutions (SAIs), the Legislature (with the Public Accounts Committee), and the Judiciary. All these institutions are needed for a good public control regime and a functional national integrity system.
Internal audits evaluate an agency’s internal controls, including its governance and accounting processes. They ensure compliance with laws and regulations and help maintain accurate and timely financial reporting and data collection. Internal audits also provide the tools necessary to attain operational efficiency by identifying problems and correcting lapses before they are discovered in an external audit. Internal audits provide risk management and safeguard against potential fraud, waste, or abuse. The results provide suggestions for improvements to current processes not functioning as intended.
However, conducting an internal audit is simply not enough. It is also vital for state institutions and agencies to ensure external control and remedial action is provided to help mitigate any potential corruption risk.
Supreme Audit Institutions (SAIs)
A supreme audit institution is an independent branch or agency of the government which provides auditing services to the government. It may be called a court of audit (common in Europe and its former colonies), auditor-general (common in the Anglosphere) or the board of audit (in some Asian countries) (Source: Chêne 2018).
SAIs are national-level watchdog agencies that oversee the management of public finances, promote proper and effective use of public funds, monitor proper execution of administrative activities, and provide information to public authorities and the general public. SAIs are key components of the formal system of financial accountability. SAIs also ensure that public funds are managed in an effective and efficient manner in compliance with existing laws, and that the government’s reported financial data is credible (ibid.). Real independence is a key determinant of the ability if a SAI to counter corruption. For an SAI to function adequately, it is crucial to separate its operational control from the ministry or other public body nominally subject to its supervision (Chêne 2018) and financial and administrative autonomy is key. This depends on political will and support, which can unfortunately be withdrawn at any moment – especially in an authoritarian setting.
SAIs are not specialised anti-corruption agencies and are not explicitly responsible for detecting and investigating corrupt activities. Auditing activities usually concentrate on physical evidence, meaning they are not always in a position to investigate corruption which leaves little documentary evidence. However, they have an important role to play in deterring and detecting public sector corruption. SAIs may be in a position to identify potential corruption, especially when they uncover irregularities such as falsified statements and claims, purchasing for personal use, illegal bidding practices, tax evasion, malpractice in the liquidation of public companies, overbilling or non-delivery of goods and services, etc. Recently, some SAIs have taken a more active role in addressing corruption and have sought to proactively identify and monitor areas that are particularly vulnerable to corruption.
Although some SAIs are politicised and corrupt, some have exerted influence. A recent literature review concludes that available evidence suggests that auditing helps curb corruption (Assakaf et al. 2018: Public sector auditing and corruption: A literature review). In some cases, the SAI has been able to strengthen its role in anti-corruption through relationships with other national institutions, involving the public in auditing processes, and widely publicising the recommendations of audit reports. Successful approaches have also included focussing audit planning on areas at high risk of corruption and engaging civil society in audit processes. Training and capacity building activities are important means of developing the anti-corruption expertise of public auditors (Chêne 2018).
International standards and international cooperation, training and support is also important. Most national SAIs are members of INTOSAI, the International Organization of Supreme Audit Institutions.
SAIs typically conduct three types of audits:
- compliance audits that seek to verify the legality of the transactions made by public institutions (the most common form),
- performance audits that assess the efficiency and effectiveness of public institutions’ use of resources. Performance audits can raise red flags, point to issues were corruption is likely to have occurred, and pass cases on to other relevant authorities for more thorough investigations.
- financial audits that focus on providing a financial opinion on the annual accounts of public institutions (Evans 2008: The role of supreme audit institutions in combating corruption (pdf)).
SAIs have also recently expanded the scope of their activities, undertaking more specialised audits, such as environmental audits, ethical audits of public institutions, and audits focussed on corruption prevention and control.
Another promising approach to detect fraud and corruption is the emerging concept of participatory auditing (ibid.). The objective of participatory audits is to identify opportunities for corruption along the public service delivery chain by asking the end users or clients of the audited agency. While participatory techniques still have to be fully developed, public service users can be involved in the audit process via the use of tools such as user satisfaction surveys, citizen report cards, town-hall meetings etc, to assess the quality of public service delivery (see for instance Zúñiga 2018: Anti-corruption in the healthcare sector in South-East Asia).
There is also the possibility of conducting specific anti-corruption audits. These can identify the opportunities of corruption in an organisation and evaluate the efficacy of the existing control environment in preventing it.
Conducting an anti-corruption audit can be an effective way to promote compliance within an organisation, while also helping deter possible improper behaviour. When an organisation chooses to conduct anti-corruption audits, the management sends a clear message that corruption will not be tolerated. Anti-corruption audits provide constructive feedback regarding how effectively the program is functioning while identifying potential new risks.
The parliamentary budget session is the most important procedure for parliamentary oversight and control (see Addressing corruption in the budget process). The basis for parliamentary oversight is that the executive must seek parliamentary approval for its budgetary spending. Only the budget process is able to piece together an overall framework of governance choices and policies in each sector and do so in a financially holistic and reliable fashion.
The Public Accounts Committee (PAC, also called finance and expenditure committee) is another important mechanism for financial parliamentary oversight. With the assistance of the Auditor-General (AG-SAI), this committee executes the state budget. They also handle the reports of the Auditor-General, which can invite ministers, permanent secretaries, or other ministry officials to the committee for questioning and require specific inquiries, investigations, and audits. PACs often make recommendations to government ministries requiring that they change certain policies and procedures to improve their operations.
