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Conduct of performance audit of the republican budget planning, "Public audit" journal № 4 (37)

The Head of the State in his Address to the nation of Kazakhstan, dated December 14, 2012, “Kazakhstan-2050” Strategy”: new political course of the established state” put the task before state financial control bodies to create a complex system of the state audit based on the international best practices.

In the furtherance of this goal, the Law of the Republic of Kazakhstan “On the state audit and financial control”, where performance audit of the republican budget execution was indicated as one of the main directions of the performance audit, was accepted.

In the world practice, the performance audit of the budget planning exists in different forms. One of them is preliminary audit, the specifics of which has a preventing character aimed at determining the justification, practicability and reliability of the planned indicators and decreasing the risk of possible financial violation in future.

The performance audit of the republican budget planning was not conducted in the Republican of Kazakhstan.

In this connection, the study of experience of foreign countries plays an important strategic significance as the efficiency of the budgetary funds and assets depends on the quality of the conducted audit activities on budget planning. Consequently, a system analysis of foreign practice of conduct of the performance audit of the budget planning, with elaboration of the recommendations and preparation of the methodological base on conduction of such work in the Republic of Kazakhstan, is needed.

In 2017, RSE “Center for financial violations research” of the Accounts committee conducted the analytical research on the topic: “Research of the conduct of a performance audit of the republican budget planning in accordance with the principles of the budget system in the Republic of Kazakhstan with elaboration of methodological guidelines tested on the bases of the pilot project”. In the framework of this research, the foreign experience was studied, the approaches and algorithm for conduct of the performance audit of the republican budget planning were elaborated, the proposals and recommendations on the procedures of conduct of the performance audit of the republican budget planning were formed, as well as the project on methodological guideline on conduct of the performance audit of the republican budget planning was elaborated.

In this article we present the main results of the conducted research and define the main proposals and recommendations we has formed in the framework of this research.

Considering the experience of the foreign countries, it should be noted, that in this or that state, the SAI bodies conduct the audit activities in different scales. Therefore, the study of the mechanisms and procedures of their conduct allows to justify certain findings and proposals: depending on the function and tasks put to the SAI.

In Belgium and Russia, the performance audit of the budget planning is performed at all stages of the budget process: ranging from studying the macroeconomic indicators and impact of income and expense budget parameters to the assessment of the income base and budget expenses, as well as the assessment of the deficit and sources of its financing.
For example, the Accounts Court of the Kingdom of Belgium gives to the legislative meetings own comments concerning all budget projects, presented for consideration to them, previously putting them to the vote. It is legally defined that the Accounts Court investigates both budget implementation and budget project.
The main task of the Accounts Court in relation to the budget project is to check its validity, which is as follows:
1)    if the budget project is full;
2)    if all principles are included (observed);
3)    give an estimation to the notes
4)    if the used parameters of the macroeconomics are feasible (useful) (comparing them with the forecasts of different above-mentioned Advices);
5)    if the incomes and expenses are feasible (underestimation vs. overestimation).

In this connection, to our opinion, the experience of Belgium can be used in elaboration of the methodological provision of the performance audit of the budget planning in the Republic of Kazakhstan.

In Russia the state audit standard SAS 201 “Preliminary audit of federal budget forming” is elaborated and approved. The process starts in May from the analysis of the annual address of the President of the RF and ends up in November with the participation of the representatives of the Auditing Chamber in consideration of the budget project in Duma and at the Federal meeting.

Meanwhile, it is performed the assessment of:

- the efficiency of the federal budget project for another financial year and for the planning period as the tool of social-economic policy of the state, its correspondence to the provisions of the annual and Budget addresses of the President of the Russian Federation and other program documents, conformity with the conditions of the medium-term planning oriented at the end result;

- the quality of forecasting of the federal budget incomes, budgetary funds expense, investment and debt policy as well as the efficiency of the inter-budget relations.

Besides, in some countries the SAI takes part in the process of budget planning in the form of consultations by the results of the audit activities.

For example, in Germany the process of budget planning consists of two stages:
1. Each ministry directs to the Federal Audit Chamber (hereinafter as - FAC) its budget project straight after the preparation (the FAC has a possibility to consider and give its comments to each ministry before federal budget project preparation).
2. The FAC also takes part in discussion of the budget project in the Parliament. The FAC presents to the Parliament oral and written reports about the results of preliminary talks with the elaborators from the Budget committee as well as the results of follow-up meetings on the budget. However, the FAC relies on own audit experience.

Here, like in the control over the budget execution, the control over the observation of the budget legislation and management efficacy norms comes into the picture. The conclusions, made in the course of a control, can lead to the introduction of amendments to the republican budget in the current budget year. However, the planned, but inefficient expenditures can be possibly frozen.

In such countries as the Netherlands, the Great Britain, a peculiar attention is paid to the quality of budget forecasting, the issues of making the amendments and additions to tax legislation and their impact on forming of the revenue. When considering the budget project, the quality of budget income forecasting, impact of tax reliefs, preferences on budget income bases are studied at the same time.

