Support for Improvement in Governance and Management
A joint initiative of the OECD and the European Union, principally financed by the EU
PUBLIC INTERNAL FINANCIAL CONTROL IN THE CZECH REPUBLIC
REPORT OF THE SIGMA PEER REVIEW TEAM
This document has been produced with the financial assistance of the European Union. The views expressed herein can in no way be taken to
reflect the official opinion of the European Union, and do not necessarily reflect the views of the OECD and its Member countries or of the
beneficiary countries participating in the SIGMA Programme.
I- Introduction ............................................................................................................................................... 6
II- General context of the peer assistance work/Control environment in the Czech Republic ..................... 9
III-- Budget and treasury issues .................................................................................................................. 10
3.1. The status of the Czech public finances...................................................................................... 10
3.2. Number of staff ........................................................................................................................... 11
3.3. Organisation of the budget department ....................................................................................... 11
3.4. Scope of the state budget ............................................................................................................ 12
3.5. Structure of the state budget ....................................................................................................... 14
3.6. Structure of the state administration ........................................................................................... 16
3.7. EU related financial flows on the state budget ........................................................................... 18
3.8. State payments ............................................................................................................................ 19
3.9. The closing of the state accounts ................................................................................................ 22
3.10. The Budget documents submitted to the Chamber of Deputies ............................................. 24
3.10.1. Documents submitted ......................................................................................................... 24
3.10.2. Medium-term forecasting ................................................................................................... 24
3.10.3. Approval of the budget ....................................................................................................... 25
3.10.4. A rather detailed budget ...................................................................................................... 25
IV- General strategy and legal issues for financial control and internal audit ........................................... 26
4.1. Lack of Strategy Paper ................................................................................................................ 26
4.2. Legal Framework ........................................................................................................................ 27
4.2.1. The Act 320/2001 (Financial Control Act) ......................................................................... 27
4.2.2. The Decree 64 ..................................................................................................................... 27
4.2.3. Continuation of the previous act on state inspection of 1991 ............................................. 28
V- Department 17 and its position within and outside the Ministry of Finance ......................................... 28
5.1. Internal structure of Department 17 and the role of Central Harmonisation Unit (CHU) .......... 29
VI- Financial control procedures and systems ............................................................................................ 30
6.1. Operation of Financial Management and Control (FMC) Systems in the Czech Republic ....... 30
6.1.1. Legal Definition of Financial Control ................................................................................ 30
6.1.2. Responsible Bodies ............................................................................................................. 31
6.1.3. Structure .............................................................................................................................. 32
6.1.4. Control Bodies .................................................................................................................... 32
6.1.5. Managerial Controls ........................................................................................................... 34
6.1.6. Reporting and follow up Procedure .................................................................................... 35
6.2. Role and Responsibilities of Department 17 in respect of Financial Control ............................ 36
6.3. Creation of the Regions and the Impact of the Decentralisation Process ................................... 38
6.4. Audit trails .................................................................................................................................. 39
6.5. Performance indicators on economy and cost effectiveness ...................................................... 39
6.6. Irregularities and fraud................................................................................................................ 40
6.7. A More Integrated Approach to Internal Financial Control ....................................................... 41
VII- Internal Audit Function : Developing the Internal Audit in the public administration ...................... 43
7.1. General remark ........................................................................................................................... 43
7.2. Internal Audit tasks and duties.................................................................................................... 43
7.3. Preliminary surveys and audit approach ..................................................................................... 43
7.4. Audit programmes ...................................................................................................................... 44
7.5. Fieldwork .................................................................................................................................... 44
7.6. Working Papers........................................................................................................................... 45
7.7. Audit Techniques ........................................................................................................................ 46
7.8. Audit of IT systems / Audit in IT environment .......................................................................... 46
7.9. Reporting .................................................................................................................................... 46
7.10. Follow-up ................................................................................................................................ 47
7.11. Standard framework for the activity of the Internal Audit Units : Purpose, Authority,
Independence and Responsibility ........................................................................................................... 48
7.11.1. Purpose................................................................................................................................ 48
7.11.2. Authority ............................................................................................................................. 48
7.11.3. Independence ...................................................................................................................... 48
7.12. Organisation of the Internal Audit Units in Ministries and other budget organisations ......... 49
7.13. Standards, Guidelines, Manuals.............................................................................................. 50
7.14. Audit Charter .......................................................................................................................... 51
7.15. Code of Ethics ......................................................................................................................... 52
7.16. Multi-annual audit plan ........................................................................................................... 52
7.17. Human resources management and development ................................................................... 53
7.17.1. Position of the internal auditors .......................................................................................... 53
7.17.2. Staff recruitment and retention ........................................................................................... 54
7.17.3. Basic and continuous training ............................................................................................. 54
7.17.4. Incentives for staff retention and career perspectives ......................................................... 55
7.18. Quality Assurance Review...................................................................................................... 55
7.19. Relation with the Czech Supreme Audit Office (NKU) ......................................................... 56
7.20. Responsibilities of the CHU in regard of internal audit ......................................................... 56
VIII- Specific aspects of EU funds management and control .................................................................... 58
8.1. EU-Funds .................................................................................................................................... 58
8.2. Agency for agricultural markets and rural development ............................................................ 58
8.3. National Fund ............................................................................................................................. 59
8.4. Central Financing and Contracting Unit (CFCU) ....................................................................... 60
8.5. Post accession requirements for financial control for EU structural funds and cohesion fund .. 61
8.6. Impact on Department 17 ........................................................................................................... 62
8.7. Treatment of irregularities .......................................................................................................... 62
8.8. A final suggestion ....................................................................................................................... 63
IX- Conclusions .......................................................................................................................................... 63
1. In January 2002 the Ministry of Finance of the Czech Republic, following a recommendation from the
European Commission, asked SIGMA to arrange a Peer Review of the Public Internal Financial Control
(PIFC) and Internal Audit systems. The purpose was to provide the Ministry and the European Commission
with observations and recommendations for possible changes and improvements to further develop the PIFC
system in line with good European practice.
2. A team was established, consisting of :
Member State Peers:
Ake Hjalmarsson, Director, Budget Department, Ministry of Finance, Sweden
Karin Hochhaus, Deputy Head of the EU-funds Control Division, Federal Ministry of Finance,
Patrick Morrissey Certified Internal Auditor and IT Auditor (CIA, CISA, CISSP), France
Graham Jenkins Former Finance Director of the Intervention Board, United Kingdom
SIGMA Peer Review Management and Organisation:
Annes McGoogan SIGMA Project Assistant for the Peer Review
François-Roger Cazala Conseiller maître, French Court of Audit, seconded to SIGMA as Principal
3. The purpose of this peer assistance was to make an external independent analysis of the Czech PIFC system
using as a basis of the evaluation the professional knowledge and experience of EU Member State senior
practitioners and SIGMA experts in specialist areas. Some of the yardsticks used by the peers are the
internationally existing internal auditing standards and good practices as applied in the EU Member States.
The peers have made recommendations based on these benchmarks as well as on their knowledge and
experience of national, international and EU systems and best practices. The team was composed with this in
mind, representing different types of PIFC models, and differing types of financial management and specialist
4. As for previous exercises of a similar type, it is emphasised that peer assistance is not an audit or an
assessment – but by its very nature it largely concentrates on challenges and problem areas. Given the time
available, it was also not always fully possible for the peers to substantiate all recommendations in exact
detail. However, a contradictory procedure at the end of the review with the Czech counterparts has been used
as a general measure to confirm or correct the findings of the peers, and to ensure that their understanding in
the relevant areas is not materially or significantly incorrect.
5. The fieldwork was initially planned to be carried out in September and October 2002. Due to the severe flood
that affected the Czech Republic and notably Prague in the summer of 2002, it was agreed to postpone the peer
review exercise and the field missions finally took place over two weeks in February and March 2003. The
Peers gathered information through extensive interviews (see Annex 1) and analysed relevant laws,
regulations, guidelines and official files and papers, including audit reports and documentation pertaining to
technical assistance projects. Before the mission a comprehensive questionnaire was established and sent to
the Ministry of Finance, which kindly accepted to answer it thoroughly, thus adding to its already heavy
6. We wish to express our sincere thanks to the Ministry of Finance, in particular the First Deputy-Minister Mr
Janota and the Deputy Minister Mr Safařik, who both took from their time to contribute to the mission. In
Department 17 of the Ministry of Finance, our thanks go naturally to Mr Josef Svoboda, Director, Mr Jiři
Kuchyňa, Head of Division 174, who together with his team, most specially Mrs Věra Martinů and Mrs
Pejčochová took the burden of supporting the peer team, as well as the other Heads of Division in department
17 Mrs Chladková, Mrs Pexová and Mrs Pejšová. We would also like to thank the management and all staff in
other Ministries and institutions for their contributions.
7. The peer assistance first results in the production of this report, which represents the views of the peers, and by
its nature it is a fairly large and detailed document. It is hoped that it could be used as a reference guide for
some time to come and as a basis for considering and developing detailed further actions to implement actively
and effectively the recommendations of the peers. The objectives of this Peer Review have been to:
Provide an independent review of the quality and adequacy of the present Czech systems for public
financial management and control as well as for public internal audit; and
Support the Czech government in its efforts to ensure and further develop, in a practical and effective
manner, sound financial management of national and EU resources, taking into account principles and
standards of internal good practice as well as specific Czech circumstances.
8. The focus in the Review has been with the arrangements for and implementation of:
Management control within budget spending units;
Support functions for the management of control;
Internal audit; and
Control activities at the central level.
9. The point of departure for the Peers has been to take a broad view of the PIFC system in line with the
definition by the European Commission. In our view the set up and the implementation of an effective PIFC
system demands commitment to effective management and personal integrity and professionalism amongst top
leadership at all levels.
10. The Peers are conscious of the fact that the “modern” definition of a financial control system indeed the one
used in the review and this report is broader than the one that seems to be used in the Czech Republic, which
just focuses on control of financial transactions. Nevertheless this is done in the interest of understanding the
challenges faced by the Czech authorities.
11. We have set high standards as the basis for this Review. In so doing we are also conscious of the fact that not
all Member State PIFC systems and arrangements can claim to fully and effectively apply the entire range of
such standards and procedures to the maximum degree over such a wide and complex area. The Peers
consider, nonetheless, that good ambitions to make and demonstrate effective progress in the PIFC area are the
only ones that could satisfy the right Czech ambitions to be a full partner in policy making within the
12. As with most if not all other candidate countries, when assessing the Czech financial control system some
important factors must be taken into consideration:
Resources are scarce in the public sector;
Concepts used are new and sometimes difficult to understand;
Political backing ensuring consistency and continuity of reform is often insufficient.
13. The above mentioned factors as such strengthen the need for using given resources in a targeted and rational
14. The Peers note that many recommendations, if implemented, still represent complex and significant changes to
the current approaches, working practices and procedures, and this despite the significant progress already
made. They could also require amendments to existing laws and regulations, sufficient investment of resources
and more understanding by management of the issues involved. We consider, however, that these
recommendations will assist senior financial management in deciding upon priorities to take forward the
development of the PIFC system.
15. These changes cannot all be made overnight. The significance of our recommendations concerning the
adoption and implementation of a development planning process and detailed action plans (for the relevant
components of the Review) with defined objectives, targets and deadlines for achievement should be seen in
II- General context of the peer assistance work/Control environment in the Czech Republic
16. The development of sound financial control arrangements in the public administration of the Czech Republic
is, by far, not a matter of legal framework and of some techniques such as, for example, internal audit. To a
large extent, the entire system of public administration, including the civil service system as well as working
habits, is at stake, as such issues can influence and even determine the integrity framework, the degree of
transparency in individual or corporate behaviour, as the degree of trust to cast upon the implementation
mechanisms. These are key components of the “control environment” to use this “COSO” concept.
17. In that regard, the situation in the Czech administration is not constantly satisfactory. Here is not the place to
analyse the causes of this situation and it was not the team’s mandate. It is however only fair to point to certain
features of the Czech administration, apparently common even if they seem to widely affect some specific
parts, which as such prevent sound financial control systems and procedures being implemented.
18. The Civil Service Act has finally been adopted after a long process but now the prospect for actual
enforcement in due time looks slim. This is very regrettable, as a robust civil service should be seen as a key
component of the “control environment”. This could lead to de-motivation and again prevent young candidates
from joining the civil service at a time when this is seriously needed.
19. In general Czech civil servants are competent and well-educated, proud of their work and achievement, some
(very few) with management experience in particular in other ministries. These advantages could be
challenged by other less positive features, such as :
A strong legalistic approach : this is good to ensure the rule of law but can prove too rigid, inflexible and
progress inhibiting in the cases when adaptability and managerial behaviour are looked for. This has
prevented reforms from occurring or happening in a smooth manner.
Weaknesses of internal communication : this can be illustrated (and in that case probably encouraged)
by the way offices of Department 17 are distributed in the Ministry’s premises. The doors are generally
kept locked as if state secrets were stored in each office. The departments of the Ministry are designated
only by their numbers, which are entirely cryptic for an outsider. All this gives the image of an inward-
looking organisation, in circumstances where external exposure, networking and partnership are needed.
The lack of global perspective and external communication : for example, the organisation of
Department 17 (as to an extent for the whole of Ministry of Finance : see for example. the Budget
department) is not at first sight readable for most external people.
Lack of (and need of ) clear objectives : one has the impression that so far the objectives were to
marginally introduce changes in order to comply with EU requirements on the surface.
The lack of networking organisation of the internal audit function (see below) nor co-ordination of
financial control developments : the department 17, nor any of its internal subdivision has really taken
over that key role so far, despite a good institutional positioning to do so (and there is some risk that this
could be done by others).
The need for serious renewal of staff. The average age in Department 17 (over 50) speaks for experience
but not so much for dynamism, let alone for serious change process. There is a need for a better balance
between age ranges, making room (and therefore offering better perspectives) for more junior staff. In
addition there is an evident risk of a sudden creation of staff shortage once most current staff will retire in a
few years from now.
20. This general context led the peer team to focus on those issues that seem more immediately a matter of
concern, rather than to proceed with a comprehensive analysis of all systems and procedures that may fall
under a broad conception of “financial control”. This approach was to a large extent based on and justified by
the results of the initial questionnaire.
III-- Budget and treasury issues
3.1. The status of the Czech public finances
21. Czech public finances have been deteriorating over the last few years and the prospect for the next few years is
that the situation will become even worse. Presently the general government deficit amounts to some 6 per
cent of GDP and it might rapidly increase to some 7 or 8 per cent if decisive corrective action is not taken
22. Public expenditures correspond to some 47 per cent of GDP, i.e. they are already close to the EU average. The
high expenditure ratio is not explained by relatively high investment expenditure that would increase the
potential for future revenues that could contribute to easing of financial problems. Instead a very large part of
the expenditure consists of social security payments. Although the present debt ratio is rather low, somewhat
more than 20 per cent of GDP, the ratio will increase rapidly with the present large deficits. If corrective action
is not taken the debt will exceed 40 per cent in a few years1.
23. The revenue and tax ratio is below the EU average but the deficit problem can hardly be solved by
substantially increasing the tax revenues. Such increases would risk damaging the competitiveness of the
Czech economy. Instead it seems obvious that the Government in the medium term must adhere to a very firm
fiscal discipline based on careful scrutiny of all expenditure items and effective use of public means2.
24. In this perspective it is an advantage that the deficit is almost exclusively located to the state budget which the
Government has a more direct control of than for example the budgets of the local government units.
25. The strained situation for public finances now described makes it compelling to have systems and procedures
for financial control which will ensure that public funds are used for the intended purpose and also used in an
effective manner. It is also necessary to develop budgetary methods and structures which will contribute to a
consolidation of the public finances.
If the very real obligations in the Czech Consolidation Agency are included the debt will be increase by some additional
Within the Ministry of Finance a Budgetary Outlook for 2003-2006 has been prepared in December 2002. It describes the
fiscal situation and suggests measures to be taken in order to consolidate the public finances. The original Concept of Reform
of the Public Budgets was not approved by the Government at the time of the review, but a revised version was later on
3.2. Number of staff
26. In this context a small digression should be made. As a result of the Public Administration Reform
autonomous regional administrations and municipalities are replacing the earlier state districts. A Civil Service
Law will come into effect soon changing the situation for the civil servants. Furthermore, ten years ago the
country was split in two when the federation broke up and presently there is a strong need for developing and
implementing new institutions in order to comply with real and imagined EU requirements. These are indeed
formidable organisational changes.
27. During several of the interviews carried out by the team the peers made observations suggesting that the
number of staff in ministries etc. was quite ample when superficially considering the tasks that should be
managed and when compared to the number of staff used for similar tasks in the peers’ national
28. The peers are aware that the observations are sketchy and not verified by thorough investigation which would
go far beyond the scope of the peer review. However, the peers are so worried by the observations that they
cannot just leave it at that. Maybe a thorough review of the need for staff should be included in the intended
Reform of the Public Budgets. The question that should be asked is whether the structural changes have been
made without duplicating functions and staff3.
3.3. Organisation of the budget department
29. In the Ministry of Finance there are a number of departments involved in the annual process of preparing the
draft state budget. The State Budget Department has a staff amounting to some 30 persons. The tasks of this
department include mainly methodological issues, the co-ordination of the process and consolidation of the
draft state budget. The more detailed budget preparation tasks are performed by a number of so-called line
units within the Ministry of Finance. The State Budget Department also provides the line units with financial
frames for each of the line ministries handled by each line unit. The line units are responsible for different
parts of the state budget and extra-budgetary funds. There are units for 1) the financing of non-productive
organisations, 2) the financing of enterprises, 3) the financing of defence and crisis management, 4) the
financing of social security, and 5) the financing of local government budgets4. The total number of staff in
these line units is some 150.
30. The issue here is not the division into a number of organisational units but the conspicuous fact that the
methodological department and the line units (except the one for local government financing) report to two
different deputy ministers. There is no doubt that an organisation divided in this way and lacking a Budget
Director provides a weaker control over the preparation and implementation of the state budget than a unified
budget department would do.
