Highlights

International Journal of Government Auditing – January 2015


Introducing preventive audit in local government:
the case of Greece

Editorís Note: This article might be especially relevant to those SAIs who, like Greece, audit local governmenments and municipalities.

According to the International Standards for SAIs (ISSAIs), pre-audit by a supreme audit institution (SAI) has the advantage of being able to prevent damage before it occurs, but has the disadvantage of creating an excessive amount of work and of blurring responsibilities under public law.

The task of pre-audit involves the authorizing of public expenditure. Typically the control body receives all payment orders and supporting documentation, checks that the transaction has been authorized, that it is legal and regular, and that there is sufficient provision for it in the budget. It then either sanctions the payment or, where the transaction does not meet these criteria, returns it to the auditee for amendment (Crespo, 2005, p.6).

However this system has been characterized as costly and inefficient. Cogliandro (2000) argues that a strict examination of the legality causes delays in the delivery of public services and weakens the responsibility of management. Yet, despite the undoubted usefulness of preventive control, there is nevertheless a tendency to minimize its scope and content (Crespo, 2005).

Contrary to this trend, the Hellenic Court of Audit (HCA) still audits in advance almost all expenditures of central government and public entities, with the exception of municipalities: until recently, these have been excluded from the preventive audit of the HCA. The a priori audit of expenses of the public sector in Greece has been in existence for over a century, but in local government it became mandatory only as of 2005 onwards.

This traditional form of audit of all the transactions of public entities leads public managers to rely heavily on conducting ex-ante audit of their expenditures by the Court. Moreover, HCA is still the only SAI in Europe limited to the legality and regularity of public expenditure, as it had not been empowered to assess the performance of public policies until the recent reforms. Over the past three years a number of legislative reforms have been aimed at modernizing the existing mode of public expenditure control, and its alignment with international standards. All of this turns Greece into a special case.

As the external auditor, the SAI has the task of examining the effectiveness of internal audit. In Greece, the task of internal auditing is assigned on the services of the State General Accounting Office, and organized structures of internal audit do not exist within public organizations (although a relevant law was passed in 2006 for the creation of separate internal audit departments within public organizations, but it has never been widely implemented). Greek municipalities, even now, are excluded from this rule, and their expenses are sent directly to the services of Commissioners of HCA for review and visa. As a consequence, municipalities operate practically without organized internal control departments.

"Data highlight a problem concerning the compliance of municipalities in Greece, at least compared with the other financial management categories. This fact is partly due to the absence of internal control services."
—Dr. Kontogeorga Georgia

Data Analysis

In the data included each year in the Annual Reports of the HCA, a plethora of repeated infringements of financial legislation by audited entities has been noted, and from the year 2005 onwards (year of introduction of a priori audit) the majority of findings refers to the financial management of municipalities.

The local government has been organized in Greece in two tiers. The structure of this organization was reformed in recent years with the goal of making local government more efficient, effective, responsible and transparent, both in terms of function and in terms of services to its citizens. The current administrative division of Greece was formed according to the program ‘Kallikratis’ and has been in force since January 1, 2011. According to this program, the local authorities of the first and second tier were reformed demographically and spatially in larger geographical units by merging municipalities, communities and local prefectures. Today the country is divided into 325 municipalities (first tier local government) and 13 regions (second tier local government) (Ministry of Interior, 2012). Before the reform, in Greece there were 914 municipalities and 120 communities. The number of municipalities was large in relation to the size (132,270 square kilometers) and the population (about 11 million inhabitants) of the country.

Initially, the Presidential Decree (P.D.) 172/1997 subjected the three major municipalities of the country (Athens, Piraeus and Thessaloniki) to the preventive audit of the HCA, followed by the P.D. 133/2001, which included the municipalities of Heliopolis and Peristeri. Law 3202/03 provided for the extension of preventive audit on public expenditure of all municipalities with a population of more than 5,000 citizens, which eventually took place in 2007.

HCA is still the only SAI in Europe limited to the legality and regularity of public expenditure, as it had not been empowered to assess the performance of public policies until the recent reforms.

