Highlights
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International Journal of Government Auditing – January 2015

The role of SAIs in auditing policy and law-making

We argue that SAIs can play an important role in advancing evidencebased policy-making and regulatory quality. We will demonstrate that in recent years several SAIs have conducted audits on policy-making processes and that this can be considered as a transnational field of performance auditing. We urge SAIs to share share experiences on the topic so that auditors can be encouraged to recognize relevant audit questions and methods.

Editor’s Note:   In addition to research and the authors’ auditing experience, this article is inspired by discussions at two workshops: the paper builds on the discussions at the workshop “Auditing Policy-Making Process: How to Create Better Regulation” delivered by the writers at the Young EuroSAI congress in Rotterdam in November 2013, and the workshop “The Role of Audit Offices in Regulatory Policy,” which was run by the OECD at the International Regulatory Reform Conference in Berlin, February 2013.

Policy-making or law-making?

In this article two terms, “policy-making” and “law-making” are used to describe the preparation of legal norms. In the English language, the term “policy-making” emphasizes the role of political decision-makers, while the term “law-making” refers more to the technical work carried out by civil servants. However, in some other languages and jurisdictions, this distinction cannot be easily made.

Why should policy-making processes be audited?

Careful formulation of legal rules may contribute to efficient use of public resources, competitiveness, and social welfare. Regulatory failure may have disastrous effects; the financial crisis of 2008 partly resulted from incomplete regulation and implementation. Auditing creates an incentive for government officials to make better impact assessments, to consult relevant stakeholders, and to develop regulatory management.

Policy-making itself may be a function involving significant public spending. Depending on the scope of the jurisdiction, there can be hundreds or thousands of government officials directly involved in the preparatory work. Hence, evaluation of policy-making can also be justified by direct economic significance.

Citizens and members of parliament expect SAIs to evaluate policy-making processes. This call, or wish, expressed by SAIs’ “clients” is the final argument for the need to audit policy-making. In some countries, SAIs may also be the only public authority in a position to independently evaluate policy-making processes.

Policy cycle and audit questions (Accessible Text: TXT)
Graphic:  Policy cycle and audit questions

What types of audit have been conducted?

In the past few years, several SAIs have audited regulatory policy. A recent survey by the OECD found that in 14 of the 34 member countries, SAIs had audited regulatory management tools or programs (OECD. 2014, OECD Framework for Regulatory Policy Evaluation:68-72, ). OECD considers this as a moderate result and indirectly calls for a strengthened role of SAIs in the field.We examined what types of audit have been conducted by European SAIs. Examples of recent audit reports of seven SAIs are listed in the information box below. When reviewing audit reports on policy-making, we found that the following four topics had been audited by more than one SAI:

  • Impact analysis: the European Court of Audit, the British, the Finnish, the Norwegian, and the Swiss SAIs
  • Preparation or implementation of EU regulations and directives: the British, the Finnish, and the Dutch SAIs
  • Government’s regulatory policy: the British and the Finnish SAIs
  • Evaluation of the administrative burden reduction programs: the British and the Swedish SAIs

Our brief comparison indicates that the policy-making process is a transnational topic for performance auditing. Still, national SAIs may not be aware that the same audit questions have also been posed elsewhere by several other SAIs as, to our knowledge, this field of auditing has not been widely discussed in the international government auditing community. Our argument is that the SAIs auditing policy-making processes may benefit from recognizing that the same topic has also been evaluated in other countries. Understanding the context of a policy-making process may help an and quality criteria, as will be shown in the next section.

How to audit policy-making processes?

There are a number of generally recognized criteria for evaluating the quality of a policy-making process. Policy-making should be analytical, evidence-based, open, and participative.

During the process, alternative regulatory options should be taken into consideration. At the final stage, members of parliament should be provided with all the necessary information to decide on the proposed law. The following chart illustrates the policy cycle and presents audit questions that should be asked at different stages.

These normative criteria have been articulated in several government guidelines. The most influential is the OECD’s Recommendation of the Council on Regulatory Policy and Governance (http://www.oecd.org/governance/ regulatory-policy/49990817.pdf). The OECD recommendation strongly emphasizes the role of an implicit whole-of-government policy for regulatory quality with institutions and mechanisms to implement and oversee the policy.