31. It seems obvious that the present organisational structure is a legacy from the past political and economic
system where there was a strong tendency to restrict the standing and influence of the Ministry of Finance -
For instance 1) what happened with the staff in federal and state ministries when the federation broke up, 2) which functions
can be eliminated from the central ministries as a consequence of the delegation of authorities to the autonomous regional
administrations and municipalities, and 3) which existing administrations can be closed down when new structures are created
as a preparation for EU accession?
The Financial department has another character and constitutes the Ministry of Finance chapter administrator’s
and also the Budget Department - to little more than a budget consolidation, financing and accounting
32. Presently the State Budget Department obtains quarterly reports on the outcome of the state budget. These
reports are based on accounting data and are structured in accordance with the budgetary binding indicators
decided by the Parliament. This is not enough if the Budget Department is to have a satisfactory control of the
financial implementation of the budget and be in a position to request reduced expenditure, lower budgetary
limits etc. during the implementation. The line units also receive reports every third month but they can
request monthly reports from the line ministries. However, this seldom occurs. The Ministry of Finance
departments also receives daily and monthly information on the financial outcome based on payment data
from the Czech National Bank. This information can be used for monitoring the performance of revenue and
expenditure by type and by chapter. It appears however, as this information is not structured in accordance
with the binding indicators decided by the Parliament, that it cannot be used to monitor the execution of the
33. It is quite right that the Fiscal Policy Department belongs to the Ministry of Finance. Due to the close links
between the macroeconomic framework, the medium-term budgetary outlook and the annual budget though, it
would strengthen the economic and budgetary policy if the Fiscal Policy department also belonged to the same
deputy minister as the Budget Department.
34. The concept for a Reform of the Public Budgets aims at reducing public expenditures and at reducing the
unsustainable general government deficit. The organisational structure within the Ministry of Finance might be
crucial in achieving and maintaining such a result.
As a significant element of the initiated Reform of the Public Budgets, the Budget Department and
the five line units should be brought together into one organisational unit headed by a Budget
Director reporting to one of the two deputy ministers.
The deputy minister responsible for the unified Budget Department should also be responsible for
the Fiscal Policy Department.
The State Budget Department and the line units should obtain monthly reporting of the detailed
outcome of the implementation of the state budget, structured in accordance with the binding
indicators approved by the Parliament. There should be a similar reporting of the outcomes for the
extra-budgetary funds and the Health insurance system.
3.4. Scope of the state budget
35. The general government expenditure corresponds to some 47 per cent of GDP. Of this relatively high figure
the state budget represents some 27 percentage points. This means that the budgets of the EBFs, the social
security funds and the local government including expenditure correspond in all to some 20 per cent of GDP5.
36. The EU budgetary requirements which can be derived from the Maastricht criteria and the Stability and
Growth Pact all refer to the general government sector according to the ESA 95 definitions. These definitions
encompass all the four parts of the government sector enumerated above.
EBFs 3.5 %, social security funds 6 % and local governments 11.5 %.
37. The present and projected Czech public finances are not sustainable and are far from complying with EU
requirements. The general government deficit might soon become 7 or 8 per cent of GDP according to the
ESA 95 standard. In the revised Concept of Reform of the Public Budgets the Government aims at a deficit
corresponding to 4 per cent of GDP in 2006.
38. That local government budgets represent a large part of the overall government expenditure and the local
governments (regional administrations and municipalities) are autonomous in relation to the central
government. Since local governments’ budgets cannot be controlled by the Government the financial
development in this sector must instead be forecast by the Ministry of Finance.
39. In the Czech Republic today there only exists one separate social security fund namely the Health Insurance
System which covers the costs for hospital and clinic treatment. It is financed from employers’ and employees’
contributions and allocations from the state budget. The deficit, and the dependence on the state budget for
additional funds, is hardly sustainable and it indicates that the present financial and organisational structures
are not adequate.
40. A few years ago there was a Government proposal to create an off-budget social insurance system including
also pensions and sickness pay. The proposal was defeated in Parliament. It can be mentioned that the pay-as-
you-go pension system6 is now on the state budget and actually runs a considerable annual deficit. It is difficult
to shape and run sustainable social security systems. Just moving a system outside the state budget, however,
does not solve any problems.
41. Also typical of the previous budgetary set-up was the multitude of Extra-budgetary Funds (EBFs)7. This
contributed to the fragmentation of the state budget and reduced the possibilities for the Ministry of Finance
and Parliament to control the use of public money. In all EU candidate countries the number of EBFs has been
radically reduced to a few funds. In this perspective it is discouraging to observe that the number of EBFs in
the Czech Republic has recently been increased from six8 to nine9 bringing the expenditure up from maybe 1 to
3.5 per cent of GDP. The result was that a somewhat smaller state budget deficit could be presented.
42. With a few exceptions EBFs seldom contribute to a better control of public money. The opposite is generally
the case since the earmarked money is withdrawn from the ordinary stringent scrutiny other budgetary
expenditures are subject to. Abolition or at least strong reduction of the number EBFs increases the
transparency of the state budget and also increases the possibility for the Ministry of Finance to control overall
general government spending and also to allocate funds according to present day political priorities. It would
also facilitate the internal financial control if the number of extra-budgetary bodies were reduced.
A system where the payment of current pensions is financed from the contributions paid the same year. It is the opposite to a
funded system where everybody pays for his or her future pensions.
In Bulgaria in 1997 the number of EBFs exceeded 100.
The State Fund of Environment, the State Fund for Land Fertilization, the State Fund of Culture, the State Fund for Czech
Cinematography Support and Development; and the two privatisation funds: the National Property Fund and the Land Fund of
the Czech Republic.
The three new funds were: The State Agricultural Intervention Fund (2001), the State Fund of Housing Development (2000),
and the State Fund of Transport Infrastructure (2000).
43. The peers note that the revised Concept of Reform of the Public Budgets plans to abolish but a few number of
EBFs10 in the near future. More positive is the Government’s intention to introduce a medium-term binding
ceiling for the state budget, the EBFs and the municipalities (see also Section 3.10 below).
Most of the present nine EBFs11 should be eliminated and the revenues and expenditures of these
funds should be included in the state budget.
No more EBFs or other off-budget social security organisations should be created until the systems
are in balance
The EU budgetary requirements refer to the general government sector. Since the local
governments are autonomous the Government cannot control their finances. Instead the
Government should improve its methods for forecasting the development of the local government
budgets – and also the health care system budgets – so that the Government can adapt its own
budget and fiscal measures to the extent that the EU general government budgetary requirements
3.5. Structure of the state budget
44. The state budget is divided into some 40 chapters of which some 15 are ministries. The remainder consists of
central state bodies like the President, the Chamber of Deputies, the Senate, the Supreme Audit Office, the
Office of the Government and the Statistical Bureau etc. The head of each chapter is called chapter
administrator and is responsible for the implementation of the budget of the chapter.
45. For each chapter there is a total binding indicator. Then the budget of the chapter is divided into binding
indicators which are of two kinds. First there are five uniform partial binding indicators expressed in terms of
expenditure categories, mainly salaries, mandatory social security fees, other current expenditure and the cost
for replacement of capital/fixed assets12. Then there are a number of specific partial indicators reflecting the
character of activities and expenditure of the respective chapter. These specific indicators vary between
chapters and can refer to organisations, salaries for special groups, programmes, subsidies and national co-
financing of EU activities. The number of indicators can range between zero and more than 30 for the Ministry
of Education and the Ministry of Cultural Affairs. The average seems to be approximately 5-15. The indicators
rarely correspond to administrative units13.
46. It is obvious that the uniform partial indicators really are partial and normally do not add up to the total
expenditures for the chapter. It is even more striking that the special partial indicators can add up to a figure
It has been suggested that the National Property Fund, the State Fund for Transport Infrastructure and
the Czech Consolidation Agency would be abolished in 2005 or 2007.
As a first step it seems appropriate to decide to close down the two privatisation funds, i.e. the National Property Fund and
the Land Fund of the CR and also to decide to close down the three small funds, i.e. the State Fund of Culture, the State Fund
for Czech Cinematography Support and Development, and the State Fund for Land Fertilization.
The indicator for replacement of capital assets is divided into investment projects which also are presented in the draft
The Ministry of Finance has issued a decree (324/2002, 2 July 2002) on the scope and structure of data
necessary for the preparation of the state budget and the time schedule of submissions.
larger than total expenditures in the chapter because the same sum might appear several times. Chapter 336
(Ministry of Justice) provides good examples.
47. This means that there are some 40 chapters and five uniform partial indicators and some 15 specific partial
indicators for each chapter, making the total number of restrictions [40x(5+15)] decided by Parliament amount
to some 800. In addition there are details regarding the investment programmes and projects.
48. In order to prepare for the implementation and monitoring of the approved state budget each chapter
administrator breaks down the chapter budget into budgets for state organisational units and contributory units
subordinate to the chapter, i.e. the administrative organisations which will carry out the execution of the
approved budget. In this process the chapter administrator can introduce additional binding indicators for the
implementing units. The ministry itself is one state organisational unit.
49. The present structure of the binding indicators represents a mixture of expenditure categories, organisations
and programmes. As a consequence for example the same salaries might appear both as a binding uniform
indicator and – under the special indicators - as part of an organisation and as a special salary item. No budget
structure will ever be perfect but the one presently applied seems to have such disadvantages that a thorough
review is called for.
50. In principle there are four types of possible budget breakdowns, namely according to1) expenditure categories;
2) administrative or organisational units; 3) functions, or rather similar; 4) programmes. Combinations are
possible, e.g. under a chapter the budgets can be divided according to administrative units or programmes and
than subdivided into a few expenditure categories. The revised Concept of Reform of the Public Budgets plans
a change of the structure of the budget in the direction of programme and performance budgeting. No
timetable is however indicated for this development.
51. Parliament controls the overall state budget expenditure by dividing them into chapters and binding indicators
and it belongs to the Government to manage the execution of the budget according to these restrictions. In that
sense the structure of the budget represents the prevailing idea of control and management and distribution of
fiscal powers between the Legislative and the Executive Branches. However, closer scrutiny reveals that the
so-called binding indicators are not very binding.
52. The Government is authorised14 to reallocate funds between chapters and binding indicators. According to
these rules the Government may reduce the funds for a chapter by no more than 5 per cent and a binding
indicator may be reduced by no more than 10 per cent. There is no limit regarding the amount with which a
chapter or an indicator may be increased. Parliament’s Budget Committee approves transfers between binding
indicators larger than 10 per cent.
53. Changes between chapters and binding indicators are defined as budgetary measures. The Ministry of Finance,
chapter administrators and state organisational units are obliged to keep records of all budgetary measures
undertaken. According to the “Overview of budgetary measures taken” kept in the State Budget Department
the number of changes involving more than one chapter normally is 750-800 every year. According to
information from several line ministries the number of changes within the chapters is smaller than the changes
between the chapters.
54. The budget approved by Parliament is never the budget executed by the Government. There is an obvious
logical link between the structure of the state budget and the number of changes required during the
implementation. A structure which necessitates too many changes is not feasible and a structure that requires
no changes is obviously too elastic. A balance must be struck between Parliament’s legitimate desire to control
and direct the use of public funds and the Government’s need to adjust to realities during the execution stage.
Act on Budgetary Rules (No. 218/2000) section 24.
The large number of budgetary measures regularly undertaken indicates that the present structure of binding
indicators is not satisfactory. (See also section 3.10 : The Budget Documents Submitted to the Chamber of
55. In this context it should also be mentioned that the Government is allowed to carry over up to 2 per cent of
some of the expenditures to the next fiscal year. However, this does not apply to funds under the binding
indicator salaries etc. In some cases a transfer of 5 per cent is allowed. The Government currently discusses an
amendment to the Act on Budgetary Rules that would allow unspent budgetary means-without any limit- to be
carried over from one year to the next. One purpose would be to reduce the number of budgetary measures.
56. The structure of the state budget and the large number of budgetary measures undertaken each year make the
external as well as the internal financial control difficult and also reduces its meaningfulness. A more relevant
structure of the state budget and fewer changes of the indicators during the execution would have beneficial
effects on the conditions for financial control.
Also relevant for the initiated reform of the public budgets would be to perform a review of the
structure of the binding indicators (both uniform and special) within the chapters.
An improved structure within a chapter should in the first step correspond to one of the four
general structures mentioned above and when necessary be supported by a sub-structure15.
The reformed structure of binding indicators should make it possible to diminish the number of
The possibility to transform small chapters to binding indicators (of an organisational character)
should be considered in order to reduce the number of chapters and also the number of budgetary
measures involving more than one chapter.
3.6. Structure of the state administration
57. Under the chapter administrators, e.g. the ministries, there are state organisational units and contributory
organisations. These are sometimes established through a law laying down the activities the organisations shall
carry out, in other cases there is a just a Government decision.
58. The state organisational units could be described as government agencies performing traditional state
activities. Their expenditures are to a large degree financed from the state budget even if they to some minor
extent also collect revenue, which they can use to finance their operations. The overall number of state
organisational units is 370. Under the Ministry of Justice there are 114 units, e.g. courts of law, prosecutors
and penal units. Under the Ministry of Labour and Social Affairs there are 92 units. Under the Ministry of
Agriculture there are 81 of which 70 are veterinary units. All ministries and most other chapter administrators
are also state organisational units.
59. The contributory organisations do usually not perform core state activities in the sense of administering the
rights and duties of the citizens, rather they provide services of other kinds. To a larger or smaller extent they
obtain revenues from their own activities and funds from the state budget. A few of them cover all their costs
The administrative structure has proven its viability and should be tried. The application of this structure could mean that
under each chapter there are separate indicators for each large administration, then under each administration there could be
items for salaries, other current expenditure and capital expenditure. There could be separate indicators for e.g. major
transfers/subsidies and co-financing.
with own revenue. The Government’s control of the contributory organisations is not as firm as the control of
state organisational units. The overall number of contributory organisations is 290. The Ministry of Education
is the founder of 104 organisations among which are a large number of juvenile diagnostic centres; the
Ministry of Health is the founder of 66 organisations; the Ministry of Culture has 39 contributory
organisations, e.g. theatres and museums, but no state organisational unit; the Ministry of Justice has four
holiday resorts in the form of contributory organisations; and the Ministry of Environment has twelve
contributory organisations of which three are national parks.
60. The number of state organisational units seems to be reasonable in an international comparison. This, however,
does not exclude that there might be good reasons for structural changes including mergers, splits and
termination of some state organisational units. It could for instance be discussed if it is not possible to include
what today are separate organisational units performing similar duties as sub-units in a larger state
organisational unit. This can be done without any negative effects on the authority of the unit to take
independent professional and subject matter decisions within its remit. It is natural that issues like this will be
addressed in the course of the ongoing review of public expenditure, which is a part of the reform of the public
61. As regards the contributory organisations more fundamental changes should be considered. For every
organisation it should be discussed whether the character of the operations really makes it necessary that it is
operated by the state or if it would not be feasible to transfer the organisation to another owner, e.g. the
regional administrations, the municipalities, non-profit organisations etc. The transfer of an activity to another
owner does not exclude continued financial support but the ultimate responsibility will belong to somebody
else than the state. If such a review is successful it might not be necessary to keep this special state
62. The state organisational units and the contributory organisations are often accounting units, i.e. that is they
carry out their own economic and financial administration and accounting. Some of the accounting units are
very small and can hardly bear the cost of competent administrators and accountants. The Ministry of Justice
provides an interesting example where 88 district accounting units have been reduced to eight regional
63. A reduction of the number of organisational bodies and/or the number of accounting units will reduce
administrative costs, reduce financial risks and also significantly contribute to facilitate and improve the
working conditions for the state financial control.
The possibilities of reducing the number of state organisational units, particularly through mergers
of small units performing similar duties, should be considered in the course of the ongoing review
of public expenditure.
The activities of all contributory organisations should be scrutinised in order to establish whether
the activities are vital and must be carried out by the state or if the activities could not be
transferred to other owners.
The possibility to reduce the number of accounting units should be examined, particularly through
concentration to regional and branch centres.
Activities now performed by contributory organisations deemed to be core state operations should,
if possible, be transformed to state organisational units and the remainder should be handed over
It could also be part of the Public Administration Reform.
to other operators. The organisational form of state contributory organisation could eventually be
3.7. EU related financial flows on the state budget
64. Presently, pre-accession financial support17 from the EU budget is channelled through the National Fund
outside the state budget directly to the beneficiary, which in most cases is a central government organisation.
Only national co-financing is now included in the state budget.
65. A draft amendment of the Act on Budgetary Rules is being prepared in the Ministry of Finance. The law will
mainly include rules for how a) EU own resources, and b) funds from the EU budget and national co-financing
are to be handled on the state budget after Czech accession to the EU. The law was presented to Parliament
before the summer 2003 and is expected to come into force on the 1st of January 2004.
66. The essence of the amendments is that with a minor exception a gross budgeting technique will be applied
from 2004. This means that financial flows from the Structural Funds and the Cohesion Fund will probably be
channelled over the National Fund and be entered as a revenue indicator under the concerned chapter in the
state budget. On the expenditure side of the same chapter will be two indicators, one for the EU-financed
expenditure and one for the national co-financing. FEOGA-funds will not pass the National Fund but will be
entered directly on the revenue side under the chapter Ministry of Agriculture. The corresponding expenditures
will be separate indicators on the expenditure side. There is almost no co-financing involved in the Common
Agricultural Policy. However, in the Czech case there might be some transitional national topping up of the
support to farmers.
67. When it comes to the national contribution to the EU budget the traditional own resources, i.e. customs duties,
agricultural and sugar levies will be kept off budget. This means that only the 25 per cent of the collected
revenue a Member State is entitled to keep as a compensation for the collection costs will be presented on the
state budget’s revenue side. Consequently, the national contribution to EU presented on the expenditure side of
the budget will include only the VAT-based fee, the UK-correction and the GNI-based fee.
