Technical Articles

International Journal of Government Auditing – October 2012


Factors Critical to Institutional Strengthening of Public Auditing (A Case Study from the SAI of Kazakhstan)

Editor's Note: The author is a public audit advisor to the U.S. Agency for International Development (USAID) Macroeconomic Project that Deloitte Consulting LLP is implementing in Kazakhstan and Turkmenistan. The views expressed in this article are the sole responsibility of the author and do not necessarily reflect the views of USAID or the U.S. government.

Today, SAIs play a central role among public audit institutions, and the growing challenges and sophistication of the environments in which they operate makes it increasingly important to strengthen their capacities. SAIs must meet high standards to ensure the transparency, accountability, and efficiency of government operations, a task of national importance. Therefore, SAIs at every stage (whether advanced, newly created, or emerging) need to identify and model the factors critical to success in strengthening of the government’s auditing function. Their aim should be to achieve sustainable and progressive results at the tactical, strategic, and conceptual levels, and they should focus their efforts on improving audit-related legislation, methodology, and practice.

Because of their role, SAIs can and must help to identify prospective development areas in the public audit systems of their countries, which can be addressed by negotiating with involved state bodies and implementing long-term development concepts. All institutions comprising a national public audit system should work together to identify and set out on a development path that will lead to improved governance; ensure the transparency and accountability of the public sector; prevent fraud, abuse, and corruption; and meet the requirement for efficient use of public resources.

The Accounts Committee for Control over Execution of the Republican Budget—the SAI of Kazakhstan and an INTOSAI Member—has, over the years, started to adopt a long-term development concept for the state financial control system (presently, a draft concept for the period until 2020 has been developed). To date, Kazakhstan’s system has achieved certain positive results; namely, the country’s SAI and independent local audit bodies were established and developed, and the internal control function was introduced in the public sector. However, some systemic issues still need to be addressed, including shortcomings in the organization of the public audit and information exchange systems, limited opportunities to conduct audits of the government’s consolidated financial statements, and inefficient preventive actions and early warning mechanisms used to detect deviations. The conceptual implementation measures are designed to resolve these systemic problems and establish the following priorities: (1) attaining greater independence of external audit and ensuring its sustainable capacity improvement and (2) facilitating efficient organization of internal control in accordance with successful examples of public bodies in advanced countries and private sector entities.

Along with conceptual initiatives, newly created SAIs need to draft, and all SAIs need to improve, legislative acts governing and relating to public audit. Establishing a legal framework and improving existing legislation are equally difficult. However, for newly established SAIs or those undergoing reforms, the legislative drafting is complicated by a number of issues. These include the need to (1) identify and establish an SAI model (whether court-based, mixed, or unique) that will not conflict with the government structure and (2) identify the SAI’s role, mission, and mandates to facilitate its efficient functioning.

At the methodological level, SAIs need to focus on strengthening institutional development by harmonizing national standards (state financial control standards) with ISSAIs and other professional standards. Harmonization envisages improving the quality of standards that will meet the needs of the auditors and ensure relevant and effective auditing. If the structure and content of the standards are improved, it will, in turn, help ensure better transparency and accountability in executive bodies and help prevent deviations and fraud, thus increasing the level of public trust in public governance. This will also create greater trust in the SAI itself as it uses its standards to declare and follow principles of independence, ethics, professionalism, openness, and serving the public interest.

In this area, the SAI of Kazakhstan is undertaking the following tasks to improve its audit standards:

  • Build a hierarchy of legislative and methodological documents to clearly differentiate norms and requirements that will be regulated at the level of standards—in other words, the areas and boundaries of public audit standardization (the content of relevant laws, standards, and guidelines should be interrelated and exclude duplication and misinterpretation).
  • Develop an operational system of standards and derivative or implementation guidelines, preferably those similar to the updated ISSAI structure.
  • Introduce a mixed-modified application of international standards—i.e., a definition of the regulations of ISSAIs, International Auditing Standards, the U.S. yellow book, and other national standards that can be implemented in the Kazakh system.
  • Determine an efficient structure to ensure the continuity of the process of modernizing the standards by establishing managing committees and working groups.
  • Involve all interested bodies, organizations, and the public in the standards improvement process by applying various mechanisms and new technologies.

In addition, the SAI of Kazakhstan needs to implement tasks that take into account the country’s unique characteristics and material and human resources situation, as well as its access to INTOSAI know-how and products.

