1. The meeting was attended by representatives of 24 SAIs who are members of the Working Group (membership 31 SAIs) plus observer representatives from 3 further SAIs. A list of participants is set out in Annex 1.
2. Welcoming the representatives, the Host of the 8th meeting, Dr Arpád Kóvács, President of State Audit Office of Hungary, said he was very proud of the contributions that members were making to the work of the Group. The meeting was also an excellent opportunity to strengthen the links between SAIs, and he and his colleagues were looking forward to bringing the participants up to date with the latest developments on privatisation in Hungary.
3. Sir John Bourn, Comptroller Auditor General of the United Kingdom and Chairman of the Working Group, thanked Dr Kóvács, on behalf of all participants, for the warmth of his welcome. It was a sign, not only of the importance with which members regarded the work of the Group, but also of their high regard for the State Audit Office of Hungary that so many of the SAIs were represented at the meeting.
4. The Chairman said it was very encouraging that members of the Group had prepared papers on how they had been using and testing these guidelines, while still in draft, as part of their audits. Those papers showed how the guidelines were being applied in the reality of the audit, underlining the Group’s aim that any guidelines they prepared for adoption by INTOSAI should have real value.
5. The Group noted that both sets of draft guidelines had been circulated in October 2000 to the full INTOSAI membership for comment. They agreed a number of amendments to the draft guidelines in the light of these comments and approved the final drafts for submission to and adoption by XVII INCOSAI. In recommending these guidelines to INCOSAI, the Group noted that the guidelines were concerned with the administration of policy, not aimed at questioning the policy itself which was a matter for government. There was no intention of seeking to replace the discretion of governments with that of auditors. The guidelines were meant to identify valuable lessons from experience which would demonstrate what was likely to work well, and also where ignoring this experience was likely to lead to difficulties for public bodies.
6. The Group agreed that these two new sets of guidelines would be a valuable supplement to the privatisation audit guidelines adopted by INCOSAI in 1998, underlining that privatisation was not just a one-off event but an ongoing process that is experiencing many changes and developments.
7. The Chairman thanked Dr Kóvács for his paper on experience of the audit of Hungarian privatisation. He welcomed Dr Macher, Deputy Director General of the Hungarian State Property Holding Company, who addressed the meeting on the reorganisation of the Holding Company, and also provided a paper.
8. The Group expressed their appreciation of both presentations, illustrating the progress made in Hungarian privatisation and also the work of the State Audit Office of Hungary in examining and reporting on those transactions. The presentations underlined that one chapter in the process of privatisation was coming to an end, with more emphasis now being given to the management of state owned assets. It was notable that even where it was the intention to retain these assets in public ownership, there was concern to see them handled as commercially as possible, as though they were in private hands. This tied in very much with one of the themes the Group was likely to be pursuing in its future work – collaboration between the public and private sector in a variety of forms, for example joint ventures, concessions and franchises.
9. Eleven members of the Group had responded to the questionnaire on the role of the state as a minority shareholder in private business. The survey report showed that in ten of these eleven countries the state had such a role, ranging from small numbers of post privatisation shareholdings to a considerable range of holdings (1365 in Poland). Such shareholdings arose in a variety of ways. In some countries eg Norway, the state had for many years been both a majority and a minority shareholder in a range of private companies; in others these holdings were a product of the privatisation process, either as a stage towards complete disposal of the state’s shares or intended to be retained.
10. In Norway a number of the companies in which the state had an interest were among the most profitable businesses. Other countries which had gone down the road of a clean break (full privatisation) were now back tracking not into old style nationalisation but into a variety of joint ventures with the private sector aimed at maximising value from state owned assets, where frequently the state was the minority partner. The UK paper on the commercialisation of state assets set out a number of examples where the UK government was encouraging public bodies to make greater use of state owned assets in association with commercial partners, for example, in exploiting the products of state funded research.
11. The survey showed that in most cases the state had no more rights than any other minority shareholder, and that in most cases the SAIs did not have audit access to the private businesses themselves. In spite of this, SAIs had managed to carry out audits of the administration of state holdings by those responsible in government ministries etc and were making reports and recommendations to those responsible for the shareholdings.
12. In the course of a wide ranging discussion it was noted that while the public sector partner and the private sector partner had shared concerns they did not always have shared interests. A key issue was how the state as minority partner could persuade the majority shareholder to act against what it might perceive to be its interests. There was a risk that the private sector partner would seek to secure as much as possible of the benefits while looking to the public sector partner for guarantees and indemnities, and to take responsibility if things went wrong. But if the operation was supposed to run in the interest of both parties the public sector should get its share of the benefits too.