68. The amended law will also include new rules providing for a flexible use of appropriated money. EU funds
and national co-financing will be entered on the budget as binding indicators under the relevant chapter. The
Government will be authorised to carry over appropriated but not used sums to the next fiscal year even if the
amounts involved exceed 2 per cent of the indicator. It will also be possible for the Government to reallocate
co-financing funds from one chapter to another even if the amount exceeds 5 per cent.
69. The general experience among Member States is that it is difficult to forecast and control the outflow of
financial means for the structural funds, particularly in the beginning of a programme period. Therefore it is
quite necessary that the national budgets are equipped with feasible instruments of flexibility making it
possible to carry over unspent money to the next fiscal year. In-year reallocation between co-financing in
different areas might also be a useful option.
70. It should also be mentioned that the national contributions to the EU budget for the next fiscal year will not yet
have been decided in Brussels neither will when the draft national budget is to be submitted to Parliament, nor
will it be fully known when Parliament approves the state budget. In addition, figures communicated by the
Commission on the 29th or 30th of December can change considerably in both directions during the fiscal year
due to supplementary and amendment budgets. Consequently, flexibility mechanisms must also exist related to
the VAT-based fee, the UK-correction and the GNI-based fee, since the contributions with short notice must
In the form of funds from Phare, Sapard, Ispa etc.
be paid in full and timely in order for the Member State to avoid penalties. It might be useful to have these
three types of fees as one binding indicator on the state budget since deviations sometimes go in different
directions and thus even out. An unlimited authority to reallocate between the appropriated funds for different
types of fees might be another option. An authority to exceed the appropriated sums without compensating
reallocations might be a necessary last resort.
The readings in Parliament of the law amending the Act on Budgetary Rules should be finalised in
order for the law to entry into force without delay.
The intended manner of presentation of EU related financial flows on the state budget means that a
gross budgeting approach is applied which will provide the desirable transparency to the state
During the finalisation process it should be considered whether the present draft provides the
necessary flexibility mechanisms for EU financed expenditure, for national co-financing
expenditure and also for the national contributions to the EU budget.
3.8. State payments
71. Since 1950, the Czech National Bank (CNB)19 has been keeping government accounts and from 1995 there has
also been a summary account for the state budget. State organisational units and contributory organisations
have their accounts in the CNB and are not allowed to have accounts in other banks. This means that all
payments to and from the state pass through accounts in the CNB and that all state cash is concentrated to the
bank. For all practical purposes the system thus has the qualities and benefits of a Treasury Single Account
system, with the exception that the Ministry of Finance does not have full control and has to rely upon the
72. The account system in the CNB is based on the gross principle, i.e. there are separate accounts for revenues
and expenditure which makes it easy to extract information. The number of accounts amounts to some 21 000
accounts (30 000 but 9 000 are idle) and of these some 4 000 accounts are used for off-budget transactions. For
the last two years the system has also included a number of deposit accounts for the state, which have brought
large state financial of assets into the bank. The number of clients is approximately 3 000 and on average the
number of accounts per clients is 10. The monthly number of revenue transactions is 1.2 million and number
of expenditure transactions is 1.6 million.
73. Revenues from all different kinds of taxes have separate accounts. Revenue that a state organisation can use
directly has a separate account. As regards the expenditure the account structure for each client in an
aggregated manner reflects some of the binding indicators applied to that organisation in the state budget, e.g.
there are accounts for all current expenditure, for salaries, for minor capital expenditure, individual special
accounts. There are also deposit accounts, e.g. suspense accounts, and accounts for the state organisations’
reserve funds and cultural and social needs funds.
In some Member States all EU related revenues and expenditures are included on the state budget in order to provide full
transparency. This approach could mean that also the traditional own resources in full are presented on the revenue and
expenditure sides of the budget. Flows from the EU budget to universities and companies are often very difficult catch in
The main rules regarding the administration of the state’s financial means can be found in the Act on Budgetary Rules
(No.218/2000) chapter IX.
74. In order to control the cash implementation of the state budget chapter administrators set budgetary limits for
the state organisational units and the contributory organisations regulating the drawing of means from the
accounts for specific periods. Presently monthly limits are set, usually meaning that one twelfth of the full year
amount may be drawn during one calendar month. Surprisingly limits may not be set for the payments of
social security benefits or for disbursements from the General Treasury Administration chapter.
75. The administration of the budgetary limits is presently based on signed paper documents sent from the chapter
administrators to the CNB. However, the CNB is carrying out discussions with two line ministries in order to
explore the possibilities of introducing a system with electronically transferred limits.
76. Payments from the state to other state bodies and external parties are decided by the individual state
organisational unit or contributory organisation. Neither the chapter administrator nor any other body regularly
checks the payment order before it is handed over to the CNB for execution. Thus, the necessary ex-ante
controls remain the responsibility of each budgetary administrator. Payment orders can be transferred to the
CNB on paper, on tape, on diskette and over Internet.
77. However, before the CNB carries out the payments ordered by the clients it performs some checks. The first
kind of control is that money is available under the relevant budgetary limit for the month imposed by the
chapter administrator. The second type of control intends to make sure that the Government has sufficient
funds to cover the payments and is related to the fact that the CNB never lends money to the Government. The
CNB does not perform any material controls of the ordered payments and all verifications remain with the
78. The CNB reports to its clients in different ways. A client who has ordered one or several payments will receive
a bank statement detailing the balance brought forward, each transaction performed, pending transactions (not
executed) and the balance to be carried forward. The statement can cover any desired period, e.g. day, week or
month and is available electronically or as hard copy.
79. The CNB also provides monthly aggregated reports to the Ministry of Finance. These reports include: 1) state
revenue divided into different types of taxes; 2) revenue and expenditure for state organisational units and
contributory organisations by chapter and 3) revenue and expenditure for other organisations. The CNB
provides daily information for the Ministry of Finance on the outcome of principal revenue and expenditure as
a total and by chapter. Some officials in the Ministry of Finance, e.g. in the State Final Accounts Department,
also have on-line and real-time access to all payment data and state accounts.
80. The State Final Accounts Department compiles a monthly report on the development of the state finances,
which is distributed to media. The department also produces management reports for Ministry of Finance use.
In addition the Department submits three quarterly reports on the financial execution of the state budget to
81. Payment orders presented to the CNB in the morning can technically be performed during the day, e.g. money
can be credited to a supplier’s account in a commercial bank the same day. However, the Ministry of Finance
has requested that there is to be a delay of four days between the day when the payment order is lodged with
the CNB and when it is carried out. The reason for this mechanism is that the Ministry of Finance in some
situations might need this time for making predictions and preparations for the short term financing of the
state’s need for liquidity. Reference is particularly made to experiences made in June 1997 when the state
finances for a short period were in a precarious shape. In most western countries forecasting systems,
including advance notification of large payments, are used instead of built-in delay mechanisms. A well-
developed commitment accounting system accessible to the payment system should in principle prevent any
82. The CNB provides services as regards state payments and state deposit accounts. It also acts as fiscal agent
issuing and buying treasury bills and bonds on behalf of the Government or the Ministry of Finance. The CNB
is remunerated for these services.
83. In order to characterise the situation it can be stated that the CNB provides payment and account services of a
kind any large bank could provide to clients and on the same basis. The CNB performs no tasks which
constitute elements in an overall system for financial control within the central government administration.
The controls actually performed by the bank are those that any bank would perform and they include that
payments are ordered and signed by authorised persons and that funds are available on the proper accounts.
84. The systems and procedures presently used for state payments, cash management and financing seem to be of
a relatively high standard. The system includes a number of well established and working elements which
should provide a good starting point for further improvements.
85. A major development activity concerning the State Final Accounts Department has recently been initiated, the
purpose of which seems to be to transform the present department into a more fully fledged treasury
department. The main objective of a Czech-French twinning project starting in the summer of 2003 is to
support the reform of public finance management and control by introducing a comprehensive and integrated
State Treasury, to increase the efficiency and transparency of the budget process with the aim of reducing the
financing of public budget deficits and managing the debt services and cash flow. Among the specific
objectives is included the definition and implementation of a Treasury Single Account (TSA) system. The
project will be concluded at the end of 2004.
The Act on Budgetary Rules should be amended so that budgetary limits can be used also for social
security payments. A budgetary limit can be a strong signal of alarm if the funds approved are
The account structure should be reviewed and designed so that it better corresponds to the
structure of binding indicators in the different chapters.
From January 2003 very large payments to the regional administrations are made on a quarterly
basis. For good cash management reasons these payments should instead be made on a monthly
With a view to reducing the present paper based administration of budgetary limits efforts should
be made to introduce a safe electronic system for transferring monthly budgetary limits from
chapter administrators to the CNB.
It should be considered if the methods used by the Ministry of Finance for forecasting the state’s
need for liquidity in the short term could be developed so that the Ministry of Finance does not
permanently have to rely on the delay mechanism now built into the payment system.
The analysis of the current situation, which will be an initial step in the twinning project, will no
doubt pay attention to the existing TSA system and payment system operated by the CNB. The
possibilities to use these systems as components in an integrated treasury system should be
3.9. The closing of the state accounts
86. When the fiscal year has come to an end the Government is obliged20 to present draft closing state accounts to
the Chamber of Deputies21. The closing accounts include the outcome of the state budget in comparison to the
budget approved by Parliament.
87. Shortly after the end of the fiscal year the state budget organisational units and the contributory organisations
hand over accounting information to their respective chapter administrators. Based on this information each
chapter administrator compiles a draft closing state account for the chapter. These reports are handed over to
the Ministry of Finance in the end of February and – after Ministry of Finance approval - in the middle of
March to the appropriate committee in Parliament22.
88. The Ministry of Finance consolidates all the chapter accounts into draft state closing accounts with the same
scope as the state budget and submits a draft to the Government for approval. The draft finally approved is
submitted by the Government to the Chamber of Deputies at the end of April.
89. The centrepiece of the draft final accounts is of course the presentation and analysis of the outcome of the
approved state budget. There is a detailed analysis of over- and under-spending on different indicators. In
addition the document includes summary information on the outcomes for the regional administrations, the
municipalities, the nine EBFs, the Czech Consolidation Agency, an outline of state financial assets and
liabilities, and an outline of state guarantees. The value of the document is enhanced by the fact that it also
includes a review of the macroeconomic development in comparison to the forecast on which the budget was
90. The other committees in Parliament receive the final accounts for the different chapters in the middle of
March. Line ministers are invited to the committees to answer questions. When a committee has reached a
resolution it is submitted to the Budgetary Committee.
91. When Parliament receives the draft closing state accounts at the end of April it requests the Supreme Audit
Office, i.e. the NKU, to present its opinion on the draft. The NKU often presents its opinion in the end of May
or early June.
92. The NKU shall control the implementation of the state budget and the management of state assets and
liabilities23. The NKU is obliged to draw up and submit to the Chamber of Deputies its opinion on the report
on the course of implementation of the state budget and on the final budgetary statement including the audit
conclusions on which its opinion is based24.
The main rules for the closing state accounts can be found in the Act on Budgetary Rules (No.218/2000) chapter VII.
The Senate is not at all involved in the approval of the State Final Accounts (the Constitutional Act art. 42.2).
Detailed rules of procedure are included in the Ministry of Finance decree (419/2001) On the scope, structure and deadlines
of data presented for preparation of the state final account draft, and on the scope and details for preparation of drafts of final
accounts of state budget chapters.
The Constitutional Act (art. 97).
Act (No.166/1993) concerning the Supreme Control Office.
93. The NKU has a staff of some 450people25 and it produces a number of audit reports during the year. NKU’s
opinion on the state final accounts is not based on financial and compliance audits of all or even most of the 40
chapters and the NKU thinks it presently is a waste to audit the compilation of the chapter accounts to the state
final accounts. Therefore the NKU can neither express an opinion on whether the implementation of the state
budget is in compliance with relevant rules, nor if the accounts provide a true and fair picture of the state
finances. The NKU opinion on the implementation of the 2001 state budget is an example of this.
94. However, it is said to be the intention of the NKU to focus on the chapters and the chapter accounts so that
corrections can be made before the chapter accounts are compiled to the state accounts. The objective is to
perform enough audits of chapters so that it becomes possible for NKU to say whether the state final accounts
provide a true and fair picture of the result of the implementation of the state budget and the financial situation.
95. The establishment of the different elements in the system for PIFC will no doubt facilitate the NKU’s work
particularly at the chapter level and lower.
96. The compiled state final accounts are handled in the Budgetary Committee. For its deliberations the
Committee uses the resolutions from the other committees, the draft closing accounts, the NKU opinion and
answers to questions given by a deputy minister from the Ministry of Finance. When the discussions are
completed the Budgetary Committee decides on a resolution which is submitted to the Chamber of Deputies.
97. The Minister of Finance is invited by the Chamber to participate in the debate. After the debate there is vote on
whether the accounts should be adopted without reservations, adopted with reservations or not adopted at all.
The issue is usually finished before the end of June.
98. In many parliaments the discharge procedure is a mere formality. This, however, has not been the case in the
Czech Republic where on two occasions during the last few years Parliament has not adopted26 the closing
accounts. This is not the place to discuss whether the reasons for this outcome are mainly political or mainly
based on substance. Whatever the reasons it is obvious that the handling of the state closing accounts and the
discharge process in Parliament includes a careful scrutiny of the outcome of the state budget. There is no
doubt that both the Government, the Chamber of Deputies and the NKU will learn from these experiences and
that they will contribute not only to the improvement of the future preparation and implementation of the state
budget and its structure but also to the manner in which the NKU controls the implementation of the state
The NKU should urgently organise and prioritise its work so that all major chapters are audited to
an extent allowing the NKU to state whether the chapter administrators have implemented their
budgets in compliance with relevant rules and whether the chapter final accounts and the compiled
state final accounts provide a true and fair picture of the financial situation.
The number of staff at the Swedish Riksrevisionen is 310, the number of staff at the French Cour des Comptes is 225 and
the number of staff at the British National Audit Office is 750.
This outcome has not been regarded as a vote of no confidence.
3.10. The Budget documents submitted to the Chamber of Deputies
3.10.1. Documents submitted
99. The Government submits the draft act on the state budget to the Chamber of Deputies no later than the 1 st of
October. The chairman of the Chamber hands the draft budget over to the Budget Committee for preparation27.
100. The documents submitted by the Government include:
- The main document including the Government’s proposal for Parliament’s decision on the State Budget
Act, the main indicators regarding overall revenue, expenditure and deficit and its financing, annexes
detailing revenue and expenditure for each chapter and the binding indicators for each chapter, etc.
- Supporting documents A-I.
A: Report with brief motives and overall figures.
B: Macroeconomic framework for the next year.
C: Report on the draft act for the state budget.
D: Tables with revenue and expenditure.
E: Expenditures classified according to functions and economic categories for the chapters.
F: Detailed information on investment programmes for the chapters (2 volumes).
G: Report on expected development of state assets and liabilities.
H: Summary of the budgets of the local governments.
I: Draft budgets for the EBFs and the Czech Consolidation Agency.
101. In addition to the information presented to the Chamber of Deputies by the Government each chapter
administrator submits detailed explanations regarding his/hers chapter to the relevant committee of the
3.10.2. Medium-term forecasting
102. Together with the draft state budget the Government also submits an approved medium-term budgetary
outlook28 which covers the new fiscal year and two additional years. Against an explicit macroeconomic
framework the state budget revenue, expenditure and deficit are projected.
103. Like most formerly centrally planned economies the Czech Republic is facing difficulties in making
macroeconomic forecasts. One reason is the lack of sufficiently long time series, which can be used in
economic models. Another reason is that the behaviour of households (consumption and saving) and
businesses (investments) is not reasonably stable. The Ministry of Finance (the Financial Policy department)
does not presently use more advanced models as tools in the forecasting. Instead the Ministry to a large extent
relies on expert estimates and judgements. Consistency of the forecasts is assured with the help of some GDP
identities. However, there is a close co-operation with the Prague School of Economics which uses the
HERMIN model adapted to the Czech economy. The Financial Policy department also co-operates with CNB
in economic and monetary forecasting. It takes considerable time – and cost - to recruit qualified staff, to
The basic rules for how the state budget is handled in Parliament can be found in Rules of Procedure of the Chamber of
Deputies (Act No.90/1995) articles 101-106.
See the Act on Budgetary Rules (No.218/2000 Coll.) section 4.
organise the collection of data and to develop methods and models29. Such efforts are under way and should be
continued in a purposeful manner. All forecasting should be based on ESA 95 definitions.
3.10.3. Approval of the budget
104. The state budget is approved in three readings. In the first reading the Chamber of Deputies30 approves the
basic information of the draft act, i.e. overall expenditure, overall revenue, deficit/surplus and financing. If the
draft is not approved it will be returned to the Government.
105. Then specialised committees of the Chamber discuss the individual chapters of the budget and submit their
resolutions to the Budget Committee. The Budget Committee discusses the draft budget and the amendments
proposed by other committees and reaches a resolution which together with the minority opinion is submitted
to the Chamber of Deputies. A detailed plenary debate is held. New amendment proposals are presented by
members of the Chamber. This second reading is not concluded with a vote.
106. At the third reading, which may be started no earlier than 48 hours after the end of the second reading,
only minor technical changes of the draft or the amending proposals may be proposed. However, proposals for
returning to the second reading may be presented. At the conclusion of the third reading Parliament votes on
the proposals to amend the draft state budget submitted by the Government. In practice this means that
Parliament approves the draft act on the state budget with a list of changes as regards specified amounts and
some new texts.
3.10.4. A rather detailed budget
107. The Chamber of Deputies and its committees are supplied with huge volumes of documents and large
amounts of detailed information on the draft state budget. The approved budget is also rather detailed.
Obviously it is too detailed or has the wrong structure since a large number of changes must be made during
the implementation of the budget. It is hard to believe that the present structure and details actually correspond
to the political needs of the Chamber. This assumption is confirmed by the fact that Parliament has granted the
Government considerable authority to change the approved budget. If the present details really were necessary
to provide the Chamber with the instrument for the policy-based allocation of resources to different purposes
Parliament would not have granted the Government such large powers to change the budget. In practice
Parliament has become too much involved in what should be regarded as executive management issues.