Strategic level planning is a parallel step in building a good model for the institutional strengthening of public auditing. Many advanced SAIs have successful strategic planning practices and other SAIs are following this practice, including the SAI of Kazakhstan. As the SAI gains more experience, it can take the lead in introducing best planning practices because it has the authority to assess strategic plans of all public bodies. Therefore, it needs to not only propose improvements in assessed strategic plans, but also demonstrate best practices by its own example. Presently, Kazakhstan’s SAI is a regional leader in defining its mission, strategic objectives, and goals. However, it still needs to introduce acceptable targets and performance indicators, further strengthen organizational structure in accordance with strategic objectives and goals, and develop and introduce efficient risk management mechanisms.

Applying successful practices is one way to improve the efficiency of strategic planning. For instance, the following practices would be acceptable for Kazakhstan’s SAI to study in the midterm and adopt in the long term: identifying high-risk areas (SAI of the United States), developing better governance guidelines in the public sector (SAI of the United Kingdom), and using the “4E” methodology of economy, efficiency, effectiveness, and ecology (SAI of Canada). Peer reviews can also be introduced depending on the development goals of Kazakhstan’s SAI. For example, it is currently feasible to conduct peer reviews to assess (1) audits of the compliance of public and quasi-public sector entities’ financial statements with International Public Sector Accounting Standards and International Financial Reporting Standards; (2) the methodology and practice of efficiency and strategic plan assessment audits; (3) quality control and risk management systems; and (4) the system of professional development for public auditors.

In a successful strategic plan, actions planned at a strategic level should be achievable at a tactical level. Developing an annual action plan at a tactical level is a traditional and well developed task for advanced SAIs, but not an easy one. It is often beyond the scope of possibility for newly established and emerging SAIs in terms of the degree of complexity and decision making required. Establishing a new institution should be justified for the legislators and the public from more than an economic point of view. An SAI’s plan should ensure that the auditors will be in a right place at a right time and that their work will be efficiently organized, will not affect operations of the auditee, and will be focused on both the detection of deviations and implementation of improvements. An annual plan should define the list of audits in accordance with the SAI’s statutory powers; ensure the conduct of timely audits based on unforeseen requests; and ensure the segregation of employees’ duties based on the audit area depending on their qualifications, experience, and functional tasks.

The annual planning process adopted by Kazakhstan’s SAI addresses the following issues:

  • selection of methods and techniques to apply to audits and analytical and research assignments allowing for complete and objective conclusions on budget execution;
  • timely methodological and informational support of auditing bodies at local levels; and
  • implementation of an efficient public audit information and communication system.

The experience of newly created or emerging SAIs demonstrates that planning and implementing work under annual plans is complicated by the lack of resources.

Finally, practical level modeling should be rationally linked to measures aimed at maintaining the proper professional level of SAI employees. While participation in training is undoubtedly successful and effective, it is not an exhaustive measure. In particular, a newly established or emerging SAI should address a number of issues, including the following:

  • How can a trained employee be retained in an SAI or, at least, within the public audit system?
  • Are there mechanisms that guarantee practical application of the knowledge and skills obtained through training?
  • What is the life cycle of the knowledge and skills obtained—the time period during which such knowledge and skills will remain valid and relevant for an SAI’s goals?

Therefore, additional actions and funds should be envisaged in addition to professional development measures. A high expectation environment focused on achieving practical results should be created at all SAI structural subdivisions. Best practices, whenever acceptable, should be applied and also take domestic initiatives into account. For instance, in the case of Kazakhstan’s SAI, practice is developed ahead of methodology and legislation. Success in this area can be achieved by focusing on target issues related to existing gaps or areas that require further improvement and by selecting accessible and rapid ways to resolve such issues.

Additional measures designed to strengthen institutional public auditing capacity also include international and regional technical assistance projects. For instance, the USAID Macroeconomic Project that was launched in October 2011 provides technical assistance to key public bodies in Kazakhstan and Turkmenistan. The project’s work with the Kazakh SAI focuses on strengthening its capacities and covers issues ranging from improving standards, to promoting conceptual initiatives, to holding targeted workshops, to conducting pilot audits with the help of the project’s experts. A mandatory requirement in determining the assistance areas of a project is to avoid duplication of tasks with other projects, which fully conforms to donor coordination initiatives of INTOSAI.

For additional information, contact the author at amukhamediyeva@hotmail.com.