The Netherlands conduct the audit of realization of the policy of the Government and its impact on the development of economy. However, the SAI pays attention to the issues of the efficiency of tax and budget policy. The Accounts court also checks, if the central Government functions in a proper way. In other words, it assesses if the Government legally uses the tax returns received from citizens and enterprises. With transition to the budgeting by results the information about the achievement of the aims of the conducted policy is received once a year during the checking correctness of the accounting. The financial information is all the more brought into line with the information about the results of policy realization and budgeted values, the attention to the aims of the policy conducted by the state during the process of budgetary funds allocation increases, strengthening by this a traditional responsibility of the Accounts Court in the audit of financial statements.

The US Office of the SAI prepares long-term federal budget stimulations with variations of financial and political decisions, that is, the Office estimates the long-term effect of various political and financial decisions on the economy of the USA. The experience of the US is particularly interesting due to the fact that the SAI of this country perform the preliminary assessment of only those projects that fall into the category of significant ones clearly specified in the US Congressional Review Act. With regard to the tight schedule and the limited human resources the US experience and particularly the mechanism of differential approach to draft budget assessment will be practically useful for Kazakhstan.

 At the same time, one should note that international standards for draft budget planning performance auditing have not been developed by INTOSAI. However, INTOSAI provide for the basic principles of an audit in the public sector which may be used on a regular basis for auditing and as auditing standards if no national auditing standards have been developed.

In the Republic of Kazakhstan the republican planning process consists of the following steps:
- SEDP project development and approval by the Government of the Republic of Kazakhstan;
- determination of the limits for expenses of the republican budget program administrators (hereinafter – RBPA), limits for new initiatives;
- development of the draft strategic plans, budget programs of the central state bodies and RBPA that do not develop strategic plans, budget requests from RBPA, and review of the projects by the Republican Budget Commission (hereinafter – RBC);
- development of the RB draft law;
- introduction of the RB draft law to the Government of the Republic of Kazakhstan and the Accounts Committee;
- presentation of the RB draft law in the Parliament of the Republic of Kazakhstan;
- review of the RB draft law by the Parliament of the Republic of Kazakhstan and its approval;
- development of the resolution by the Government of the Republic of Kazakhstan to implement the RB law.

The analysis of the republican budget planning process in the Republic of Kazakhstan shows that the agreement between the monetary policy and the fiscal policy revealed during the budget planning is insufficiently comprehensive. This results in the non-correspondence of the decisions made by the Government during the budget formation with the indicators of the key program documents. Since 2013 the statistical documents have provided for the reduction of the budget deficit. However the republican budget deficit planned for 2017 is 3.1% while the GDP has increased 1.5 times compared to 2013. A similar situation was in 2014 and 2015. Under such conditions the Government of the RK borrows considerable means on the domestic market and on the foreign market by issuing the government securities. This does not develop the share market and the credit market in the republic; besides, the expenditures for the government debt servicing and repayment increase with the currency market being unstable in the republic.

It should also be mentioned that the strategic plans of the state bodies are poorly oriented at solving the problems posed in the state and government programs. The time provided for the review of the draft strategic plans of the state bodies and the budget programs with the state bodies performance evaluation result and budgetary funds management programs is not agreed in the republic, which results in the contravention of the principle of continuity and soundness of the budget system.

Presently, amendments and additions have been introduced to the RK Budget Code in order to enhance the efficiency of the budgetary expenditures and the responsibility of the budget program administrators. For instance, the procedures for consolidating budget programs with several sub-programs from one program. The administrators have the right to redistribute the funds among the sub-programs without changing the approved amount for the program. This requires the development of certain criteria for the inclusion of sub-programs into the program, since the direct and the final results of the sub-programs can vary. Thus, it is would make sense to finalize the laws and regulations, and particularly the Order of the Minister of National Economy "On approval of the Rules for budget program (sub-program) development and approval (re-approval), and the requirements for their content" No. 195 dated December 30, 2014.

One of the key problems of RB planning is the lack of a systematic approach to establishing limits for budget spending and new initiatives. As a result, the strategic plan is not comprehensively agreed with the budget program and the corresponding budget request. This leads to a lack of a clear relationship among the budget resources, activities, direct and final results. Therefore, it is advisable to analyze the mechanisms for drawing up a strategic plan, budget programs and budget requests, and based upon this, develop an automated system of verification of their agreement, acceptance of budgetary requests related to drafting the republican budget.

Currently, the strategic plans of the state bodies being the main PBB tool contain a subsection "Risk Management", but the information contained therein does not give an idea of how the activities of the risk management state bodies contribute to the achievement of strategic goals.

Therefore, an integrated assessment of budget risks and publication of the results are recommended; and this information is also recommended for inclusion in the budget documentation submitted to the legislative body in order to improve fiscal transparency.

Presently, the inclusion of the information on tax expenditures (budget losses due to provision of tax exemptions and preferences) in the budget documentation is not legislated. The information on the reduction of budget revenues resulting from tax exemptions is not disclosed. Therefore, it is recommended to provide reporting on tax expenditures, including the assessment of possible losses of budget revenues as a result of certain provisions of the Tax Code of the RK. One should ensure that this report is included in the budget documentation and submitted to the Parliament of the RK as part of the budget documentation for the draft national budget and for the report on its implementation.

Thus, it should be noted that the above conclusions and recommendations will make a certain contribution to the creation of the methodological base of the state performance audit and the determination of the criteria of effectiveness in the field of republican budget planning, complying with the INTOSAI standards with due regard to the budget legislation.

Serik Nugerbekov, Member of the Accounts Committee for Control over Execution of the Republican Budget

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