108. In an historical perspective it is easy to understand Parliament’s desire to prove its ultimate fiscal power in
relation to the Government. However, step by step an understanding and acceptance of the basic division of
powers and tasks between the Legislative Branch and the Executive branch in a parliamentary democracy
should be established. A simple guideline could be that Parliament should decide on mainly what should be
done and the Government on mainly how it should be done.
The documents E (Detailed classification according to functions and economic categories) and F
(Detailed information on investment programmes) are very large and rich on details. The content
is of a statistical character and should not be of any ex-ante interest to any Parliamentary
In Lithuania the Ministry of Finance uses a simple calibration model which has been developed based on experiences
gathered from the German Bundesministerium der Finanzen. A similar model is said to be used also by the Latvian Ministry
The Senate is not at all involved in the preparation and approval of the state budget (the Constitutional Act art. 42.2).
Assembly. The content of E could be summarised in two tables, and the document F could be
reduced to one table on the chapter level. These tables could all be included in C or in D. The
details would still be available in the chapter explanations submitted to the committees by the
chapter administrators. The corresponding outcome information could then also be excluded from
the Closing of the State Accounts.
The macroeconomic framework should cover a three-year period, the presentation should be
expanded and the methods for forecasting should also be improved. Document B and the medium-
term forecast should be integrated.
The link between the macroeconomic forecast and the macro-fiscal medium-term projection should
be made more explicit and detailed.
The linkage between the draft state budget and the macroeconomic framework and the macro-
fiscal framework should be made more explicit. The draft budget for the next year should be a
budget drafted in a three-year perspective and be consistent with the macroeconomic framework.
The Pre-accession Economic Programme (PEP) and later on the Stability or Convergence
Programme should be formulated against the background of a medium-term economic and
budgetary projection approved by the Government and the Chamber of Deputies. Presently the
PEP is formulated in advance of the draft state budget which makes it difficult to see the link
between the budget and the PEP. The national decisions on the budget should precede the
programme handed over to the EU.
The C report with explanations should include a presentation of the development of the
consolidated general government sector’s (state, EBF’s, health sector, local governments) revenue,
expenditure and deficit.
The Chamber of Deputies should aim at deciding mainly on the allocation of budgetary funds to
purposes and try to avoid getting involved in detailed decisions.
In order to facilitate such a change the structure of chapters and binding indicators should be
reviewed and changed (see section 3.5 Structure of the state budget).
IV- General strategy and legal issues for financial control and internal audit
4.1. Lack of Strategy Paper
109. Differing from the situation in other candidate countries, the legal framework for the basic development of
the PIFC in the Czech Republic was not prepared using a strategic document in the form of a “policy paper” or
“concept” as a platform to build understanding and consensus. This may explain some of the ambiguities or
different interpretations of procedures or systems that it was intended to put in place, as illustrated in this
110. It is now probably too late and not opportune to re-start a full process of creating such a concept paper, at
least with a view to changing the legal framework. What remains is however a general need for a common and
better understanding of both general PIFC and internal audit concepts. Department 17 could consider setting
up a working party composed of key partners in line ministries and agencies initially tasked with the analysis
of the progressive development of the installation of internal audit and financial control in the Czech
administration, and to work out the many difficulties that may arise from this new development. This could
possibly lead to recommendations in the form of a strategic paper.
Set up an inter-ministerial working group to monitor progress and difficulties in the development
of the internal audit in the Czech administration. Another group could address the issues related to
As a possible outcome these groups consider the production of a strategy paper creating the basis
for further and harmonised development and understanding.
4.2. Legal Framework
111. The creation of the legal framework for PIFC has been partly carried out in the Czech Republic with the
adoption of the Act 320, into force since the 1st of January 2002 and represents the conclusion of a three years
effort by the Ministry of Finance, as well as a major step in developing a sound PIFC.
4.2.1. The Act 320/2001 (Financial Control Act)
112. The major aspects of a PIFC system are included in the Act and this concerns in particular the internal
audit function. This act would have certainly benefited from a general basis in form of a strategic document
making sure that a common and accurate understanding was created amongst the main stakeholders, including
the Czech Parliament. It appears indeed that the preparation and discussion of the text has been a particularly
tedious and cumbersome exercise. The end result, whilst providing a legal basis for the development of PIFC
and in particular of the internal audit, mirrors these difficulties as it remains a rather complicated text with
numerous ambiguities or at least a lot of unclarity. In addition it seems that some wordings tend to
accommodate the existing institutional set-up, to the expenses of simplicity and clarity, rather than providing a
basis to change it.
The Act320/2001 is specific enough and allows starting to work with the new concept of PIFC.
Despite the serious need for improvements in the text, the peers do not advise the Ministry of
Finance to re-start a process of law drafting in order to get the “perfect law” in that area as it is
highly unlikely to reach such stage and as it is anyway more important to start the actual work ;
What is mostly needed now is to start the daily work of implementation, without losing sight of the
possible improvements in the new organisation.
4.2.2. The Decree 64
113. As stated in Act 320/2001 section 7 (1) "The Ministry of Finance as the central administration authority for
financial control shall methodologically regulate and co-ordinate the performance of financial control in public
114. To fulfil this role, the Ministry of Finance has issued Decree 64/2002, which came into force on 1 st of
March 2002. Among other things, this text introduces the principle of the three signatures-operation involving
the “mandator”31, budget administrator, and chief accountant, in accordance with the section 26 of the Act
115. But as with Act 320/2001, the Decree is unclear on what procedures are supposed to take place during
ongoing and ex post controls. The audit procedures described in sections 19-21 are mainly compliance audit
procedures and cannot be regarded as meeting the requirements of the Act 320/2001, where the internal audit
comprises not only compliance audits, but also systems and performance audits. This gives the impression that
the focus of the audit work will be on compliance issues, thus little different from the inspection/control work
performed so far. In its sections 28-29, the Decree 64 lays down the structure and scope of reports on financial
controls. These reports as described in the tables in an annex, are indeed more of an inspection type even for
Internal Audit activity (appendix 3 of Decree 64).
116. In this regard the peers consider that Decree 64 falls somewhat short its target as it can be interpreted as
seriously narrowing the perspective given by the Act 320. Indeed it seems to restrict the scope of internal audit
to a plain “old-fashion”-type inspection activity. It thus shows that a complete or clear understanding of
internal audit is still deficient in the Czech Republic public administration.
Whilst a review of the Act 320 is not recommended, there is a good case to walk through its
implementing decree in view of the above-mentioned biases and as it is anyway easier to amend a
decree. Department17 could initiate this work, possibly in the framework of the inter-ministerial
working parties recommended earlier.
4.2.3. Continuation of the previous act on state inspection of 1991
117. As an illustration of the above, it is remarkable to state that, despite the novelties presumed to be
introduced by Act 320, Act 552/1991 of 6 December 1991 governing state inspection is still partly applicable.
118. The issue here is not to oppose inspection functions to internal audit functions, since they are both
necessary in any set-up, and there are obviously commonalties between two kinds of ex post scrutiny
activities. Rather it is to clarify their respective areas of implementation in order to take full advantage of their
respective features. The situation is far from being entirely satisfactory in that respect : a same unit may for
instance have to implement Act 320 and Act 552. Similarly it can prevent the development of a new internal
audit approaches as there would appear to be small difference, if any, between “control” and “audit” type of
work. This risk is being enhanced by the fact that in a lot of cases, former controllers staff the newly
established internal audit divisions.
The legal basis for internal audit and for control activities should be clearly distinguished and
cross-references should be avoided. Act 552/1991 should not provide a basis for the activities of
the internal auditors.
V- Department 17 and its position within and outside the Ministry of Finance
The “mandator” is the employee entitled to initiate a financial transaction.
5.1. Internal structure of Department 17 and the role of Central Harmonisation Unit (CHU)
119. According to the Act 320-Part Two-Title I-Competency of Control Bodies-Section 7- Competency of the
Ministry of Finance : " (1) The Ministry of Finance as the central administration authority for financial
control shall methodologically regulate and co-ordinate the performance of financial control in public
120. The Ministry of Finance has established Department (or Section) 17. According to the detailed rules of
procedure of the Ministry, this department performs the following tasks :
"1. Activities of the Section
"The section creates the concept of the system of internal audit and public administration inspection (ex-post
system), including harmonisation of Czech law with the acquis and the relevant methodology to provide
functioning of these systems in public administration bodies.
For this purpose it secures the co-ordination of the mentioned bodies, summarising activities and related
functions, including provision of relationship of the Ministry to the European Anti-Fraud Office (OLAF). It
exercises public administration inspections (ex post system) on site at non-sectoral and sectoral public
administration bodies and others subjects within inspection jurisdiction of the Ministry according to s.7 and s.
8 the Financial Inspection Act. It fulfils tasks within the powers for issuing declarations at the conclusion of
the assistance from Structural Funds and the Cohesion Fund according to EC regulation N° 438/2001. The
section answers inquiries and creates opinions to interpellations within the scope of its activities."
2. Organisational Structure
Department 171 Harmonisation and co-ordination of methodology of internal audit and public
Department 172 Public administration inspection
Department 173 Summarising, planning and reporting
Department 174 Methodology and execution of financial inspection of foreign funds
121. Although the translation from Czech into English is somewhat deficient, it seems that the description of the
activities indicate a mix of several objectives of different nature. As for internal audit issue :
- Dept 171 deems not to have the full ability to harmonise internal audit in the public sector and express their
wishes to undertake this task.
- Dept 173 is just starting to gather some summarised reporting from the line ministries and other bodies and is
expected to produce a first annual synthesis. The use of database software (FKVS) is only used to record the
statistical data resulting from the financial control activities, including fines and amounts recovered, but
nothing relating to the Internal Audit findings yet.
122. Both departments have a key role to play in the successful development of the internal audit in the Czech
123. As for financial control procedures the situation is even more unclear as Department 17, beyond the
production of legal text, does not seem to have undertaken any networking activity. It has to be said that none
of the subdivisions of the Department are unambiguously tasked with this function.
124. Despite the general mandate of the Ministry of Finance in that respect, it finally appears that Department
17 does not fully play the role of Central Harmonisation Unit in the field of Public Internal Financial Control.
This situation keeps on although no other body is likely or able to take over this function in the short-term and
in spite of the fact that Department 17 has initiated, even on a small scale, activities that normally belong to the
common remit of a CHU.
One of the reasons for non-achievement of the co-ordination of the implementation of Act 320/2001
by the Ministry of Finance is a reciprocal lack of communication with other administrative bodies.
The idea that civil servants belonging to various bodies could work together for the common good
of the public sector is not disputable but seems difficult to implement in the Czech public
administration. It is then recommended to re-think the setting-up of an entity in charge of the co-
ordination of all PIFC issues. This entity would be supported and led by the Ministry of Finance
but could be collegial in order to demonstrate a higher visibility outside the Ministry of Finance
and enhance the acceptance of the role of such a central body.
A possible model, according to the peers, could be described as follows :
New entity composed of
Deputy Minister ex 171 and 173
Public Administration Internal Audit supervision
Inspection - FM/C including EU Funds
The establishment of an interministerial PIFC committee could help deal with the
difficulties in the relations to other ministries and agencies in the area of PIFC. The CHU
could then report to this committee in order to illustrate that the PIFC policy is not a
matter of interest or concern for the Ministry of Finance only.
VI- Financial control procedures and systems
6.1. Operation of Financial Management and Control (FMC) Systems in the Czech Republic
6.1.1. Legal Definition of Financial Control
125. The main legislation setting out financial management and control in the public administration of the
Czech Republic is the Financial Control Act 320/2001(effective from 1 January 2002) and Decree 64 of 2002
(effective from 1 March 2002). Within this legislation financial control is defined as covering :
a) Financial controls performed by “control bodies”;
b) Financial controls performed in accordance with international agreements, and
c) “Internal controls” within public administration bodies. This latter category is further divided into:
- “Managerial controls” ensured by responsible chief employees as part of internal management; and
- “Internal Audit”.
6.1.2. Responsible Bodies
126. The heads of “public administration bodies” are responsible for the organisation, managing, adequacy and
effectiveness of financial control. These public administration bodies, each of which also includes a “control
body” as defined in the law, consist in :
a) the Ministry of Finance,
b) 8 Regional Finance Directorates,
c) 222 Financial Authorities,
d) 42 Administrators of state budget chapters,
e) the Capital City of Prague,
f) 13 Regions,
g) 6500 Municipalities.
127. Additionally the Ministry of Finance as the central administration authority is required to
“methodologically regulate and co-ordinate the performance of financial control in public administration”. The
various occurrences of the “control” concept in the Czech legislation can be summarily illustrated in the table
Ministry of Finance Financial control Financial controls Internal controls within the public
performed by in accordance with administration bodies
control bodies international
Methodologically Control of Performed by Managerial controls Internal audit (checking
regulate and facts(before international (financial controls and evaluation of
coordinate Financial provision, during organisations during preparation, adequacy and
Control in Public and subsequently subject to before approval, on- effectiveness of
administration bodies after their use) international going, final settlement, managerial controls,
(S 7 320/2001) agreements accounting, subsequent checking of correctness
checking) of selected operations)
128. These more recent laws need to be read alongside earlier legislation in particular the Act governing State
Inspection (552/1991), which remains the basis for a number of activities e.g. the on the spot control methods
and procedures (S 6 of 320/2002), and the imposition of fines (S17 320/2002). Other relevant laws include Act
218/2000 of 27.06.2000 on budgetary rules, Chapter XI of which covers financial control.
129. Many of the public administration bodies visited had there own internal documentation (variously
classified as a guideline, directive or regulation) setting out the requirements of financial control. These varied
in detail from the very general to the provision of practical examples of control needs.
The Peers consider that the full benefit of an integrated financial management and control
approach with an independent internal audit body has not yet been fully appreciated or fully
implemented in all areas. This is in part due to the short period since the legislation came into
effect, but also indicates the need to further develop organisational structures to better reflect the
transition from the previous “inspectorate/policing” approach to the current PIFC requirements.
A more proactive harmonisation and co-ordination approach by the Ministry of Finance is key to
this transition, especially to ensure that the best practice already adopted in some areas is
disseminated and applied more generally and consistently.
130. Various structures covering financial management and control (or inspection) appear to be in place in the
organisations visited. The peers have concluded these reflect a combination of the previously existing laws, on
inspection and the compliance with regularity requirements, and the more recently introduced requirements of
public internal financial control.
131. All organisations visited had an internal audit unit reporting to the head of the organisation, but the
location of the other control bodies differed, possibly reflecting previous structures. For example most
ministries had one department combining the units for internal audit and control/inspection (the latter also
covering the handling of complaints), whilst others had a financial control department as part of the general
management structure (e.g. Ministry of Interior and the Central Bohemian Region). The Ministry of Interior
also had a specific Inspection department reporting direct to the minister, as did the Ministry for Regional
Development, the latter dealing only with complaints.
132. The national laws only require the internal audit unit to report directly to the head of the public
administration body, whilst the adequacy of all financial control remains the responsibility of the head.
However in establishing or reviewing an appropriate structure there is need to reflect on the roles that will
develop following EU accession. In this respect one example is the structure of the Sapard Agency that has
been accredited by the EU. It is noted that the Sapard Agency has an internal audit unit reporting direct to the
Head of the Agency whereas the execution of controls, on the spot checks, and most importantly evaluation of
the control checks and adjustment as necessary to risk assessment and procedures is the responsibility of a
separate operational unit. This outline is also appropriate to consider for the operation of the Structures and
Cohesion regulations where specific verification and control checks are required (e.g. Article 10 of 438/2001).
As part of its harmonisation and co-ordination role Department 17 of the Ministry of Finance
needs to generate a wider understanding of the integrated approach to financial management and
control and the respective role of each body.
It may also be appropriate to provide guidance on the “recommended” location, structure and
reporting lines of the bodies implementing these various activities.
6.1.4. Control Bodies
133. The general requirements to be performed by control bodies (defined as “public administration control”)
are set out in Part Two of the Public Control Act (Sections 7-23) and the Implementing Decree (Sections 22-
27). These requirements which cover rules for on the spot checks, relate to ex-ante, ongoing and ex post
controls. Additionally as mentioned previously control bodies need to take account of the Act on State
134. Many of the requirements are the same as those applicable to managerial controls (Decree 64 Section 22
refers). It is important therefore to have a clear understanding of the respective roles of these two areas of
control to avoid any unnecessary duplication of activities.
135. With many of the control bodies being in the same Directorate as the internal audit units the reporting
structure tended to result in control staff seeing themselves as independent of operational managers and on a
similar basis as internal auditors. Whilst this approach is taken in some member states it tends to create an
artificial separation between operators and controllers. (See section 6.7 below on an alternative more
136. During meetings held with the peers it was apparent that the control units were often a continuation of the
previous “inspectorates”, with much time spent on handling complaints or ad-hoc requests from senior
management or Ministers. This is not surprising as the key elements of the State Inspection Act still apply.
Additionally some units combined audit and control visits and interchanged staff between the units as work
levels fluctuated. This is not an ideal situation. In this connection it was noted that the Ministry of Finances
Department 56 (which deals with Ministry issues) had a unit for internal audit and a unit for “Inspekce”
whereas other Ministries visited had “Financni Kontroly”.
137. It is also important for there to be central harmonisation and co-ordinated advice on the operation of public
administrative control performed by these control bodies which goes wider than more traditional “inspection”
role set out in the Act 552/1991. The peers have seen a number of guidelines produced by public
administration bodies and noted some variation in the level of detail. For example the Regulation for the
Prague Municipal Authority included practical examples of the control activity and output. The peers found
this approach interesting and would recommend a similar approach co-ordinated by Department 17 of the
Ministry of Finance.
