INTOSAI Working Group on the Audit of Privatisation

Papers for the Ninth Meeting

Oslo, 10 and 11 June 2001

Using the Guidelines

1. The Working Group have produced three sets of guidelines on best practice for the audit of:

• privatisations (adopted by INCOSAI in 1998);

• economic regulation (adopted by INCOSAI in 2001); and

• public/private finance and concessions (adopted by INCOSAI in 2001).

2. At their eighth meeting in Budapest in June 2001 the Working Group agreed that they should continue to monitor the effectiveness of these guidelines, from three viewpoints

• are the guidelines assisting SAIs in planning and carrying out audits?

• how can the guidelines be shared with audited bodies, not only to show them the criteria that the SAI will use, but as best practice that auditees themselves might wish to follow?

• is there scope for the SAI to provide guidance to audited bodies before deals are made, and projects completed, not as a system of pre-audit, but as helping the auditee to improve performance and accountability?

3. This note considers each of these aspects.

A. Planning and carrying out audits

4. At the Working Group's meetings in Buenos Aires in 2000 and Budapest in 2001, members provided papers setting out their practical experience of using the guidelines.

5. The papers and subsequent discussions showed that many SAIs have found the guidelines to be of value in planning and carrying out audits. Papers by the SAI of Hungary on the audit of privatisation (Buenos Aires, 2000) and of the SAIs of Argentina and Poland on the audit of economic regulation (Buenos Aires, 2000) went through the guidelines, relating them to their audit methodologies, and explaining how the SAIs had addressed the issues highlighted by the guidelines. Papers on public/private finance and concessions by the SAIs of Hungary and Poland (Budapest, 2001) used individual audit projects as case studies to illustrate the relevance of the guidelines in practice.

6. These papers, and the subsequent Working Group discussions on these and other privatisation case studies presented by other SAIs (eg Albania and Denmark), underlined the message in the guidelines that SAIs need to have regard to their particular mandates, and the context within which they operate, in deciding which are the most useful and relevant guidelines for their purposes. For example:

   Public/private finance and concessions

   The SAI of Hungary noted the importance of selective application of the guidelines, depending on local circumstances. For example, they noted that their own audit did not consider the level of experience in the purchasing authority's project team, because concessions projects were so new in Hungary that nobody had experience of procuring them (Budapest, 2001).

   The SAI of Poland noted that there are "differences in tradition, standards, scope and methodology of the auditing process, and even in basic audit terminology that may hinder a direct and effective use of the guidelines during audits" (Budapest, 2001).

   Economic regulation

   Underlining the importance of Guideline 2 (the regulatory framework), the SAI of Poland noted that, when undertaking an audit of an economic regulator, the audit "cannot be limited to performing an audit of that regulator only; it must cover also other institutions whose activity might determine the decisions made by the regulator" (Buenos Aires, 2000).

7. Another common theme emerging from the comments was the relevance of the guidelines relating to the skills required by the SAI; it is crucial for the SAI to develop and maintain expertise in the audit of what are often complex and highly technical transactions, and hiring expert consultants where necessary.

B. Sharing the guidelines with audited bodies

8. Performance audit should be a source of constructive advice to practitioners. So although the guidelines are addressed to auditors, setting out best audit practice, a good test of their value added is whether decision makers also find them useful, of genuine help in devising and constructing deals and projects. This message was underlined by Mr Gejza Halász (SAI Hungary) in his paper "Auditing Concession Contracts" presented at the eighth meeting of the Group in Budapest: "the value for money evaluation done by either the authorities and the auditors is a reasonable idea in every respect. Nevertheless, I have to draw the conclusion: it is more important to make the decision-makers understand this idea than to audit it".

9. A number of SAIs are sharing the guidelines with both the management and internal auditors of audited bodies. In Hungary, for example, the SAI shared the privatisation audit guidelines with the State Holding Company at an early stage, well in advance of SAI audits, so that the Holding Company could take them into account and internal audit arrangements. And in the UK, the SAI sought the views of the Finance Ministry and the economic regulators at the drafting stage of the guidelines, in particular on their likely value to decision makers.