13. In the absence of guidance, public servants had to operate these arrangements and to take decisions as best they could. The protection offered to minority shareholders gave some reassurance to public servants but might not be sufficient to meet the expectations of government and the public, unless these expectations could be identified in advance in some way and, for example, written into the articles of association of the business.
14. In the increasingly interactive ways in which public services were being delivered, the involvement of the private sector, through outsourcing, contracting out, joint ventures as well as outright privatisation, was likely to grow not diminish. Developments in electronic government alone meant that the issue of the seamless delivery of public services had become a demand, not an option.15. Patterns of audit access to the private businesses varied. In some cases the government had set up an operation in the form of a private sector company, even though it was the majority owner, in order to deny the SAI access. The division of holdings between the state and the private sector could be complex, making it very difficult without audit access to disentangle how the state subsidies were being used within the business or group of businesses.
16. Objections could be raised by the private sector partner to SAI
audit access where the private business already had its own private sector
auditors. What could the SAI add to that audit and would it be related to the
percentage of the state’s interest or something more? In a number of countries
the SAI only had audit access where the state was the majority shareholder. It
was noted, however, that practice varied. In one country the SAI had audit
access even where the state shareholding was as little as five per cent, subject
to that holding being at least of a certain value. Sometimes the SAI got
obtained access rights because there was concern among government and the public
that a private company carrying out a public function might be taking advantage
of its position. For example, in the United Kingdom public concern over the
level of directors’ remuneration in the company administering the national
lottery had led to the SAI being asked to audit the money that was due to come
to the state from the lottery.
Auditing in an outsourced environment
17. In discussing the issues raised in Mr Barrett’s paper, which
were clearly related to those raised in the examination of the role of the state
as minority shareholder, the Group noted that, in spite of having different
cultures, countries were confronting similar issues as the public and private
sectors try to work together in the delivery of public services. There was no
one recipe to cover all situations, rather a spectrum ranging from circumstances
where commercial realities were so predominant that private sector
considerations were likely to be in the lead to ones where public sector
expectations and requirements were paramount.
18. There was evidence that public servants had difficulty in understanding what business risk management and corporate governance were about and the role that audit committees and internal audit could play. In such circumstances they had great difficulty in identifying the optimal allocation of risk between the public and private partners and important issues such as securing access to the books were overlooked. The increasing variety of partnerships meant there were new issues of accountability to be confronted, including who would be held accountable for what.
19. It was essential for SAIs to be seen as relevant people making a contribution to the success of these new arrangements. SAIs had to maintain their independence while at the same time having the skills to make a contribution and to gain credibility through understanding the issues. In this way they could contribute to win/win outcomes so that people would have everything to gain and nothing to lose in co-operating with the SAI.
23. It was agreed that the secretariat would identify suggestions for supplementing the guidance for discussion in Norway.
25. The meeting discussed cases (for example casinos in the UK) where the SAI had identified grounds for withdraw fromreducing the policing of regulation by the state, leaving it torelying more on businesses to self-regulate, under the pressure of reputational risk and the need to maintain shareholder value. This underlined the need for SAIs to become still more sophisticated in their approaches. Another example of privatising regulation was where the UK House of Commons had contracted the external audit of the UK SAI to a firm of private accountants, rather than carrying out the work itself.
26. It was noted that an example of privatising regulation within the UK was where the UK House of Commons had contracted the external audit of the UK SAI to a firm of private accountants, rather than carrying out the work itself.
27. It was agreed that the development of guidance for SAIs in this area would also be useful to auditees because they would know the sort of questions that SAIs would be likely to raise; such questions might also enable the audited bodies to achieve a more satisfactory outcome.
29. Among the suggestions for consideration were ways in which SAIs might be encouraged to summarise details of such cases and the lessons learned for incorporation on the website, the addition of links to the websites of individual SAIs and other bodies, and a website structure which would facilitate access to these details. It was agreed that the secretariat would bring forward proposals for consideration at the 9th Meeting.
33. In carrying forward their work in preparation for XVIII INCOSAI (Budapest, 2004) the Group agreed that the discussions had demonstrated there was scope for seeking to draw up audit guidance in relation to the role of the state as a minority shareholder. The papers presented had demonstrated how the state was trying to deliver services through a variety of privatisation and concessions – partnerships, joint ventures, networking, new arrangements for procurement which went far beyond the letting of contract. The Group would wish to consider the extension of existing guidelines having regard to three significant points.
Budapest
June 2001