Whilst the Peers felt that the controls in place were sufficient to provide an assurance on the
adequacy and effectiveness of the systems evaluated, it was felt that different bodies applied
different meanings to the intended purpose on “public administrative control”. It often combined
ad-hoc inspection type activities and was seen by some as a policing role rather than an extension
of the requirements of the managerial operators. This could be overcome by incorporating the
control body within the managerial structure, as in the case of the Sapard Agency and having a
separate “inspectorate” to handle irregularities and complaints.
There is need to provide a clearer understanding of the role of public administrative control and
review arrangements to ensure there remains a clear separation between the roles of internal audit
and those control bodies conducting public administrative control. It may as a result be necessary
to review the scope and further amend the State Inspection Act to clearly distinguish general state
inspection tasks from those specific public administration controls set out in Act 320/2001.
As many of the operational activities set out in the legislation are the same for both managerial
and public administrative controls there is need for an assessment to ensure the avoidance of any
unnecessary overlap. This could be achieved through a self assessment exercise co-ordinated by
Department 17 of the Ministry of Finance.
There is need for Department 17 of the Ministry of Finance to set out broad guidelines on best
practices that should be incorporated into the operational activities for the control bodies
performing public administrative control. As with the recommendation concerning managerial
controls, particular attention should be given to the development of checklists, specimen documents
(as prepared by some bodies), and audit trails and to ensure that the concept is understood
throughout the 6500 plus public administration bodies.
It is also suggested that Department 17 of the Ministry of Finance develops appropriate
seminars/workshops to review these needs in more depth.
6.1.5. Managerial Controls
138. Managerial controls are one element of the so-called “internal controls”. The other element covers internal
audit and is reviewed at chapter VII in this report.
139. These, along with the setting up of internal audit units, were new concepts included in the Financial
Control Act 320/2001. The main requirements are understood (being similar in detail to long standing controls
by the Operation Requesting Officer, Budget Administrator and Principal Accountant on budget execution,
payment, bookkeeping etc.). However from documents seen and interviews undertaken by the peers it would
appear that it is not always fully appreciated that managerial control is the responsibility of all staff in
operational units and needs to be reflected in their daily routine.
140. The general requirements of managerial control are set out in the Financial Control Act (S 25-27) and the
Implementing Decree (primarily S 14-18). These provisions describe in fairly broad terms the key principles,
approving, operating and evaluation procedures. However alone they are insufficient to ensure the adequacy of
controls. For example there is no reference to the development of checklists, how to undertake risk analysis,
audit trails, nor general requirements on document archiving etc. While such details are not appropriate for
inclusion in the legislation they should feature in supporting guidelines and also be covered in individual
141. The peers saw examples of guidelines produced by a number of public administration bodies and were
aware that others were in the process of preparing such documents, sometimes based on the results arising
from specifically set up working groups. These covered the control requirements in more detail but tended to
state the needs without explaining how they should be undertaken. The one exception seen by the peers was in
respect of the Prague Municipal Authority where some examples were provided of control activity and output
to be checked. In general there are frequent references of the need to ensure compliance with economy,
efficiency and effectiveness and the need to ensure the underlying documentation is complete. These could be
interpreted differently by different staff and also differently between bodies, bearing in mind that these
requirements are to be applied to more than 6500 public administration bodies.
142. It was also noted that some guidelines suggested that managerial control was the responsibility of and
should be performed by “top executive staff”, rather than all staff, and there were references to some of the
checks being “audits” and other differences in terminology which may be either a translation issue or a lack of
appreciation of the different functions between audit and management (including public administration
143. In any case nothing suggested that these guidelines or other similar working documents were submitted to
and reviewed by Department 17 in order to guarantee a minimum level of consistency regarding the concepts
and the terminology.
144. The peers consider that generic central guidelines need to be prepared to set parameters for the overall
approach to be applied throughout the 6500 public administration bodies, whilst leaving specific details to be
added by each of the bodies. This will need to cover the development of various checklists to both verify and
record key actions, and the preparation of a detailed audit trail (see paragraph 156). Additionally there will be
need to set out a methodology for risk analysis, and cover IT security, contingency arrangements, document
archiving etc. A format for job descriptions would also be beneficial, as would guidance on the setting of
approval levels at different staff levels, and arrangements for alternative signatories to cover temporary
absences. There is also a need to cover arrangements to ensure the rapid reporting of irregularities when found
and to whom they should be reported (see section 6.6).
Managerial control is not always understood as the responsibility of all staff in public
administration bodies. It is important that line officers at all levels and in all organisational units
are aware of, understand, and implement the principles of sound financial management and
efficient internal control.
There is need for central advice on the content of guidelines for managerial controls and in
particular how to ensure and verify the controls are appropriate, correctly undertaken and fully
recorded for future reference. This is a role for Department 17 of the Ministry of Finance. Since a
number of manuals have already been individually prepared by various bodies, and more are in
preparation, this is an urgent task.
In developing these guidelines there would be benefit in referring to the structure of those already
prepared by the Sapard Agency and National Fund.
Particular attention should be given to the development of checklists, specimen documents (as
prepared by some bodies), and audit trails and to ensure that the concept is understood throughout
the 6500 plus public administration bodies.
6.1.6. Reporting and follow up Procedure
145. Various procedures are set out in the legislation. A process for annual reporting of the results of financial
controls (covering controls by control bodies, controls in accordance with international agreements,
managerial controls and internal audits) is set out in the Financial Control Act (S 22) and the Implementing
Decree (S 28, 29 and annexes). Additionally there are references in the Act for the timely submission of the
results of such controls to the heads of the bodies concerned. “Material” findings by control bodies also have
to be submitted to the Ministry of Finance (not via the heads of the bodies concerned) within one month of the
control visit. There is also recognition of the need for co-operation between bodies of public administration (S
23 of Public Control Act), and for follow up procedures with the imposition of fines, in some cases, for
continued non compliance. These are sound ground rules but would benefit from review and development.
146. The first annual report was in the process of compilation during the peer missions and Unit 173 of the
Ministry of Finance recognised that some adaptation would be necessary for future years, including the need to
cover municipalities. Software is being developed to simplify the collection and analysis of the data and will
consist of three modules (reporting and analysis, material findings and financial control/ audit findings). The
aim is to complete the introduction of this software by the autumn of 2003.
147. The basic data collected reflects the details of the annexes to Decree 64, and as such sets out an outline of
key indicators (e.g. number of planned audits, number performed, number of on the spot controls, number and
volume of fines imposed etc.). However the more significant part of this report should be the results of the
analysis on the adequacy and effectiveness of the controls in place. This will not be an easy task to perform
especially at the central level in view of the large number of bodies involved and the fact that the final
assessment will rely on summary details from other bodies e.g. municipality reports to Regions.
148. A perception noted by the Peers was that, in general, the assessment of control findings data undertaken for
the annual report was not seen as an ongoing task. It was also unclear how the heads of the respective bodies
responded to the results of the financial and managerial controls in order to ensure effectiveness of the
systems. In addition to responding to the financial consequences arising from the controls (e.g. collection of
debts and imposition of fines etc.) there is need to assess for example whether there are weaknesses in the
system procedures, newly established risks, or need for further staff training etc. In other words, there is a
general need for more systemic feedback, instead of individual sanction (be it at the level of staff or of
149. These assessments can be achieved in many ways but are best effected through regular meetings within
each public administration body consisting of representatives from the control body, internal audit, operational
staff involved in managerial controls and chaired by the head of the body or a senior member of the
managerial staff (this approach was already being applied in one Ministry visited). Also throughout the year
the co-ordinating units at each level (e.g. municipalities with regard to contributory bodies, regions with regard
to municipalities etc.) should undertake regular assessments to ensure objectives are being met, corrective
actions implemented and any systematic weaknesses in procedures or new risks are identified and
disseminated to all concerned. This exercise should be seen as strengthening the new regional structure and
The Ministry of Finance (Department 17) should undertake a full analysis of the preparation,
collection and quality of the summary evaluations provided for the compilation of the annual
Part of this analysis should cover the value of the collected data in assessing the appropriateness,
adequacy and effectiveness of the control activities, the benefits that resulted for example in
improvements to the systems, and most importantly any administrative changes that are needed to:
i) improve the basic data provided for compiling subsequent annual reports and ii) improve the
quality of financial controls.
The assessment of results from financial controls should be seen as an ongoing role for the public
administration bodies and consideration should be given to creating a regular review forum in
these bodies to assess results, and take any necessary action through revising procedures,
adjusting risk assessments, or additional staff training etc.
Co-ordinating units should also undertake similar reviews (with bodies that submit data to them)
on a regular basis
At a later stage, the Ministry of Finance (Department 17) could consider using the results of this
first annual report as a basis for proposing self assessment exercises in each public administration
body to review and strengthen the quality and effectiveness of the financial control by controllers,
management and internal audit. Department 17 should also consider holding a number of seminars
on this issue.
6.2. Role and Responsibilities of Department 17 in respect of Financial Control
150. The Financial Control Act (S 7) defines the Ministry of Finance’s competency as:
“(1) The Ministry of Finance as the central administration authority for financial control shall methodologically
regulate and co-ordinate the performance of financial control in public administration.
(2) Unless a special legal regulation shall state otherwise, the Ministry of Finance and territorial financial bodies
shall perform public-administrative control of
a) state organisational units, State Funds and other state organisations , and that including checking documents on
the adequacy and effectiveness of the introduced systems of financial control pursuant to Section 3 par. 1 letter
a) and c);
b) providers of public financial aid, with the exception of self-governing territorial units;
c) applicants for public financial aid and beneficiaries of such aid, with the exception of those to whom public
financial aid was provided from the budget of a self-governing territorial unit.”
151. The peers then assume that the Ministry having a central harmonisation role for EU requirements and co-
ordination responsibility for all aspects of financial control as defined in Section 3 of the Act (i.e. the 6500
plus public administration bodies), and also having a control body function and specific financial management
controls on the bodies defined at Section 7 (i.e. excludes self governing territorial units).
152. However the Rules of Organisation for Department 17 of the Ministry of Finance appear to limit the
harmonisation and co-ordinating role to internal audit and public administration control [inspection] (ex-
post)32. This more restrictive interpretation is reflected in the current activities of unit 171, which is
responsible for harmonisation and co-ordination methodology. Indeed, according to Department 17 itself the
function of Central Harmonisation Unit for PIFC does not currently exist, while functions belonging to it are
scattered amongst various departments.
153. The methodological section of Unit 171 has produced a number of guidelines mostly in respect of internal
audit issues and has organised a number of seminars and training courses on financial control but with
emphasis on internal audit. This is understandable as it represents the newest and least understood area of
financial control in the Czech Republic. Furthermore much of 2002 was spent on legal related issues following
the introduction of the new financial control laws. The unit is also currently working on guidelines for
sampling and risk analysis.
154. However, Unit 171 recognises the need for guidelines together with harmonisation and co-ordination in all
other areas of financial control particularly in the area of public administrative control and managerial
controls. While it has not yet progressed in this area a number of public administration bodies have prepared
their own guidelines. As described above they tend to be rather general and do not cover important issues such
as the need for checklists, etc. It is therefore important for the Ministry of Finance to commence this activity at
an early date, not least as the peers heard from more than one source that this area, and an understanding of
internal/managerial controls, was the least developed in public administration bodies. This will be an extensive
task due to the substantial number of public administration bodies involved, and will add to the work of an
already busy unit (171). Consideration should therefore be given to either expanding its resources or exploring
the opportunities of utilising external assistance.
155. As mentioned elsewhere there would also be merit in undertaking further self assessment exercises linked
to training seminars to maximise the transfer of good practice to the practitioners. This is especially so for
managerial controls where their full integration into management operations appears to be less well-developed.
The annual report on financial control would be a good and current vehicle to on which to develop further this
It is not even sure if the harmonisation concept used in the organisational rules of Department 17 is not actually restricted to
EU issues. This would really convey a narrow understanding of the co-ordination/harmonisation role.
Department 17 of the Ministry of Finance needs to adjust its scope to include the harmonisation
and co-ordination of all aspects of financial control as defined by Section 3 of the Financial
Control Act (see table at para. 126 above).
Priority needs to be given to developing a harmonised approach to the implementation of public
administrative controls and managerial controls and the issuing of central guidelines for use by the
public administration bodies
The Ministry may also wish to consider the concept of appointing lead Ministries to progress
specific topics (In other words they could “champion” certain proposals.)
These developments could be supported with a self-assessment exercise based on the annual
financial control report.
6.3. Creation of the Regions and the Impact of the Decentralisation Process
156. The establishment of the Regions from 2001 aimed at a substantial transfer of responsibilities and
accountability to them from the Central State Organisations. This was extended from the end of 2002 with
certain of the District Office functions also transferring to the Regions, including the need to review the
financial management of municipalities in their area (this can also be undertaken by an auditor).
157. During their missions the peers visited one region and one municipality. It was clear that basic financial
controls existed in both, as was the case in the central state bodies visited. There were however a number of
specific issues. It would seem that at present the accounting role of the regions is little more than a post box
between the municipalities/contributory bodies and the state chapter administrators. Also it was unclear to the
peers on the degree of assurance obtained by the regions in respect of the quality and effectiveness of financial
control by these lower level bodies. While it is true that they receive summary reports as part of the annual
reporting exercise and would see the annual reports on financial management in accordance with Section 42 of
the Act on the Establishment of the Municipalities (128/2000), there appears to be no ongoing assessment.
This would be particularly important should any significant problem arise within the year. (This would be a
wider interpretation than “material findings” (S22 of 320/2001) which in any case would be reported direct to
the Ministry of Finance). Additionally these bodies shared the same level of uncertainty as the central state
organisations over the incorporation of managerial controls in to their system and the role of a modern internal
audit unit as opposed to the control functions.
While recognising the decision of the Czech Republic to decentralise various responsibilities from
the state organisations, the peers, suggest the need for the Ministry of Finance Department 17 to:
- ensure that the regions and municipalities continue to receive ongoing guidance on best practice
in the area of financial control,
- assess, in the light of the evidence arising from the first year’s financial reports whether there
are any specific weaknesses in the application of these controls, which can then be addressed,
- reach a view on whether the present procedures provide sufficient ongoing assurance to both the
higher self governing units and central government, on the operation of financial control
throughout these 6500 plus public administration bodies.
6.4. Audit trails
158. The development of audit trails as part of managerial needs is essential to provide a clear view of processes
and control points in place – it is a requirement of the EU Sapard and Structural funds (e.g. Regulation
438/2001). It is not mentioned in either the Financial Control Act or Implementing Decree. Other than in
respect of bodies responsible for EU Funds management (and not even all of them at the time of the review)
individual audit trails were not in place in the bodies visited. This is not legal requirement as such (except in
some cases of EU funds management33) but would certainly help the understanding and setting up of modern
and integrated financial control procedures in budget institutions. The early development of comprehensive
and documented audit trails (including control points) is important as it provides management with a clear
picture of the processes, needs, potential gaps and overlapping controls. Examples of these can be found in the
Department 17 should help to develop a generic audit trail document that can be adapted by public
These should then be used by management to review the adequacy of their controls, potential gaps
in processes, and any unnecessary overlapping activities.
The audit trail should be able to trace a process from start to end and across units and where
appropriate different bodies. This should help to assess any gaps or duplications between such
Ideally the audit trails should be developed by operational staff but overviewed by internal audit
6.5. Performance indicators on economy and cost effectiveness
159. An important part of the principle of sound financial management is the adherence to economy and cost
effectiveness – the three Es. This is recognised in the Financial Control Act and in the Implementing Decree
(e.g. Section 5 of the Decree states “The control method of monitoring shall check whether conditions and
procedures are set in compliance with intentions and objectives of a public administration body for an
economic, effective and efficient performance of the checked activity…”. Heads of public administration
bodies are also required to monitor and ensure fulfilment of approved objectives [Section 25 (2) of PCA].
These principles need to be assessed through performance measures and indicators, which do not generally
appear to be in place. These techniques will help to improve programme management, increase accountability
and improve related decision taking. In terms of FMC examples of performance measures include assessing:
i) the unit cost of an activity in a former period with the current period or between similar activities
carried out by another body (efficiency);
ii) the compliance with laws/regulations, timeliness, reliability, accuracy etc (effectiveness). This is an
important element of value for money in the public sector;
For example, it is a requirement for SAPARD under EU regulation 1267/1999, reflected in the MAFA.
iii) the extent to which the inputs/resources necessary to carry out an activity (raw materials, equipment,
staff etc) are obtained at minimum cost having regard for appropriate quality. It is usual to compare
such inputs with recognised norms and standards (economy).
160. Over time it is useful to set benchmark performance measures for specific activities to compare results
against a recognised standard. Such a technique helps both evaluation but especially ongoing improvement. It
does however require a heavy investment and is seen as a development once the basic performance measures
have been in place for some time.
161. The above techniques differ from performance measures to evaluate achievement of programme objectives
which is frequently linked to policy assessment. Examples of the latter are the evaluations under Sapard and
the EU Structural Funds.
The introduction of performance measures and indicators needs to be developed both to measure
progress made in the area of financial control as well as in general to evaluate programmes
performance. Here again there is a role for Department 17 of the Ministry of Finance to organise
networking and disseminate good practice in this area. .
6.6. Irregularities and fraud
162. The Financial Control Act recognises the need for action to be taken in the case of “material findings”
[Financial Control Act S22 (6)]. This section requires control bodies to notify the Ministry of Finance within
one month of the finding. This section also notes the need for control bodies to notify tax administrators where
there is a breach of budgetary or tax discipline. Elsewhere there is recognition of the need to have a mutual
exchange of “significant” information between control bodies and for competent authorities to be notified
(Decree S 27) and for internal auditors to inform the head of public administrations of any crime or offence
detected [Decree S 20 (8)]. There is also provision for the offender to remedy the position.
163. There are in addition specific laws governing the notification of criminal activities to state prosecutors or
police bodies [Act 141/1961 (S8) on criminal proceedings, Act 552/1991(S24) on State Control].
