REPORT OF THE SIGMA PEER REVIEW TEAM by via28446

VIEWS: 20 PAGES: 64

									                                                                SIGMA
                               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




                                                              (June 2003)




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




                                                                               2
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




                                                                             3
   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




                                                                            4
   8.8.       A final suggestion ....................................................................................................................... 63

IX- Conclusions .......................................................................................................................................... 63




                                                                             5
                                                 I- Introduction

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,
                                  Germany

        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
                                  Administrator

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
   control experiences.

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




                                                        6
    the Ministry of Finance, which kindly accepted to answer it thoroughly, thus adding to its already heavy
    workload.

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
    European Community.




                                                          7
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
    way.

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
    this context.




                                                         8
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




                                                          9
        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
    quickly.

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.




1
 If the very real obligations in the Czech Consolidation Agency are included the debt will be increase by some additional
percentage points.
2
  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
23.6.2003.




                                                             10
    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
    administrations.

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 -


3
 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?
4
  The Financial department has another character and constitutes the Ministry of Finance chapter administrator’s
administrative staff.




                                                             11
      and also the Budget Department - to little more than a budget consolidation, financing and accounting
      ministry.

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
    state budget.

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.

           Recommendations
               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.



5
    EBFs 3.5 %, social security funds 6 % and local governments 11.5 %.




                                                              12
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.




6
  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.
7
    In Bulgaria in 1997 the number of EBFs exceeded 100.
8
  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.
9
 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).




                                                              13
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).

         Recommendations
             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
               are met.


     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


10
  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.
11
  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.
12
  The indicator for replacement of capital assets is divided into investment projects which also are presented in the draft
budget.
13
  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.




                                                              14
       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.

14
     Act on Budgetary Rules (No. 218/2000) section 24.




                                                         15
     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
     Deputies).

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.
         Recommendations
             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
               budgetary measures.

              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
15
   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.




                                                              16
       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
    budgets16.

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
    organisational form.

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
    accounting units.

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.
           Recommendations
               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

16
     It could also be part of the Public Administration Reform.




                                                                  17
                   to other operators. The organisational form of state contributory organisation could eventually be
                   abolished.


       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

17
     In the form of funds from Phare, Sapard, Ispa etc.




                                                           18
     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.

         Recommendations
             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
               budget18.

              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
    CNB’s diligence.

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.

18
   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
advance.
19
  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.




                                                            19
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
    budgetary administrators.

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
    Parliament.

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
    incident.




                                                         20
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.

        Recommendations
            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
             insufficient.

             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
              basis.

             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
              considered.




                                                        21
       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
    prepared.

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.




20
     The main rules for the closing state accounts can be found in the Act on Budgetary Rules (No.218/2000) chapter VII.
21
     The Senate is not at all involved in the approval of the State Final Accounts (the Constitutional Act art. 42.2).
22
  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.
23
     The Constitutional Act (art. 97).
24
     Act (No.166/1993) concerning the Supreme Control Office.




                                                                   22
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
    budget.

           Recommendations
               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.




25
  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.
26
     This outcome has not been regarded as a vote of no confidence.




                                                               23
       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
    Chamber.


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




27
  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.
28
     See the Act on Budgetary Rules (No.218/2000 Coll.) section 4.




                                                               24
       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.

           Recommendations
               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

29
   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
of Finance.
30
     The Senate is not at all involved in the preparation and approval of the state budget (the Constitutional Act art. 42.2).




                                                                   25
               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
    report.

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




                                                        26
    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.

        Recommendations
            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
             financial control.

             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.

        Recommendations
            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
    administration."

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




                                                         27
      the “mandator”31, budget administrator, and chief accountant, in accordance with the section 26 of the Act
      320/2001.

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.

           Recommendations
               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.

           Recommendations
               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




31
     The “mandator” is the employee entitled to initiate a financial transaction.




                                                                  28
    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
    administration."

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
                      administration inspection
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
    Republic.

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.

        Recommendations




                                                          29
            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 :

                                                                      CHU
                                                             New entity composed of
                       Deputy Minister                           ex 171 and 173

                172                             174
       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”.




                                                        30
 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
     below :


Ministry of Finance      Financial control     Financial controls                Internal controls within the public
                           performed by       in accordance with                    administration bodies
                          control bodies         international
                                                  agreements
  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.

         Recommendations
             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




                                                           31
               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.


6.1.3.        Structure
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).

        Recommendations
            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
    Inspection (552/1991).

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.




                                                         32
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
    integrated approach)

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.

        Recommendations
            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.




                                                        33
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
    operational manuals.

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
    control).

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).




                                                         34
        Recommendations
            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




                                                        35
    general need for more systemic feedback, instead of individual sanction (be it at the level of staff or of
    transaction).