Effective oversight is challenging because it requires detailed information about government activities. Therefore, the parliament is sometimes in an adversarial position vis-à-vis the executive branch, making the committee’s competence important. The parliament must match the level of the executive. It is also essential that the committee has the power to call for relevant documents and officials, to administer oaths for the taking of evidence, and, where necessary, to call on the Ministers for questioning (Pope 2000: Confronting corruption: The elements of a national integrity system (pdf)).
Courts and legal control
An independent, impartial, and informed judiciary holds a central place in the realisation of just, honest, open and accountable government. The judiciary must be independent of the executive if it is to perform its constitutional role of reviewing actions taken by the government and public officials, and to determine whether or not they comply with the standards laid down in the Constitution and with the laws enacted by the legislature. Constitutional courts have the additional task of guaranteeing that new laws passed by the executive (like presidential decrees) and the legislature do not violate the constitution or other legal requirements.
In terms of public financial control and auditing, some countries have specialised courts of audits (Cour des comptes, Tribunal de contas, etc.), which serves as the supreme audit institution (SAI), with much the same mandate and role as the auditor-general. That is, their status as jurisdictional courts allows them to initiate legal proceedings against public fund managers or accountants who are possibly involved in irregularities regarding public expenditure and assets, and to directly sanction individuals within the public service. In countries without a specialised court of audits, the Auditor-General can bring cases for the criminal courts, as a last resort.
In terms of external control, the media and civil society are pivotal, particularly in countries with a deficient internal and governmental auditing system. A holistic approach to anti-corruption and auditing will have to include the media and civil society.
The media is often referred to as the fourth pillar in democracy. It has a key role to play in monitoring and investigating the actions of those in power and informing citizens about dubious practices and power abuse. Corruption reports unfold in the global news media on a daily basis, demonstrating severe deficiencies in the control and audit regimes of most countries. However, for the media to uphold its watchdog function, it needs to be independent and professional.
The necessary independence of the media requires an enabling legal and administrative environment. The freedom of the press will be aided by several measures, such as passing Freedom of Information laws giving private citizens, including journalists, access to government information (and, it follows, ensuring that government record-keeping is efficient and effective); repealing or revising anti-defamation laws and “insult” laws to ensure that these cannot be used to threaten and fetter the press; ending press and media censorship; raising the professional standards of journalists; ending government discrimination (such as controlled access to newsprint, advertising) of certain media; and, ensuring that state-owned media employees can maintain professional standards of independence and responsibility, etc. (see: Schauseil 2019: Media and Corruption).
Organised citizens, often referred to as civil society organisations (CSOs), can also play an important role in ensuring power is held accountable and public funds are used properly (see for instance Marin 2016: Evidence of citizen engagement impact in promoting good governance and anti-corruption efforts).
Social audits aim to involve the people who are affected by, or are the intended beneficiaries, of the activities being audited. Social audits are a way of measuring, understanding, reporting, and ultimately improving the social performance of a state institution/agency or programme. A social audit helps to narrow gaps between vision/goal and reality, between efficiency and effectiveness. Parliamentarians, for instance, can tap into the expertise of local actors and draw on it in their role as overseers. CSOs can also provide useful information networks for MPs, keeping them abreast of international developments, comparative national information, and regional/local experiences of service delivery.
Private companies are increasingly using anti-corruption audits. Transnational companies, in particular, seems to be increasingly concerned with complying with the risk of international prosecution, with possible multimillion-dollar fines, individual prosecution of executives, and restrictions placed on businesses. As the risk of prosecution grows, more and more companies have established anti-corruption compliance programs including policies, financial controls, anti-corruption compliance internal audits, and other monitoring mechanisms.
Anti-corruption audits are very different from other internal audits usually conducted by a company’s internal audit group. The auditors need to be trained in the particulars of the FCPA, the UK Bribery Act and local anti-bribery laws. It is also useful to have an understanding of leading compliance practices related to these laws. […] Key reasons for using experienced forensic accountants include the ability to select meaningful transactions for review and experience in recognizing corruption red flags. An experienced forensic accountant who understands the FCPA and UK Bribery Act, and has been involved in corruption investigations and anti-corruption audits, applies technical knowledge, experience and seasoned judgment in selecting testing samples and reviewing transactions. Knowing where to look is an important intangible factor that greatly increases the value of the exercise
Corruption in the control process
The audit process is prone to corrupt practices and audits can facilitate corrupt practices. For instance, SAIs can be ‘bought’ by corrupt powerholders. Compromised auditors and fabricated compliance audits can help conceal non-compliance with existing laws, rules and regulations. Non-autonomous and politicised SAIs can help conceal misleading financial statements and illicit economic transactions. Auditors and comptrollers can also be used as a political tool to silence opposition and rivals.
The frequent and increasing use of external auditors (private auditing and consulting firms) and the lack of international standards for external auditors has laid external auditing open for corrupt practices. The ‘big 4’ international audit and consultancy firms are for instance increasingly criticised for being partial, non-transparent, and to function as middlemen in corrupt corporate transactions and government procurement. In developing markets, they are believed to be eager to accept low quality practice and turn a blind eye on corruption in state companies for a good fee (see for instance this blog listing of Big 4 accounting scandals (2018). See also Chêne 2017: The role of external auditing in fraud and corruption).
The core question is the (democratic) quality of the institutions responsible for watching the watchdogs. Who audits the auditors? When considering corruption risks in a sector like audit, there is a need to go beyond a narrow focus on the specific body or agency and to consider its interactions with a range of other institutions, both formal (the executive, the judiciary) and informal (kinship groups, socio-economic elites). Indeed, the problem with focusing primarily on legal, institutional, and organisational frameworks is that these approaches can overlook the role played by informal practices that enables and perpetuates corruption (Jenkins 2018: Corruption risks in tax administration, external audits and national statistics).