164. Whilst the peers considered that the budget arrangements for correcting notified irregularities were
acceptable, and the basic tools to correct material breaches existed, they concluded that the latter was
insufficient both in coverage and in terms of the measures that are required to be in place in member states to
monitor, correct, report irregularities and fraud. Indeed the present rules would appear to be rather relaxed in
the need for immediate corrective actions to be taken. As a first step it would be worthwhile for Department 17
of the Ministry of Finance to review the EU requirements, including the need to report findings to OLAF.
There would then be value in Department 17 preparing a detailed guidance note on the interpretation of fraud
(e.g. intended criminal activity) and irregularity (e.g. unintended errors). This should then be supplemented
with more detailed guidance for all staff on how to handle such cases, to whom to report and actions to be
taken. The annual report on financial control presents only a limited picture on irregularities (in the EU
There is need to clarify terms relating to breaches in regulations and consider introducing the
terms of irregularity and fraud in order to be consistent with EU interpretation. Guidance can be
obtained from EU rules and the Sapard documentation.
The arrangements to follow in the case of irregularities or fraud, especially in respect of the
actions of senior management in the public administration body, the control body and internal
audit, need to be clarified and expanded. This should also cover the role and actions by individual
operators, e.g. whom they should report to, what procedure to follow if they wishes to report
against their superior etc. These are very practical issues that are best set down in detailed
guidelines to be drafted by Department 17 of the Ministry of Finance.
The annual report to Government on financial controls will provide only a limited picture of
irregularities and consideration needs to be given to expand this element to be in line with the
information that will need to be submitted to the EU post accession.
6.7. A More Integrated Approach to Internal Financial Control
165. As noted elsewhere in this report there remains some uncertainty, or at least need for greater clarity, on
certain aspects of the respective roles for those implementing PIFC in the public administration bodies. This is
not unsurprising and is not helped by the emphasis placed on the categories of ex ante, ongoing and ex post.
The system of internal control needs to be seen as a total concept. Thus control is not limited to certain phases
of activity but rather is present throughout the operation and functioning of an organisation. Such an approach
may also be helpful to those senior managers who remain sceptical on the need to specific internal control
166. The PIFC system should comprise a wide network of systems established in an organisation to provide
reasonable assurance that organisational and financial objectives will be achieved, with particular reference to:
1. The effectiveness of operations.
2. The economical and efficient use of resources.
3. Compliance with applicable policies, procedures, laws and regulations.
4. The safeguarding of assets and interests from losses of all kinds, including those arising from
fraud, irregularity or corruption.
5. The integrity and reliability of official information, accounts and data.
167. Key elements of effective systems of financial control need to be in place to ensure a firm platform for
controls to work in practice. These include:
1. A strong central ministry responsible and accountable for the direction and co-ordination of all
2. Central standards for control, accounting, financial reporting, internal audit and a system to
enforce these standards.
3. Clear and transparent lines of accountability and responsibility for organisational units and
4. Effective and coherent systems and procedures of preventative, detective and directive control
(wherever situated), based on an evaluation of control risks.
5. Clear, comprehensive and transparent procedures for financial and performance reporting for the
government and all other public sector entities.
6. An effective internal audit function.
7. Strong external oversight by parliament and an effective public sector external audit.
168. It has the following key concepts:
1. Internal control is a process. It is a means to an end, and not an end in itself.
2. Internal control is effected by people. It is not merely policy manuals and forms, but people at
every level of an organisation.
3. Internal control can be expected to provide only reasonable assurance, not absolute assurance, to
an entity’s management and board.
4. Internal control is geared to the achievement of objectives in one or more separate but overlapping
5. Internal control is not a person or a separate organisation/unit
169. In the context of EU enlargement negotiations and understanding the PIFC concept, the terms ex ante,
on-going, and ex post controls are often used to characterise the different types of practical control found in
financial management and control systems.
170. However, controls may also be divided into the following different types:
a) Preventative: designed to prevent the occurrence of inefficiencies, errors or irregularities. These cannot
guarantee that the controlled factor will not occur, but reduce the chance of it occurring. Examples include division
of duties and authorisation controls.
b) Detective: designed to detect and correct errors, inefficiencies or irregularities. They may not give absolute
assurance since they operate after an event has occurred or an output has been produced but they should reduce the
risk of undesirable consequences as they enable remedial action to be taken. Detective controls are most effective
when they form part of a feedback loop in which their results are regularly monitored and used to improve
procedures or preventive controls. Examples include post payment check, stock verification and bank
c) Directive: designed to cause or encourage events necessary to the achievement of objectives. Examples include
clear definition of policies, the setting of targets and adequate training and staffing.
171. In practice the above categories may not be clearly distinguished and a single control may operate to cover
two or more functions. Supervision, for example, covers all three of these categories, as it would do for the
ex ante and ex post classification.
172. Also it is common to distinguish between “hard” and “soft” controls, where soft refers to informal controls
and hard refers to the more traditional, formal controls.
173. More details on such an integrated approach can be found in annex III.
Many of the key concepts of internal financial control are recognised in the Czech Republic laws
and guidelines, but the Peers concluded that they are often viewed in isolation and not part of an
integrated and ongoing control mechanism.
While not proposing the need for fundamental changes in the present laws, it is suggested that in
developing the more detailed guidance notes and in implementing internal financial controls the
above concepts are taken into account.
VII- Internal Audit Function : Developing the Internal Audit in the public administration
7.1. General remark
174. Developing internal audit concepts is not a straightforward task. There is a need for changes in the
approach of public management by all staff but this concerns in the first instance the managers themselves.
What is at stake is a move towards an "audit spirit" or an “audit culture”, which implies a non-negligible
amount of training in order to reach a certain level of understanding, including of the objectives of internal
audit as such.
7.2. Internal Audit tasks and duties
175. When performing their work, internal auditors should fulfil the requirements from the standards and the
Code of Ethics : compliance with standards and rules, knowledge, skills and disciplines, human relations and
communications, continuing education, due professional care. These aspects are stated properly in the
standards and the different Codes of Ethics seen by the peers.
176. Generally accepted efficient Internal Audit work covers the following topics : preliminary surveys
(including scope, risk assessment, audit needs), audit programs, field work, findings, working papers, audit
techniques, auditing in IT environment – auditing IT systems, recommendations, reporting, follow-up.
7.3. Preliminary surveys and audit approach
177. Preliminary surveys are intended to give a broad view of the environment where the audit shall be
performed. They should help adapt the means to the objectives. This preparation phase is generally seen as the
most important of the audit.
178. Making initial reviews of the environment, of previous audits when available, preparing the approach
which will be used to gather information, make communication, interview people etc : far from being time
wasted these preliminary survey help to become familiar with the universe where the audit will take place and
thus make the auditor more effective.
179. The scope of the audit is also important to materialise the extent to which the auditors will have to cope
with. In the absence of a proper audit scope, there could be a tendency to go beyond the expected or needed
scrutiny and thus lead to spend to much time on an audit or a particular topic of an audit, and could also result
in lacking the time needed to complete the full range of testing initially foreseen.
180. Risk Assessment techniques provide with instruments to address the element that could have impact on the
feasibility of the audit and thus help take necessary actions.
The Central Harmonisation Unit (CHU) should provide the internal audit units with the guidance
(including documentation) that would help them to start to work on a pattern of preliminary survey
(or "pre-audit") describing the generally identified steps (documentation to look at, previous audit
reports, risk assessment, etc.…) that should be performed before actually starting the audit.
7.4. Audit programmes
181. Every audit needs to assess what will have to be looked at, how many auditors will be needed and for how
long, what skills are specifically requested, what means will be necessary to carry out the audit, if any external
aid (in particular expertise) is needed : how to input this expertise at the right time, etc.
182. Generic audit programmes exist in written form to provide a reliable basis prior to commencement of any
audit of that type. The audit programme can be modified as appropriate, during the course of the audit, but the
changes need of course to be justified and documented.
183. The audit programme should document the procedures for collecting, analysing, interpreting, and
documenting information during the audit. The form of the audit programme may vary.
184. It was not apparent from the file examination done by the peers that these audit programmes actually
existed. This may be put on the account of the recent existence of the existing internal audit units but cannot be
a sustainable situation as the audit work should develop with the view to rely on good practice and standards.
A good programming of the audit work to undertake has anyway to be regarded as a key task of sound audit
As soon as possible develop a detailed list of audits to be performed by the IA Units ("think ahead
procedure"), then start to draft audit programs with stated objectives, anticipated procedures and
tests/points of control.
Note that at the beginning, results during performing the audits may differ from what was planned,
audit programs will become very useful to estimate future audits through benchmarking the activity
and forecast the needs for resources (duration, auditors, training, skills, etc.)
185. In due time (one month is generally appropriate), a letter from the head of the IAU should inform the head
of audited entity of the mission of an audit team including an estimate of the planning, and what people are
intended to be met. Every audit should start by a kick off meeting with the head and management of the
186. During the fieldwork as such, the audit team should :.
- Gain an understanding of the activity, system, or process under review and the prescribed policies and
procedures, supplementing and continue to build upon the information already obtained in the preliminary survey.
It is also crucial for the internal auditor in his/her communication with the auditees to demonstrate that he/she has a
good understanding of the auditee’s activity.
- Observe conditions or operations, interview people, examine assets and accounting, business, and other
operational records necessary to the audit work.
- Analyse data and information, review systems of internal control and identify internal control points, evaluate
and conclude on the adequacy (effectiveness and efficiency) of internal controls as it is the very essence of the
audit. These tasks have to be fully documented.
187. However, even if the internal auditor is satisfied that internal controls are appropriate, he/she has to check
whether they are effectively implemented. Conducting compliance and substantive testing, determining if
appropriate action has been taken in regard to significant audit concerns and corrective actions reported in
prior audits are the specific tasks which will bring the assurance of the adequacy of the internal controls in
188. The peers have had few opportunities to get acquainted with the fieldwork of the internal auditors, but
from their experience, also with audited entities, can be fairly confident to state that audit units do not work in
full compliance with the basic fieldwork standards.
The CHU should promote the development and use of fieldwork standards based on existing
internationally recognised material, such as e.g. the standards of the Institute of Internal Auditors
Promoting standards is however not enough and practical implementation thereof should promptly
start, for instance in the form of pilot audits if this possibility is offered by the current or future
technical assistance ;
An interesting way of proceedings could be to seek the assistance of existing “pockets of
excellence” in the Czech Administration where there is a recognised number of skilled auditors,
who already performed audits in accordance with the applicable standards. They should be
encouraged to either offer possibilities of internship or to share their practices in whatever form or
to proceed with parallel audits, which would be mirrored in other bodies, and subject to mutual
restitution and evaluation at the end of the process. It would be up to the CHU to suggest, organise
and co-ordinate these types of co-operations.
7.6. Working Papers
189. Each audit must be adequately documented. The working papers should record, as a minimum: the audit
objectives and extent of planning, the procedures followed, the tests performed and the results and conclusions
reached. Evidencing documents were obviously present in the few files the peers had access to. It is not
possible to speak from a real work documentation as the work done as such was not documented or not in a
standard manner (with forms/template document etc.). All audit work performed should be documented. Each
audit procedure should be supported by -and have links to working papers (audit programs, schedules, memos,
spreadsheets) on which testing performed and results achieved are documented, even in cases where this did
not lead to an audit finding. There should also be an overall conclusion documented on the audit procedure
form for each of the audit steps completed.
A guideline on referencing working papers would be of great help to Internal Audit Units. This task
could be assigned in first instance to a working group set up and functioning under the CHU.
7.7. Audit Techniques
190. Basic audit techniques did not seem to be very much in use amongst the internal audit units visited, if at
all. This concerns above all the use of questionnaires, although they constitute a basic tool for any audit,
flowcharting of processes, despite its recognised usefulness as a communication tool with the auditee, or
sampling methods such as statistical sampling.
Priority should be given in training to the acquisition of basic audit techniques such as audit
questionnaires and checklists, flowcharting, sampling, interview techniques. Pilot audits should be
programmed in order to give the opportunity to use these techniques.
7.8. Audit of IT systems / Audit in IT environment
191. The role of automated internal controls will become prominent in the PIFC system. In addition to being
more secure and efficient than tedious manually processed systems, IT systems help evidencing trends and
identifying anomalies, and may signal any detected deviance.
192. Such IT systems are fully beneficial for the managers and the organisation if they are integrated. They
allow on-line reporting and the production of automated key performance indicators (KPI).
193. It becomes now crucial to build a capacity to audit in IT environment. None of the visited internal audit
units did use any other software than Word and Excel. The possibility of using a data extraction software was
only mentioned in one occasion but the system was not in use. The IT systems seemed to be out of reach for
the internal auditors.
194. Amongst the skills that are expected from an internal auditor, a good understanding of how IT systems are
functioning is required. It is not necessary for each auditor to become an IT auditor but - as for any other
activity - internal auditors should be able to understand and be in command of the basics principles of IT
195. The internal auditors should anyway have the possibility to request the assistance of specialised IT
auditors, which the internal audit units should have access to. This capacity could be built within the Central
Special training on IT audit should be started.
In due course internal auditors should become familiar with the use of computer-assisted
The building up of a specialist IT audit capability should be considered, possibly located with the
CHU together with the allocation of “drawing rights” for the use of this specialist unit to the line
internal audit units.
196. The audit report is the privileged vehicle to communicate the audit findings and recommendations to the
managers who are in a position to act on the control procedures and systems. The audit report should be
discussed as in depth as possible between the internal audit unit and the auditee. An effective oral or written
audit report requires a structured approach, whether formal or informal. Draft reports are to be sent to the head
of the entity for comments and feedback. A finalised report concludes the audit during a presentation meeting.
It is in principle up to the manager to which the concerned internal audit unit reports to publish the audit
report, not up to the audit unit. In all these respects the peers found that the Czech situation was acceptable as
the reporting standards in use are appropriate and adequately supported by the recently issued Guide for report
writing. The extent to which this guidance was effectively used in the Czech Republic was however
impossible to assess.
The existing "Guide for Report writing" can be further developed but as such is a good basis for
the internal auditors. The CHU should make sure it is widely disseminated and in effective use
amongst internal audit units.
197. Surprisingly Act 320 does contain relatively few specific provisions for the follow-up procedures of
recommendations from the internal audit. The Sections 18 to 20 deal with remedial measures for public
administration control including fines for non-fulfilment to remedy, and this cannot be regarded as standard
recommendation and follow up. This may on the other hand demonstrate a persistent focus on issues of non-
compliance, perhaps still needed now, but should not hinder the development of recommendations aimed at
improving the control procedures and set up in a systemic an systematic way. In the internal audit part, the
Section 31 contains very little guidance on the contents and procedures of follow-up, other than to whom audit
findings shall be reported. The follow up activity should anyway be recognised as a key component of the
audit work, and should be as such also subject to appropriate standards and organisation.
198. Following-up an audit to ensure that recommendations have been implemented and promised actions
carried out is one of the most powerful control facilities an auditor has at disposal. It is thus vital that the
auditee, and the management, realise that the mere acceptance of proposals or agreement to action plans are
not enough, and that a structured followed up review is necessary. It is not apparent from the information
gained by the peers on the internal audit work performed so far that this structured approach is in use and this
should be remedied at as a first matter of priority, e.g. by a common standard approach developed by the CHU.
A formal reporting to the head of the IAU (every quarter seems often convenient enough) would
facilitate the monitoring of the follow-up of recommendations.
Follow up of recommendations has to be taken into account in audit resources planning.
Follow up audits should be recognised as a full component of the audit work, and should as such
receive dedicated treated in the multi-annual audit plan.
A standard on common and structured approach for follow-up of the audit recommendations is to
be determined as soon as possible by the Ministry of Finance. It should in particular address the
timing and the extent of follow-up procedures.
7.11. Standard framework for the activity of the Internal Audit Units : Purpose, Authority, Independence
199. Act 320 contains in its section 320 a description of the tasks of the internal audit tasks which to a certain
extent refers to the generally accepted definitions of the audit work (checking and evaluation of internal
control system) but also obviously reflects features of the previous practices (priority given to compliance
aspects, restrictive enumeration of functions instead of a broad and all-encompassing definition, that would
help adapt to the specific circumstances encountered in the work). This shows that, at least when the Act was
adopted, there was no clear and common understanding of the purpose of the internal audit.
It is not recommended to review Act 320 at the moment, as this could indeed lead to further
confusion and misunderstanding and again delay the actual audit work to reach cruising-speed.
There is certainly however a need for further internal discussion and clarification of the role of the
internal audit. In lieu of new amendment, an inter-ministerial agreement on the purpose of internal
audit could be a priority topic address by the group mentioned above in view of the drafting of a
Strategy paper (see section 4.1).
200. None of the Internal Audit Units have reported problems to exercise their duties. This may come from the
perception by the auditee that these units are but the new naming of the Control Departments. This seems
nevertheless to be a strong point.
201. The IAA defines the independence of the auditor in the following way :
“Internal auditors are independent when they can carry out their work freely and objectively. Independence
permits internal auditors to render the impartial and unbiased judgements essential to the proper conduct of audits.
It is achieved through organisational status and objectivity.” The independence of the Czech public sector internal
auditor is laid out in the Act 320 where the Section 28 basically deals with the functional independence, i.e. the
strong separation between the audit and the audited activities. This independence can be further strengthened by
the fact that internal audit units shall directly report to the head of the institution it belongs to (“manager”) and this
is foreseen by the Section 29 (1) of the said Act 320.
202. In each visited body, Internal Audit Units were indeed correctly located in the organisation, reporting
directly to the head of the entity (Minister or Head of Body). However it was felt (and actually recommended
by the European Commission) that additional assurance for the protection of the head of the internal audit was
needed. This was done in form of an amendment to Act 320 setting specific procedures for the appointment
and dismissal of the head of internal audit in the various institutions concerned. The basic procedure is that this
employee can only be appointed or dismissed by or in consultation with the major stakeholder of the
institution. This amendment was adopted in the 2nd of April 2003. In the case of central authority of state
administration (e.g. ministries or state agencies), the Ministry of Finance has to be consulted.