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
    decentralisation process.

        Recommendations
            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
             report.

             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




                                                         36
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
    concept.




32
 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.




                                                               37
        Recommendations
            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.

        Recommendations
            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,
                   and

               - 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.




                                                         38
      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
    Sapard Agency.

            Recommendations
                Department 17 should help to develop a generic audit trail document that can be adapted by public
                 administration bodies.

                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
                 bodies.

                Ideally the audit trails should be developed by operational staff but overviewed by internal audit
                 units


      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;




33
     For example, it is a requirement for SAPARD under EU regulation 1267/1999, reflected in the MAFA.




                                                             39
    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.

           Recommendations
               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
    context).

           Recommendations
               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.




                                                         40
              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
    activities.

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
                 financial matters.

        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
                government officials.

        4.      Effective and coherent systems and procedures of preventative, detective and directive control
                (wherever situated), based on an evaluation of control risks.




                                                          41
        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
                categories.

        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
reconciliation.

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.




                                                          42
        Recommendations
            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.




                                                         43
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.

        Recommendations
            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
    work.

        Recommendations
            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.)


    7.5. Fieldwork

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
    audited entity.

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.




                                                          44
- 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
    place.


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.

. Recommendations
          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
            (IAA) ;

             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.

        Recommendations
            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.




                                                          45
    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.

        Recommendations
            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
    systems.

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
    Harmonisation Unit.

        Recommendations
            Special training on IT audit should be started.

             In due course internal auditors should become familiar with the use of computer-assisted
              techniques.

             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.


    7.9. Reporting

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




                                                        46
    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.

        Recommendations
            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.


    7.10. Follow-up

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.

        Recommendations
            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.




                                                         47
    7.11. Standard framework for the activity of the Internal Audit Units : Purpose, Authority, Independence
         and Responsibility


7.11.1.       Purpose
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.

        Recommendations
            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).


7.11.2.      Authority
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.


7.11.3.   Independence
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.

        Recommendations
            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




                                                            48
               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
    peer review.

             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
                                                                     Dept
                                 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
            Bohemia
                                   Origin of staff           Previous Control Dept 2 from District office
                                  Staff assignment                 Dedicated               Dedicated
                                    Staff number                                               4
                                      Report to                                     Director of Regional
                                                                                             office
            MoInterior          Organisation of units              Separate                Separate
                                   Origin of staff           Previous Control Dept Previous Control Dept
                                 Staff assignment                  Dedicated          Internal Audit and
                                                                                          supervision
                                                                                        (supervision=
                                                                                    "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




                                                        49
                                    Staff number                       8                  3 auditors
                                      Report to                     Minister               Minister
           MoRegional            Organisation of units              Separate               Separate
           Development
                                      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 origin
                                  Staff assignment                                        Dedicated
                                    Staff number                      14                     3
                                      Report to                     Minister              Minister
           MoTransport          Organisation of units                          Common
                                     Staff origin
                                  Staff assignment                             Common
                                    Staff number                                  4
                                      Report to                                Minister
        SAPARD Agency              Origin of staff                    N/A           Newly recruited staff
                                     Staff origin
                                  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
    activities.

        Recommendations
            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
             organisations


    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.




                                                         50
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.

        Recommendations
            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


34
   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”.




                                                          51
    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.


        Recommendations
            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
              Act 320.


    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.

        Recommendations
            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
              open website.


    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
    expected assurance.




                                                         52
        Recommendations
            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
    down.

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.

        Recommendations
            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.




                                                          53
             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
    replaced).

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
    Administration.

        Recommendations
            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.




                                                          54
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.

        Recommendations
            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
              certificate.


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.

        Recommendations
            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
    administration.




                                                          55
        Recommendations
            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
    professional practices.

        Recommendations
            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
             audit work.


    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.

        Recommendations
            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




                                                         56
   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
       internal auditors.

   -   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
       auditors.

   -   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.




                                            57
                          VIII- Specific aspects of EU funds management and control


    8.1. EU-Funds

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
    membership.

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
      agency);

     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.




                                                        58
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.

        Recommendations
            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
              body.

             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
              EU Funds.


    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
    Commission.

        Recommendations
            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




                                                         59
                 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
               paying authority35.

              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
    procuring.

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.

         Recommendations
             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.




35
   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.
36
  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.




                                                               60
    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
    of Finance.




                                                          61
        Recommendations
            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
             audit responsibilities.

             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
    fund).

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.

        Recommendations
            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
    Czech Crowns.

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.




                                                         62
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.

        Recommendations
            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.




                                                 IX- Conclusions

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




                                                        63
    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.




                                                          64
y paper could be here needed.




                                                          64

								
To top