10. The Working Group have sought to make the guidelines as widely available as possible: all the guidelines are available on the Working Group's website in all 5 INTOSAI official languages. In addition, the SAI of the Czech Republic has translated them into Czech and provided the texts for inclusion on the website.

C. Providing guidance to audited bodies before decisions are taken

11. Making the guidelines available to audited bodies can be a very effective way of providing general guidance before the auditee takes decisions on particular cases: the guidelines set out general principles, identifying issues that may need to be addressed in specific circumstances, seasoned with case examples. In addition SAIs are increasingly being asked to advise audited bodies on particular transactions before decisions are taken. Guideline 3 of the privatisation audit guidelines advises that

    The SAI should become involved in the privatisation process as soon as constitutionally possible, consistent with maintaining its independence.

12. In Budapest, and in previous INTOSAI discussions, SAIs exchanged experiences of their involvement in the privatisation process. A number of SAIs (eg Germany, the Netherlands) have in a number of instances examined such transactions before they take place, and have been able to carry out a corrective role. In other countries, the SAI has not hitherto been involved to this extent before decisions are taken. For example, the SAI of Hungary noted that "in the Hungarian practice, the SAI does not directly interfere with the privatisation of state-held businesses; instead it audits the process after its completion". In commenting on the public-private finance guidelines, however, the SAI of Poland commended pre-transaction appraisals, referring to "the necessity to undertake earmarked audits focused on the intention to co-finance tasks from public and private funds, and carried out before the public entity makes a decision in this respect."

13. In the United Kingdom where, like Hungary, it has not been the usual practice to become involved in transactions before they were completed, the SAI responded positively to a request by Parliament to provide a financial analysis of the proposed public/private partnership for the London Underground. The SAI decided to bring forward this part of work which they would normally do after deals were signed. They concluded that they should report only on the financial analysis, however, because of concerns that a report on the value for money of the proposed partnership would lead to them becoming too involved in the decision making. This would have been inappropriate for the SAI as it is the external auditor of the responsible government department. Involvement in the department's detailed work – either condemning or supporting it – would diminish the SAI's ability to report objectively (and to command acceptance as reporting objectively) to Parliament on the final outcome. In its report to Parliament on the financial analysis, the SAI emphasised that the final decision on the proposed partnership would need to be taken on wider value for money grounds, on which the SAI would report once that decision had been taken.

14. The recommendations of XVII INCOSAI (Seoul Accords) on Theme II: the contribution of SAIs to administrative and government reforms are of relevance. While recognising "the widely differing mandates, political and institutional arrangements, and capabilities within which individual SAIs operate", SAIs are urged "to consider how their independent audit mandate provides a foundation for expanding and evolving the roles they can assume during the planning and implementation of these reforms". There was "widespread agreement that the lack of a specific mandate should not preclude SAIs from making substantive contributions". While recognising that "SAIs must be very cautious … in order to protect their independence", the Seoul Accords recognised that, in addition to the audit role, there is also scope for the SAI to act as advisor, researcher and developer of guidance to audited bodies, provided of course that the SAI is able to develop the key competencies needed for these roles.

Points for Consideration

A. Planning and carrying out audits

• Are there any gaps in existing guidelines that should usefully be filled (in addition to the issues to be covered in the new guidance which the Group is already considering on public/private partnerships)?

• Which guidelines in particular have audited bodies found to be useful, and have and guidelines given auditees problems?

• What further publicity can be given to the guidelines?

C. Providing guidance to audited bodies before decisions are taken

• What case studies can SAIs provide showing the issues they have needed to address in examining proposed transactions before the audited body has taken a decision?

• In such cases, has the SAI subsequently experienced any difficulties in examining and reporting on the deals after they have been concluded?

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