The arrangements for the independence of auditors seem currently satisfactory from a legal point
of view and since the amendment to Act 320 offering additional protection to the head of internal
audit unit has been adopted. However as it is often the case in other acceding countries and as this
last amendment shows, these arrangements are based on new texts and the internal audit activity
has still not reached such an operational level that assurance can be given that no problem will
occur in the future. It is then recommended to proceed with a further assessment, once the system
has been fully deployed. In particular the bearing of the obligation to consult external parties
appears rather limited as their opinion is purely consultative and seems to be secret.
7.12. Organisation of the Internal Audit Units in Ministries and other budget organisations
203. The table below is an attempt at summarising the main features of the internal audit units visited during the
Bodies Fi. Control Unit IAU
Ministry of Organisation of units Common
Finance Dept 56
Origin of staff Previous Control Dept
Staff assignment Assigned to both IA and control
Staff number 18 (11 Internal auditors)
Report to Minister
MoLabour Organisation of units Separate Separate
Origin of staff Previous Control Newly recruited staff
Staff assignment Dedicated Dedicated
Staff number ? 5
Report to Deputy Minister
MoJustice Organisation of units Separate Separate
Origin of staff Previous Control Dept Other
Staff assignment Dedicated Dedicated
Staff number 4 4
Report to Minister Minister
Region of Central Organisation of units Separate Separate
Origin of staff Previous Control Dept 2 from District office
Staff assignment Dedicated Dedicated
Staff number 4
Report to Director of Regional
MoInterior Organisation of units Separate Separate
Origin of staff Previous Control Dept Previous Control Dept
Staff assignment Dedicated Internal Audit and
"kind of inspection")
Staff number 20 22 (incl. 6 auditors)
Report to Minister Minister
MoEnvironment Organisation of units Separate Separate
Origin of staff Previous Control Dept Previous Control Dept
Staff assignment Dedicated Dedicated
Staff number 8 3 auditors
Report to Minister Minister
MoRegional Organisation of units Separate Separate
Staff origin Previous Control Dept Previous Control Dept
Staff assignment Dedicated
Staff number 5
Report to Minister Minister
MoAgriculture Organisation of units Separate Separate
Staff assignment Dedicated
Staff number 14 3
Report to Minister Minister
MoTransport Organisation of units Common
Staff assignment Common
Staff number 4
Report to Minister
SAPARD Agency Origin of staff N/A Newly recruited staff
Staff assignment N/A Dedicated
Staff number N/A 7
Report to N/A Minister
204. This table shows differences in the implementation of Act320/2001 amongst sample budget organisations.
This may relate to differences in the understanding and the interpretation of the act itself.
205. It is in particular uncommon that the Ministry of Finance itself did not demonstrate an adequate
implementation of Act 320/2001, since the same internal division, Department 56, is responsible for both
control and internal audit activity, and even the same staff members can be requested to perform both types of
The Ministry of Finance should aim at a strict compliance with Act 320/2001 and consequently
clearly separate the ex post control activities between one - Financial Control/Inspection division
and one Internal audit division. This would clearly set the standards vis-à-vis other budget
7.13. Standards, Guidelines, Manuals
206. The “Blue Binder" published by the Department 171, contains the available legal documents and some
instructions and guidelines. It can be considered as a general handbook (see below) but is not sufficient for an
auditor to perform an actual audit.
207. The principle of the binder is however good in order to facilitate the update. Updates should be at disposal
from a central website maintained by the CHU, which could e.g. keep every internal auditor informed by email
of new available updates.
208. The INTOSAI standards are part of the Blue File published by Department 171 of Ministry of Finance
although the Instruction Manual ref 171/59 and guideline 171/71 are making direct reference to IIA standards
which are not in the "Blue Binder".
209. There is also a need for more specific audit manuals, on particular topics such as staff policies, public
procurement, assets or cash management etc. Such guidance documents could be produced directly or
supervised by the Ministry of Finance with e.g. the support of specialised working groups each composed of
internal auditors coming from different institutions.
210. The Ministry of Finance has recently produced other documents in compliance with Section 7 (1) of the
Act 32034, such as the Guideline on rules and recommendations in the performance of Internal Audit (171/59),
Guideline modifying methodology of financial audits of public administration meant to unify the application
of rules and recommendations related to internal auditing in the public administration bodies (171/71), or the
Guide to report writing. Whilst in need of improvements, these guidelines are adequate to start auditing. It is
however not possible to demonstrate that they are currently and consistently in use amongst internal audit units
outside the Ministry of Finance. On the other hand, line ministries and other bodies produce their own
guidance and practical documents for supporting the audit, of which the Ministry of Finance does not seem to
be very well aware of, let alone consulted upon. This is damageable to the dissemination of good practice and
the role of methodological harmonisation devolved to the Ministry of Finance.
The Ministry of Finance should undertake the revision of the “Blue Binder” having in mind to turn
it into a real audit handbook, covering the complete set of issues : Legal Framework, Role and
Methodology of Internal Audit presumably in form of standards on Audit scope and approach,
Planning (including risk assessment), Audit performance (Analytical Review, Sampling and Testing
Working Papers, Reporting, Follow Up, Quality Control and Assurance and Investigations. It
could also include a list of available audit programs.
More specific manuals on particular audit topics, could be produced, including general
information as well as the audit program for the specific audit. General risk analysis,
questionnaires - some mandatory, some optional –, suggested controls points would be included.
The Ministry of Finance should complete, preferably in co-ordination with other interested parties
(other ministries but also professionals such as IIA) the standards for internal audit in the public
administration sector in the Czech Republic.
The Ministry of Finance should collect all internal audit-related documents drafted by the external
bodies, be entitled to make comments when appropriate, make them available to the other internal
audit units when these documents reflect good practice.
7.14. Audit Charter
211. Some Internal Audit Units in line ministries have already issued an audit charter. This is a good practice in
order to clarify the position of the internal audit service within an administration and to define the “rules of the
games” in terms of access to audit evidence, relation to the other staff in the organisation etc. An audit charter
According to which, “the Ministry of Finance as the central administration authority for financial control shall
methodologically regulate and co-ordinate the performance of financial control in public administration”.
does not need in first instance to be a thick and detailed document. It has to be a communication tool in
particular as it aims at raising awareness regarding the functions, tasks and duties of the internal audit.
212. For whatever reason, the Ministry of Finance has not so far issued any audit charter for its own department
56, nor produced any charter template for other departments, thus again not living up its co-ordination role.
The Ministry of Finance should as soon as possible issue an audit charter or any equivalent
document for the own needs of its internal audit function.
As part of its co-ordination and harmonisation role, the Ministry of Finance should also start to
work on an inter-departmental template of audit charter for the internal audit units working under
7.15. Code of Ethics
213. The Peers have seen different code of ethics in different Ministries despite the Code of Ethics produced by
Ministry of Finance. As there is hardly any reason why the ethics requirements should vary amongst bodies
with same statutory base and very similar tasks, the peers believe that there should be only one Code of Ethics
for the Internal Auditor in the Public Administration, which could either derive from the general service
provisions or be a self-standing document. With regard to the slow progress to date on the general civil service
arrangements, the latter seems the most likely to happen.
The Ministry of Finance should lead and co-ordinate the efforts to issue one Code of Ethics for the
Internal Auditor in the Public Czech Administration that every IAU can work with. The Code of
Ethics should be duly articulated with the civil service legal framework.
Standards, Audit charter and Code of Ethics should be at free disposal of anyone – including on an
7.16. Multi-annual audit plan
214. With only a few months behind them, IAU have only completed their first audit plans a few weeks ago at
the time of the review. Most of the time, audit plans are only annual and sometimes only for the next 6 months.
None of the IAU has really applied any risk assessment to categorise the audit needs. IAU relied on
expectations from previous audits or requests from the management.
215. Line Ministries and Bodies do not send their annual plan to the Ministry of Finance for eventual co-
ordination, allowing that the same type of audit may be done twice without any sharing of experience and
good practice. The fact that annual audit plans tend to take too much into account the wishes expressed by the
political level, results in a serious risk of impinging on the independence of the internal audit.
216. The allocation of audit resources for ad-hoc audit work is, in some cases, much too high as it should not
exceed 20%, otherwise the IAU is not able to perform its audit plan and consequently unable to give the
The Ministry of Finance should encourage the Internal Audit Units of line ministries to undertake a
serious planning exercise based on simple risk assessment models. Ideally a specific internal audit
standard should be created as soon as possible in order to assist the IAU in the development of
their multi-annual plan (usually on a three-year basis).
As a possible first practical step, the Ministry of Finance could encourage the Internal Audit Units
to produce lists of areas to audit, based on empirical risk assessment, to make a classification of
the areas listed by risk and draw a short list of those which are the most at risk in the short term.
These lists will become the embryo for the next audit plans and audit needs assessment. They
could, as the plans themselves, be co-ordinated with the NKU own activities.
7.17. Human resources management and development
7.17.1. Position of the internal auditors
217. Since the new Civil Service Act is very unlikely to fully enter into force before long, if ever, this text will
be of little support to define the position of internal auditors in the Czech Administration, where they clearly
represent a quasi unprecedented type of activity. Internal auditors are currently de facto still governed by Act
No. 65/1965 Coll., Labour Code, i.e. the generic legal framework for most of the Czech public administration,
and the salary structure defined by the Government decree No.253/1992 Coll. Concerning the remuneration of
employees of the state administration.
218. During the review, the peers did not manage to get any clear answer to the simple questions about the
salary structure and career developments of internal auditors in place, nor how they compare with other civil
servants, let alone with similar functions in the private sector.
219. The present situation is trying to fit in the current salary scale. The average salary of an internal auditor is
said to be around 22.000 CZ crowns/months (ca. 677 €), which is about 60% of the amount for a similar
position in the private sector. A head of department can allocate a bonus of up to 100% of the salary but not
for more than 3 months. This can hardly function as a sustainable system.
220. In the meantime, it becomes necessary to specify the position of the internal auditors in the Czech
Administration. As to the knowledge of the peers, no formal position description of internal audit jobs, at their
different levels, nor an explicit career path (Junior, Senior, Audit manager, Head of IAU) have been so far laid
221. In order to do the above there is a need for a structure and speaking-partner within the administration. It is
indeed to a large extent the role of the Central Harmonising Unit to take on to ensure the defence of the
interests of the development of the internal audit profession in the public sector. It is not very apparent that the
Department 17 of the Ministry of Finance has so far played this role.
A division in the Ministry of Finance, and most likely within Department 17 should be tasked to
gather data regarding the human resources aspect of the development of the internal audit
profession in the public administration sector. This division should play a key proactive role in the
current and upcoming discussions on the civil service reform as to ensure an appropriate dealing
with this rather new category of staff.
Without waiting for such a division to be firmly established, there is a need for clarifying the status
and positioning of the internal audit function in the Czech Civil Service, so that to perform this task
should become attractive in the Czech Public Administration.
7.17.2. Staff recruitment and retention
222. The main drawback of the present system is that it is difficult to recruit young staff because of the
numerous opportunities appearing in the more lucrative private sector. “Head hunters” have already been seen
chasing good internal auditors from the public administration. Furthermore, the ages pyramid in the Czech
Republic shows a deficit in the population aged 30-45. Older agents (55-60) - which is the average age in a
number of public administration bodies, in particular at the Ministry of Finance - are to retire very soon. There
is an upcoming increasing gap to fill in the public administration in general, certainly in the Ministry of
Finance in particular (which does not mean that exactly the same number of retiring staff needs to be
223. One option is to turn young (up to 40 years old) present civil servants who could become out of work -
because of reorganisation (such as the regionalisation process for instance)- into internal auditors with the help
of heavy training programmes. It will anyway remain necessary to continue with the recruitment of new staff
in that area, and to train them to make them fit for the specific requirements of the Czech Public
A full staffing needs assessment for the internal audit function could be initiated by the Ministry of
Finance on the basis of a full scale audit needs assessment ;
The Ministry of Finance should explore under what conditions and in which proportions these
needs would be best met either by internal “recycling” or by external recruitment ;
Whether internal or external recruitment, the necessary job descriptions as well as the needed
skills have to be agreed upon officially.
7.17.3. Basic and continuous training
224. The Ministry of Finance with the help of the Czech Institute of Internal Auditors has developed training
sessions ranging from 1 day to 2 weeks. A “certification module” of 2 weeks is in place. This is clearly not
enough : Internal Audit training in member countries vary from 9 months to 4 years (including on the spot
training), in particular when aiming at getting the professional certification.
225. Should Czech internal auditors rather go for the standard international private certification (Certified
Internal Auditor) or continue with the current public sector certification ? On the one hand the CIA is
recognised and is an incentive for auditors to achieve an international standard of good practice. Some auditors
in place in the public administration have already reached the level of certification or are in the process of
obtaining it. On the other hand, there is a serious risk that this certificate, precisely because of its recognition
within the private sector, will ease the evaporation of public internal auditors out of the Public Administration,
once this latter would have offered this training or financed it, as it is in addition a rather expensive
programme. This could be further encouraged by the fact that the basic CIA needs a lot of tailoring to fit in a
public sector environment : if this does not happen, in most cases the skills and qualifications obtained will be
more suitable for the private sector. There is a delicate balance to draw here and also a lot of thinking to devote
to the issue based on the assessment of the practical results of the various forms of training schemes now
available and implemented.
226. Until an enhanced Czech Public Internal Auditor certification is really in place (if ever), promoting the
CIA would encourage the professionalism of the internal audit profession in the Public Administration. The
cost of the training should be included in the budget of each internal audit unit.
The further organisation and development of training of the internal auditor should be a key
priority on the agenda of the CHU. This would assume a comprehensive training program –
academic and including as well as on-the-spot practical training and coaching - is absolutely
necessary to achieve professional competence of the Internal Auditors. This should not primarily
focus on commenting the newly adopted primary and secondary legislation, but on the use of
practical tools for the audit work and the actual performance of audit
The assistance of the Czech IIA is important and certainly constitutes an asset. But the Ministry of
Finance should permanently be in complete lead of the process and have a fully proactive position
on the issue of training, up to define the requirements of a strong Public internal auditor
7.17.4. Incentives for staff retention and career perspectives
227. Considering the risks of staff evaporation linked to the continuing lesser level of salary for internal auditors
compared to the private sector, as well as to the strengthening of skills and qualifications resulting from the
existing and future training opportunities, it becomes all the more necessary to offer attractive career
perspectives. It might be also necessary to adopt stricter procedures to ensure that the investment in training
will not result in a loss for the Public Administration.
To guard against problems in retaining the services of staff when they become qualified, there is
also a need to promote and assure a motivating career development with good perspectives of
promotion, mobility across ministries and agencies as well as opportunities for secondment, for
example in financial management related positions. This could also help recruiting junior staff as
they would know that they will take a relatively varied career path.
On the other hand, a contractual commitment to serve during a minimum period of time could be
required from the newly recruited staff, certainly when they will benefit from training activities
leading to a recognised internal audit qualification.
7.18. Quality Assurance Review
228. In line with international standards, quality assurance is a key component of good audit work as the
development of the audit will necessarily result in an increasing demand for defensible audit. Quality
Assurance policies provide assurance that the internal audit units work in accordance with the standards and
the professional good practices. Quality should normally be built in the audit working procedures, from audit
planning to follow-up and include notably all work documentation requirements and justification of the audit
approach and procedures, or periodical review/benchmarking of the audit reports. Quality Assurance review
can also be performed through reviews by peers, either internal (i.e. from the same unit if structure and number
of staff allow for this) or external (i.e. by peer internal auditors coming from other units or from specialised
organisations). In first instance, it should be a key role for the CHU to carry out quality assurance reviews or to
organise and co-ordinate the implementation of such reviews within the internal audit community in the public
The Ministry of Finance should determine the framework and conditions for the organisation of
quality assurance and control policies and procedures. This would imply the setting-up of quality
peer reviews procedures, to be performed by the internal audit units. These reviews give the
additional advantage to create audit team with peers coming from different bodies and
background, thus increasing the possibility of exchanging and disseminating good practices.
7.19. Relation with the Czech Supreme Audit Office (NKU)
229. What is at stake in the relations between the internal and the external auditors, is not to establish a
permanent linkage but to make sure that internal and external auditors have a professional relationship of
mutual benefit, in methodological as well as in operational terms. It seems in this respect that a lot remains to
be done in the Czech Republic, as the existing relationships are rather distant. A more systematic approach
involving exchange of annual audit plans and programmes, reciprocal access to audit reports, and possibly
working papers, is of the essence. More common activities such as training events or meetings on specific
audit challenges and topics would be recommendable, as such co-operation certainly does not impact on the
always delicate independence issue. The possibilities of staff secondment would also be welcome. Good
communication lines between internal and external auditors are generally regarded as an additional insurance
policy against waste of taxpayer’s money as it should both prevents the duplication of the audit work, create
mutual trust and allow the external auditor to rely on the work of the internal audit, and enhance the
The Ministry of Finance should define a draft framework for the relations between the internal
audit units and the NKU. Co-operation should not be restricted to the formal communication of
reports etc. but should also cover all type of methodological exchanges and address issues of
mutual interest such as new audit challenges, like for instance the audit of IT or the use of IT in the
7.20. Responsibilities of the CHU in regard of internal audit
230. Notwithstanding the clear legal requirement of Act 320, the Ministry of Finance has not so far managed to
become the centre of excellence for Internal Audit issues in the Czech public administration. Some Internal
Audit Units in line ministries do not feel the need to co-operate with the Ministry of Finance or even to send to
the Ministry of Finance any of their documents or projects. This is not only contrary to the letter and spirit of
the Financial control act but even can lead to duplication of work and a waste of scarce resources. The need for
co-ordination could become yet more crucial as regions are progressively starting their activities, including the
initiating of internal audit work.