When a policy-making process is audited, official preparatory documents are in most cases an essential source for the analysis. The empirical methods typically include interviews of government officials, parties affected by the regulation, and other experts. Quantitative data on the realized impacts of a regulation can be gathered and this data can be compared with the initial goals of the regulation and estimates of its impacts.

Conclusions

There are at least three main reasons why SAIs should audit policy-making processes. First, careful design of regulations may contribute to saving public resources. Second, SAIs are in a position to independently audit preparatory work. Third, both the general public and the parliament often expect SAIs to audit it− in fact, in recent years several SAIs have already audited policy-making processes. However, national SAIs may not have been totally aware that the same audit questions have also been analyzed by other SAIs. We suggest that the awareness of the common field could help auditors to recognize relevant audit questions and methods. In the future, a discussion platform or network for changing experiences between SAIs might be fruitful.

Regulatory governance in the Ministry for Foreign Affairs

The National Audit Office of Finland audited lawmaking in the Ministry for Foreign Affairs in 2013. The evaluation was part of a broader audit report on the management systems in the Ministry. The quality of law-making was audited against three main criteria:
1) law-making is properly managed,
2) satisfying impact assessments are made, and
3) the preparatory process is transparent and involves relevant stakeholders.

Preparation of tax legislation

The economic impact assessments concerning indirect taxation were audited by the SAI of Finland in 2014. The audit covered a comprehensive selection of past reforms concerning indirect taxation, such as changes in value-added, alcohol, and fuel taxes. In the audit the background calculations of the impact assessments were reconstructed and validated. Auditors also examined whether the government proposals included all the relevant information on the economic impacts of the changes and whether the information was presented correctly. Attention was also paid to the preparation process: did the ministry have sufficient time and human resources to conduct proper impact assessments? The issue of whether the conducted changes in taxation were in line with the economic theory’s suggestions on an efficient tax system was also discussed.


Examples of audit reports on policy-making processes:

European Court of Audit

  • Impact Assessments in the EU Institutions: Do They Support Decision-Making? 2010

National Audit Office (UK)

  • Delivering Regulatory Reform, 2011
  • Assessing the Impact of Proposed New Policies, 2010
  • Delivering High Quality Impact Assessments, 2009
  • The Administrative Burdens Reduction Programme, 2008
  • Regulatory Quality: How Regulators are implementing the Hampton vision, 2008
  • Lost in Translation? Responding to the Challenges of European Law, 2005

National Audit Office of Finland

  • Veromuutosten taloudelliset vaikutukset: välillinen verotus, 2014 [Economic impacts of tax reforms: indirect taxation]
  • Sosiaali- ja terveysministeriön säädösvalmistelu, 2012 [Legislative Drafting in the Ministry of Social Affairs and Health]
  • Hallituksen lainsäädäntösuunnitelma, 2012 [The Government’s legislative plan]
  • Säädöshankkeiden valtiontaloudellisten vaikutusten arviointi, 2011 [Evaluation of the economic impacts of legislative projects]
  • EU-säädösehdotusten kansallinen käsittely erityisesti taloudellisten vaikutusten arvioinnin kannalta, 2006 [National preparatory procedure of the EU legislative proposals particularly with regard to assessment of economic impacts]

Netherlands Court of Audit

  • Europese regelgeving: Implementatie van Europese richtlijnen en handhaving van Europese verordeningen in Nederland, 2008 [European rule-making: Implementation of the EU directives and enforcement of EU regulations in the Netherlands]

Office of the Auditor General of Norway

  • Riksrevisjonens undersøkelse av om offentlige tiltak utredes på en tilfredsstillende måte, 2013 [The investigation of whether government actions are examined in a satisfactory manner]

Swedish National Audit Office

  • Regelförenkling för företag: Regeringen är fortfarande långt från mälet, 2012 [Simplifying regulations for businesses: The government is still far from the goal]

Swiss Federal Audit Office

  • Umsetzung der Evaluationsklauseln in der Bundesverwaltung, 2011 [Review of the implementation of evaluation clauses in the Federal Administration]
  • Comment les offices mesurent-ils les effets de leurs actions? Evaluation du système d’information de dix offices fédéraux, 2005 [How do agencies measure the effects of their actions? Evaluation of the information system in ten federal agencies]