III.IS THERE AN OPTIMUM LEGAL FRAMEWORK FOR THE BUDGET SYSTEM?

Box III.5. Ingredients of legal norms for external audit

●Independence: institutional, financial, managerial and operational. A law should ensure that the external audit office is independent of the audited entity. Independence from the executive should be as complete as possible.

●Appointment and removal of the head, deputy head(s) and staff of the external audit body. The legislature should be the main body involved in appointing the head of the office and his/her deputy(ies), who in turn should be provided with the freedom to recruit, promote and dismiss staff without outside interference.

●Tasks: types of audit. At a minimum, legality and regularity audits of financial management and accounting should be conducted. A certification of the financial accounts is desirable. The effectiveness of internal audits should be examined. A higher standard would require audits of performance (efficiency, economy and effectiveness). These would cover non-financial performance and management.

●Relationships of the external audit body with, and responsibilities towards, the legislature and the executive should be established. The law may specify that the annual work programme of the external audit body is largely self-determined or perhaps approved by the legislature.

●Reporting obligations. An annual report should be prepared and submitted primarily to the legislature, within no more than nine months after the fiscal year ends. It, and other ad hoc reports requested by the legislature, should be published. Exceptions should be specified, for example, for national defence.

●Investigatory powers. The law should provide the external audit office with the power to access all documents and information needed to perform its functions.

●Ensuring follow-up to recommendations made in audit reports. Law or regulation should elaborate on the obligations of members of the executive to respond to issues raised by audit reports. Written responses of actions taken (or to be taken), addressed to a parliamentary committee, is a common procedure.

Source: INTOSAI “Lima Declaration” (INTOSAI, 1977) and IMF Manual on Fiscal Transparency (IMF, 2001c).

●Contingent liabilities. A law should require the reporting of explicit contingent liabilities to parliament (Polackova, 1998, distinguishes implicit and explicit contingent liabilities – the former are not legally binding). The law should also require quantification for contingent liabilities known to be

III.IS THERE AN OPTIMUM LEGAL FRAMEWORK FOR THE BUDGET SYSTEM?

important (e.g. government guarantees on loans). Under a cash-based accounting system, the immediate cost to the government’s budget of a possible loan default is not recorded in the budget. Techniques are available for quantifying in the annual budget the cost of providing guarantees. Key elements could be embodied in the law, especially if a country decides to adopt accrual accounting principles selectively.

Box III.6. Ingredients of legal norms for government agencies

The legal framework for classes of “arm’s length” government agencies depends in part on whether public law is distinguished from private law (OECD, 2002c). Possible classes of semi-autonomous agencies are:

●Entities directly controlled by ministries, without governing boards. This class of agency would not have its own legal personality. The director of the agency would report to the minister, via the parent ministry. The agency would, however, have its own accounts and be funded entirely, or mostly, by the government budget.

●Entities directly controlled by ministries, with governing boards. Unlike the above, this class of agency would have its own legal personality. The director of the agency would report to its governing board, which in turn would report to the minister, via the parent ministry.

●Entities indirectly controlled by ministries. These agencies have less importance in terms of government policies. This class of agency would be provided with more autonomy, in terms of reporting requirements and ability to retain revenues. They would have their own legal personalities and governing boards.

Within the above broad framework for non-enterprise government agencies, further variants could be adopted. For example, entities could be categorised by nature of activity (administrative, regulatory, research, etc.) or sector of activity (health; education – primary, secondary, tertiary; defence; etc.).

Company law would be used to establish publicly owned enterprises.

3.8.2. Public availability of budget information

The publication of comprehensive fiscal information should be a legal obligation. As discussed above, legal norms for more advanced countries should be aligned with OECD best standards. The timing and periodicity of special reports (e.g. pre-election, pre-budget, long-term) should, like the annual budget report, be embodied in law.