Bearing in mind the objective of the CHU of improving the professionalism of internal audit in the
public administration of the Czech Republic, this body could be directed by a Strategic Audit
Committee mainly composed of professional internal auditors (e.g. heads of internal audit units)
coming from various parts of the Czech administration. The Head of the CHU would come from the
Ministry of Finance. The support staff of the CHU would be a small permanent team from the
Ministry of Finance, but with effective possibilities of long-term secondments from other
administrations. This team should support a methodology unit, responsible for drafting and
disseminating standards, manuals, and other good practice. A key role should be to set up and
assist working groups on specific topics composed of internal auditors, coming from various parts
of the Czech administration. This would contribute to a better networking, based on knowledge-
and experience-sharing and help address issues of common interest as they may arise in a co-
ordinated manner. The activity of the permanent staff and of the working groups could develop in
the direction of training as appropriate.
In such a set-up, the CHU could be entrusted with the following mandate :
- Regarding methodology, audit standards and manuals, the CHU should compile audit
manuals and other guidelines, prepare Audit Manuals and communicate appropriately and
available to all relevant audit staff, monitor the dissemination and use of audit manuals, give
advice on appropriate training and criteria to assess professional competence, monitor system
of quality assurance on the audit work, co-operate with national and foreign organisations etc.
It should test and update audit manuals periodically.
- Regarding reporting and feedback, the CHU should collect audit reports and analyse them to
deliver general feedback and ideas about new developments towards Internal Audit Units.
- As far as human resources are concerned and as mentioned above, the CHU should help
define the position of the Internal Auditors in the public administration by deciding upon and
monitoring the professional skills and knowledge required for internal auditors, and also in
being the natural speaking partner for all issues related to the Civil Service status of the
- The CHU should be made clearly responsible for the design the basic training program, as
well as for organising the training, in co-operation as appropriate with the Czech Institute of
Internal Auditors. A mid-term project in this respect could be the setting-up of a common
training centre or at least common training facilities, in particular for newly recruited internal
- As there will be a continuous need for awareness raising in regard of internal audit, the CHU
could develop an activity of communication to “market” the Internal Audit function amongst
the major stakeholders.
- The Quality Assurance policy would be managed by the CHU. This unit could organise
Quality assurance review which could consist either in peer review (e.g. a team of auditors
coming from various Czech public institutions) or review by an independent external body.
- In a mid-term perspective, the Ministry of Finance could consider the possibility for the CHU
to manage a small pool of expertise, comprised of a number of audit specialists needed only
for a short period of time by Internal Audit Units in line ministries or other public bodies (e.g.
IT auditors, Lawyers, Statisticians etc.).
The development remains uneven with some pocket of excellence. They should be used as examples
of good practice. Their achievements should be reproduced, less in terms of using adequate
techniques than by reflecting upon the management of the change process.
VIII- Specific aspects of EU funds management and control
231. In the Czech Republic as in every acceding state, the PHARE, SAPARD, and ISPA funds are the three pre-
accession instruments financed by the EU to assist the country in its preparation for the European Union
232. After the flood damages in summer 2002 the EU is also supporting the Czech Republic with 129 Mio.€
from the European Union Solidarity Funds.
233. The main bodies responsible for the pre-accession funds are :
In the Ministry of Finance, National Authorising Officer, National Fund (NF), the Central Financing and
Contracting Unit (CFCU), the Department 17 with an overall audit responsibilities on pre-accession funds,
and Department 31 responsible for the financing of municipalities by the State Budget. (Responsible for the
co-ordination of the Solidarity Funds) ;
The Ministry of Agriculture and the agency for agricultural markets and rural development (SAPARD
The Ministry for Regional Development and
The Ministry of Transport (PHARE and ISPA).
8.2. Agency for agricultural markets and rural development
234. Under the Ministry of Agriculture an agency for agricultural markets and rural development (SAPARD)
has been established. The accreditation process of the SAPARD agency has been finalised in April 2002. A
memorandum of understanding between National Fund and this SAPARD agency as well as the Ministry of
Regional Development has been concluded.
235. The Sapard Agency was aware of the requirements of the Financial Control Act 320/200, its Implementing
Decree 64/2002 and the State Inspection Act 552/1991. It recognised however that, since its accreditation was
based on meeting the EU Sapard rules there was particular need for these specific EU requirements to be met.
The Ministry of Finance (Department 17) should clarify the interrelationship between these various legal acts
in respect of the Sapard Agency.
236. The Czech Republic had set up a new agency (Agricultural Payments Agency) for the CAP market
regulations, which in due course is expected to incorporate the role of the Sapard Agency. It was however
unclear whether this body would be subordinated to the Ministry of Agriculture. Further it was understood that
a second agency was to be created to deal with intervention and export refunds, and these bodies might
eventually be combined into one agency.
237. The Sapard Agency was anxious to develop a clear strategy plan for the transition to the post accession
period but currently felt there was a lack of guidance from the EU. Of more immediate concern to the Agency
was recognition that current staff resources were insufficient to meet the expected activity levels under Direct
Payments. The peer team considered this to be a realistic assessment.
238. Furthermore, the Customs General Directorate informed the peers that this body was currently reviewing
the option of its staff becoming responsible for the implementation of the CAP, or at least significant sections
such as direct payments and the export subsidies. This would offset reduced staff activities at border posts
following accession to the EU.
Clear political decisions shall be adopted concerning the responsibilities of the different EU
agricultural measures which are
- market policy
- direct payments
- export subsidies
- processing subsidies and
- agricultural structural policy.
The possibility and feasibility these tasks or part of them to the regions or subordinated
administrations could be explored
At the same time there is need to develop an outline road map for this transition, assess resources
needed and provide sufficient time for new staff to be trained prior to operating the CAP measures.
Concerning internal audit and financial control it shall be also decided who is going to become
responsible for the on-the-spot-checks and who will be responsible for the function as a certifying
The experiences of the highly motivated and well-trained staff of the SAPARD agency should be
shared with the other organisations being or going to become responsible for the administration of
8.3. National Fund
239. The National Fund was established within the Ministry of Finance as the central treasury entity through
which EU Funds are channelled according to Act no. 218/2000 Coll. Chapter X. The National Fund has the
responsibility for the financial management of the EU Funds. It is headed by the National Authorising Officer,
currently the first Deputy Minister of Finance. According to the organisational rule of the Ministry of Finance
the National Fund manages and administers the pre-accession funds PHARE, ISPA and SAPARD.
240. At the moment 19 people are working in the National Fund including one person working as an internal
auditor only for the National Fund, although this was seen as a temporary measure. The main task of the
National Fund is the function of the paying authority especially for PHARE and ISPA as well as the
monitoring of these programs and the preparing of documents for the negotiations with the European
National Fund is preparing itself to become paying authority for European Regional Fund,
European Social Fund and Cohesion Fund. An adequate political decision shall be adopted soon to
clarify this situation in order to use the professional experiences of the highly motivated and well
trained personal staff for this task.
The internal audit function should be rationalised. The relation between other internal audit
departments such as Department 56 and Department 17 are unclear and the National Fund. The
audit activities of National Fund should normally be carried out by the internal audit of the
Ministry of Finance, all the more when it will act as support for the EU-funds paying authority. It
is desirable that the internal audit function now performed within the National Fund be transferred
as early as possible to the internal audit department of the Ministry of Finance, or at least should
be restricted to the pre-accession funds, and transferred once the National Fund is operational as
As for the EU-structural fund and cohesion fund a national co-financing is necessary the relations
between the budget departments within the Ministry of Finance should be clearly laid down in the
organisational rules of the Ministry of Finance. The same goes for the relations with different other
Ministries or agencies which are going to become responsible for the administration of EU
structural funds for example Ministry for Regional Affairs, Ministry for Labour and Social Affairs
as well as Regions and maybe municipalities.
8.4. Central Financing and Contracting Unit (CFCU)
241. The CFCU is part of the Centre of Foreign Assistance, Department 46 of the Ministry of Finance. The
CFCU is not carrying out pre-accession projects but assisting other Ministries or organisational institutions
concerning the implementations of PHARE and ISPA projects, in particular in regard of programming and
242. It is not foreseen that the CFCU will be involved in the future EU Funds. The remaining tasks are the
implementation and the assistance of the last PHARE and ISPA projects. At the time of the review, the CFCU
was involved in dealing with about 19 contracts concerning PHARE programs. At the moment 9 staff are
employed by the unit which currently sees a progressive phasing out of its tasks. For the administration of
single projects the CFCU applies the PRAG-Rules on procurement. At the time of the review, there was still
no formal decision the European Commission regarding the coherence between the Czech National Public
Procurement Act and the European Procurement Directive.
At the time of the review, no political decision has been taken in regard of the future of the CFCU,
that would offer a perspective for the highly qualified and motivated young staff of this unit. Yet the
Ministry of Finance will be before long in need of the type of professional experiences and skills in
the field of EU-accession36.
Since the review, the transfer of the internal auditor of the National Fund to the internal audit department of the Ministry of
Finance has been completed.
Since the review, the Ministry of Finance has developed in consultation with interested parties concepts to use professional
experienced staff of the CFCU in the area of EU funds.
8.5. Post accession requirements for financial control for EU structural funds and cohesion fund
243. The present EU-structural fund period 2000 – 2006 aims at increasing the effectiveness and the
transparency of the administration and at guaranteeing a sound financial management of the EU-structural
funds. The Czech Republic as an acceding country will get access to the regular EU-structural funds from the
assumed date of accession, i.e. on the 1st May of 2004.
244. The management and control of the structural funds constitutes a shared responsibility between the
Commission and the Member States. According to Article 38 of Regulation – EC – No. 1260/1999 the
Member States are responsible for the reliability of the national management and control system. Detailed
rules of the management - and control systems are stipulated in the Regulation (EC) No. 438/2001 which lays
down in detail the different forms of control and audit activities to be carried out at the Member State’s level.
245. As a very important result of the co-operation between Member States and the Commission,
the results of the controls by Member States and by the Commission;
the findings of other national or EU organisations concerning audit and control;
the financial impact of irregularities and changes of the administration- and control systems are to be
annually checked and assessed.
246. In general, and in particular for the internal audit, young and highly qualified persons have just been
recruited in the relevant organisations as well as some local entities (regions).
247. The budget perspective and estimates for the co-financing that is needed to be in place was still lacking at
the time of the review.
248. The necessary political decisions about the responsibility of the single ministries, regions or municipalities
supposed to be responsible for the administration of the future EU-structural funds were not yet taken. In that
context also the necessary staffing requirements for the administration, checks and control have to be provided
together with the decisions concerning the responsibilities.
249. For example the Ministry of Regional Affairs intends to increase the number of staff and to ask for about
1000 persons more to manage the European regional development fund. However before such decisions to be
made, the relations between the other ministries as well as the regions and municipalities in the field of EU-
structural funds remains to be defined. On the other hand, the regions and municipalities are willing to take
responsibilities for the administration and control of regional funds too. Regions and municipalities need in
addition to secure budgetary means to provide the national co-financing.
250. It seems to be quite clear that the Ministry for Labour and Social Affairs will be responsible for the
European social fund.
251. For the European agricultural structural fund the SAPARD agency will smoothly take-over also this
responsibility. As SAPARD agency is just working its new competencies in the agricultural structural fund
will obviously not create major difficulties. The internal audit department of SAPARD agency is generally
regarded as a point of reference. This could be a starting point to further develop the network of exchange of
practical experience of internal auditors in the civil service that has to be set up and maintained by the Ministry
The Ministry of Finance, with the contribution of Department 17, should elaborate a sort of policy
paper laying down all responsibilities of the Czech Republic concerning the administration and
control of all EU-funds. In this paper the adopted organisational rules concerning the different
responsibilities should be described. For the lacking responsibilities concerning the administration
and the different control and audit responsibilities organisational drafts should be proposed as
well. Department 17 should elaborate a list of administrative responsibilities as well as control and
An estimation of the needed national co-financing should also being elaborated. In the co-
operation with the involved ministries as well as regions and municipalities an agreement about
different responsibilities as well as administrative and personal capacities should be adopted.
8.6. Impact on Department 17
252. The Department 17 itself should clarify the scope of its future activities in view of EU funds. Very
important should be the question whether this department is going to become certifying body for the
agricultural market policies and independent bodies for all EU-structural and cohesion funds. A unit within
department 17 should become more familiar with the function of a certifying body through training and
experience. This unit should be composed by people trained and educated in audit and controls. It has also to
be decided who is going to carry out the on-the-spot-checks (5 % for structural funds and 15 % for cohesion
253. It seems that the option to entitle department 17 with this task was explored at the time of the review.
Despite the indisputable capabilities of department 17 staff in the area of EU funds management and the
fulfilling of the condition of independent checks, such an arrangement appears inadequate to the peers. It
would in first instance require an unsustainable increase of staff. It would also deprive the check obligation of
its positive feedback on the management and control of funds, as experience shows that it is better to get a
quick and direct reaction in case of disclosure of system weaknesses and other shortcomings: this would be
more difficult if the checks are performed by a central body.
The future on-the-spot checks should be performed by the internal audit divisions or equivalent
bodies of the ministries or organisations responsible for the management of funds, under the
guidance of the paying authority.
8.7. Treatment of irregularities
254. The treatment of irregularities is addressed in act No. 320/2001 section 22. According to these provisions
the Ministry of Finance has to be informed by the control bodies about material findings which has to be
announced to the state prosecutor or police authorities or findings of irregularities over an amount of 300.000
255. For the treatment of irregularities regarding the community regulation No. 595/91 and 1681/91 or the
adequate regulation for the cohesion fund the only position taken is the announcement of findings according to
this financial control act No. 320. The amount of 300.000 Czech Crowns corresponds with the EU amount of
4.000 € for the notification of irregularities to the European Anti Fraud Office (OLAF). OLAF has signed an
agreement with the supreme state prosecutor of the Czech Republic for the treatment of irregularities. The
Czech authorities are of the opinion that they could fulfil the EU regulations in that respect.
256. During the discussion with different control and audit departments in various ministries and regions and
municipalities it was obvious that the regulation in Act No. 320/2001 concerning the obligation to announce
material findings within one month to the Ministry of Finance is not everywhere known. To report these
irregularities in the context of the annual report is considered to fulfil the legal national obligation. This
national legal obligation enables to cover the EU-requirements in regard of reporting of irregularities.
For the treatment of irregularities the national regulations to report and recover the irregular
effected payments according the budgetary act seem to be adequate. They could be used for the
system of reporting of irregularities in relation to the management of EU-funds. But for the
detailed reporting to OLAF, further administrative instructions for all bodies involved should be
elaborated and the knowledge of the EU requirements in regard of irregularities should be
enhanced by the Ministry of Finance, department 17, in close co-operation with all ministries
responsible for the administration of EU-funds. Here again the experience with the management
and control of SAPARD would be useful.
8.8. A final suggestion
257. The administration and control of the European Solidarity Fund could be used as an example to implement
the principles of the administration and control including internal audit of the future EU-funds :
segregation of duties;
distinction between paying authority, management authority, internal audit and certifying body;
delegation of tasks;
competence of central ministries, regions or municipalities;
provision of national co-finance means;
co-operation between the different bodies responsible;
statement to conclude the program.
258. The development and reform of PIFC systems and procedures in the Czech Republic represent a long and
difficult process. Many obstacles still lie on the way which are of a structural, or one ought to say, of a
cultural, nature. There is a need for a good deal of energy, force of conviction, co-ordination and above all
political backing. Thus, reforming the PIFC systems still needs to be high on the political agenda. A strategic
perspective and a deeper and more general understanding of what exactly is at stake are still necessary, and the
leading role of the Ministry of Finance has to be ensured to carry out this process.
259. Whilst this latter role has to be recognised and played, it should also be emphasised that sound financial
control systems and procedures are not in need of implementation only for the EU funds and the institutions
managing them. It is and should be a matter of common concern for the entire public administration. It
definitely goes beyond the horizon of EU-accession.
260. In this respect, the progress achieved so far by the Czech administration should not be underestimated. One
has to mention the establishment of a legal framework, which by its mere process certainly helped develop the
understanding of the PIFC issues. It is however clear that this still recent and relatively complex legislation
will need an assessment at a rather early stage in order to identify what issues prove problematical and can
result in difficulties of implementation, or even of understanding.
261. The efforts made to recruit and train a significant number of internal auditors demonstrated, and still
illustrate, an important degree of commitment. The peers met on various occasions with highly competent and
motivated staff, very keen to display their skills and usefulness and help the modernising process of the Czech
public administration, as well as the re-establishment of the public finance. In most cases, they put great
expectations on the support they are entitled to get from the Ministry of Finance.
262. Last but not least, this all happens in a context of generally sound budget structures and systems, however
impedimented by the unfavourable development of the fiscal conjuncture.
263. Like the technical assistance provided so far, the review itself was restricted to the central administrative
bodies. This deserves particular mention, as on could argue the case that specific risks, and strategic issues,
exist at the local government level. But also potential centres of excellence are currently being developed at
e.g. the regional level : this new management layer really starts “from scratch” and is less subject than the
central level to administrative hindrances left by the former or subsisting structures. A proper co-ordination
system for PIFC is probably necessary there. There would be high interest also in creating formal or informal
linkages between the bodies responsible for central respectively local administration issues, definitely in the
area of internal audit. This task obviously belongs to a PIFC Central Harmonisation Unit as far as the central
level is concerned.
264. The existence and functioning of a Central Harmonisation Unit for PIFC has proven a meaningful
instrument to pursue and deepen the institution-building work in this area, as well as to carry out efficiently the
PIFC-related policies and work. This has been amply demonstrated in other albeit comparable contexts. This
feature was not clearly or completely achieved at the time of the review despite the fact that the role of
Department 17 does include some components of the typical remit of a CHU. The peers understand that the
Ministry of Finance has now started to take decisions to reach this highly needed step. They can here only
advice this to be done having in mind a strategic approach on the issue. This would be most helpfully done in
consultation with the future CHU speaking partners, in the Ministry of Finance as well as outside this
Ministry. This should have institutional and staffing consequences which should be well thought-off in
advance. Finally it seems that in that case a serious revision of the policy paper could be here needed.
y paper could be here needed.