In economic literature, the concept of compliance is generally measured in terms of the number or rates of deviant behaviors, such as crimes per capita or the number of road accidents in relation to the total population (Levy, 2002). Consequently, the rates of deviant activity of public entities identified by the ex-ante audit could constitute an objective (quantitative) index for measuring compliance.

An analysis of the data of the Annual Reports of the HCA for 1998-2009 shows that in the framework of exercising an expenses preventive audit, out of the payment orders (on average 1,495,271) of all financial management categories—Legal Entities of Public Law, Local Government Authorities (LGA), Special Accounts and Broader Public Sector—submitted for audit to the competent Commissioners Departments of HCA, on average 8,891 payment orders are returned (due to violations, omissions, etc.) not-certified to public entities for amendment. This number corresponds to 0.57 percent of the total number of payment orders annually submitted for preventive audit, while audit on the part of LGA expenses seems to be detecting violations at, on average, 1.06 percent of the total number of payment orders submitted for audit (almost double compared to other categories), as shown in Tables 1 and 2.

Interest focuses on the extension of preventive audit to the LGA as of 2005, as, from this year onwards, more than half of payment orders that are annually returned non-certified (of all financial management categories) refer to their financial management, as illustrated in Graph 1.

TABLE 1: Non-certified (returned) payment orders perfinancial management category for the period 1998-2009
Graphic:  Non-certified (returned) payment orders per financial management category for the period 1998-2009

TABLE 2: Non-certified (returned) payment orders perfinancial management category for the period 1998-2009
Graphic:  Non-certified (returned) payment orders per financial management category for the period 1998-2009
*For the years 1998 & 1999 there are only aggregated data for these two categories

It seems therefore that data highlight a problem concerning the compliance of municipalities in Greece, at least compared with the other financial management categories. This fact is partly due to the absence of internal control services.

GRAPH 1: Non-certified (returned) payment orders
Bar Chart:  Non-certified (returned) payment orders.  Color key:  Blue=Central Government; Red=Public Entities of Public Law; Grey=Local Government; Green=Spec. Accounts, but there is not green.
Source: Kontogeorga G. (2012, p.167)

However, financial management in local government seems to be a common area of concern across the world.

Conclusions

During the last three years a number of legislative reforms has taken place in Greece. These reforms are included in the effort to restrict ex-ante audit and to modernize the audit of public expenses, which is imposed both by the imperatives of international standards and by the increasing need for transparency and accountability, particularly in view of the current financial crisis.

However, the introduction of preventive audit in municipalities in 2005 revealed that there are significant weaknesses in its financial management. More specifically, municipalities show the highest rates of deviation from the legislation compared to other categories, since more than half the findings refer to such financial management.

One might say that this result is partly expected, since the first implementation period of a reform usually requires a transitional adjustment period.

Although questions remain as to the effectiveness of ex-ante audit of expenses on public organizations in Greece, undoubtedly its inclusion in the financial management of municipalities from 2005 to the present highlights a problematic situation. Whether this fact is due to the first implementation period of the reform or has other, deeper causes, it is a matter to be answered in the near future.

References

Cogliandro, A. (2000), “Reform: the audit system.” International Journal of Public Administration. 23 (2), pp. 383-403.

Crespo, G. (2005), “Public control: A general view.” Milagros García Crespo (Eds), Public Expenditure Control in Europe: Coordinating Audit Functions in the European Union. Edward Elgar, pp. 3-29.

Kontogeorga G. (2012) “The External Audit of Financial Management in Greece and the Operation of the Hellenic Court of Auditors in the Context of International Standards.” Unpublished Doctoral Thesis, University of Patras, Greece

Levy, D. (2002), “Literature Review and Analysis: Economic Perspectives on Measuring Alcohol Policy Enforcement and Compliance.” Paper prepared for the NIAAA, NIH, HHS, as part of the Alcohol Policy Information System under Contract No N01AA12009 to the CDM Group Inc. and Pacific Institute for Research and Evaluation.

Ministry of Interior (2012), Structure and Operation of Local and Regional Democracy, Greece.