Role of audits in Economic Recovery After the Pandemic-SAI Hungary

The Fundamental Law of Hungary stipulates that its application may not be suspended under a special legal order, either, therefore the State Audit Office performed its constitutional tasks in the period of health emergency, too, as the supreme financial and economic audit institution of the National Assembly, identifying the economic and social processes triggered by the pandemic, and joining the leading international organisations of the world, the SAO drew attention to the risks of corruption and infringements, and the dangers of increased social distrust.

The SAO recognised it early that a significant part of the audited entities are affected themselves, too, in the defence against the epidemic, and the population needs it more than ever that it could turn to individual organisations and institutions with trust. It became clear that the majority of audits had to be conducted more efficiently by the institution, what is more, in a way that audits should put less burden on the audited parties in the period of the pandemic. Owing to the technological, digitisation and methodological developments completed in the past years, the SAO was able not only to increase the number of parties affected by the audits, but to widen its supporting and knowledge-sharing activities, too, in a number of ways, while putting less burden on the audited organisations and holding no personal meetings.

Parliamentary Resolution

Under the conditions modified by the pandemic, the SAO placed special emphasis on its knowledge-sharing and consulting activities. Our efforts in these areas are now supported by a Parliamentary Resolution, too, as in Resolution 17/2021. (VI. 16.), the National Assembly strengthened the consulting activities of the State Audit Office in order to improve public finances and the performance of public tasks, and to strengthen public trust.

This way the support received from the National Assembly further strengthens the objective of the SAO to use its wide-ranging knowledge-sharing and supporting activities, self-tests and analyses, studies and proposals and make the use of public funds more transparent and successful, and thus contribute to the efficient operation of institutions and systems involved in public services, for the benefit of the public. Another objective is to offer - through audits, proposals and analyses - professionally established guidance to institutions using public funds to make their operation and management systems sustainable, cost-efficient and transparent, and to strengthen their governing systems and apply operation principles of integrity approach.

Consulting and knowledge-sharing activity in the time of the pandemic

The modern and efficient role of the SAO in facilitating a well-governed state is not limited to traditional auditing activities only, as the Audit Office has been attempting to contribute to its statutory task by acting as a consultant, too, over the past few years. Since 2014, self-tests have been important consulting tools for the organisation, as they are based on auditing experience, and are worked out continuously for multiple target groups. It is a remarkable fact that the number of downloads of self-tests dramatically increased in the first quarter of 2020, which clearly indicated the fact that at the time of the announcement of the emergency situation in Hungary, institutions trusted and relied on self-teaching tools that supported their operation.

Under the conditions that have been dramatically changed by the pandemic, the State Audit Office placed special emphasis on widening its knowledge-sharing and consulting activities. In Hungary, the pandemic exerted especially high pressure on local governments, therefore the provision and the strengthening of transparency and integrity for these institutions was of key importance. In this respect, the SAO made history, as this was the first time in the history of the organisation that it carried out the present-time monitoring evaluation of all local governments and local government offices in Hungary. In the course of this system-level evaluation, the professionals examined the regulations that supported every-day operation and, among other things, ensured the proper, accountable and fraud-free operation of local governments. This way the SAO assisted in the observation of rules where and when it was needed most.

Present-time monitoring-type audit

The SAO’s dynamic increase of impact, which is illustrated mainly by the comprehensive evaluation of the local government system, was facilitated by the new type of monitoring audits of the institution. With the audits of this new approach, the Audit Office is able to assess the key areas of responsible management, accountability and transparency at multiple audited organisations at any given point of time. All that contributes to the increased number of audited organisations, as well as to the fast improvements in public finances and accountability. The objective of monitoring audits is to give present-time picture of the status of the audited area, identify deficiencies and allow for their management already in the process of auditing. Monitoring audits focus on the full range of organisations operating in the same legal environment, or on a special area of a group of multiple entities, this way the coverage of audits can be significantly increased, too. In the course of the audit, the SAO evaluates a low number of documents provided by all the organisations in the audited category, that are relevant for the audited area and are related to the regulations. Consequently, monitoring type audits present less burden for audited entities, make the time of audits shorter, and significantly reduce the volume of data supplied. In monitoring audits, the SAO does not oblige the audited entities to produce action plans, but relying on their commitment, under consultancy, asks them to make immediate actions, and this way initiates the implementation of favourable changes in public finances already during the audits, supporting the operation of the well-governed state.

Multi-level consulting activity

It is extremely important to point out that the objective of system-level evaluation is not reprimanding, but facilitating development, and triggering positive changes. In the first step, already in early 2020, the SAO drew the attention of the leaders of local governments and offices to the basic regulations and records that are essential for setting up integrity controls and creating the conditions of regular and fraud-free economic management. In the course of the audit, the professionals of the SAO evaluated the 26 basic documents that have to be continuously available, as they ensure the conditions of the regulation of given local government, its regular and transparent management and fraud-free operation.

In the second step, the SAO helped the data supplies of local governments, and then in the third step, cooperating local governments and local government offices were able to remedy their deficiencies already during the audit. This is extremely important, as the improvements in these regulations and records were enforced already in the production of the reports for 2020.

In 820 settlements, the SAO basically found everything in order, and in more than 1050 settlements, mayors and notaries - based on the notice of the Audit Office - took steps already during the audit to eliminate deficiencies. In the case of 1330 local governments, the SAO highlighted the areas where local governments and local government offices could make progress. The openness and the willingness of institutions to cooperate showed that most of them already consider the SAO not only as an auditor, but as a partner who supports their lawful operation, too.

Trainings, sharing of good practices

As the next step of supporting activities, after the system-level evaluation, the State Audit Office announced and organised an on-line training for notaries managing local government offices, in order to share experience gained during the audits and to distribute identified good practices.

More than 600 notaries attended the first training course, and they were able to extend their knowledge through training videos, professional presentations and questionnaires, for the further strengthening of the regular operation of local governments. The success of the training course surpassed all the expectations of the SAO, as 96% of the participants indicated their satisfaction with the course, and how the knowledge acquired contributed to the performance of the notary tasks at a higher level.

The results of the first course and the received extremely positive feedbacks clearly indicated that there would be demand for the organisation of a second level. This is going on now - while this article is being written - with great interest again. This time the on-line training focuses on typical and significant errors identified in audits, various practical examples and the methodology of performance management. It is important to expand the notaries’ knowledge about performance management, as it is possible to identify management tools in public administration and the government sector, too, which assist organisations in achieving good results with the economical use of resources and efficient processes, and in creating long-term and sustainable added value. All this is perfectly in line with Resolution 26/2020 (IX. 22.) of the National Assembly, which draws the attention of organisations managing public funds to the performance-based use of public funds.

Analyses of the SAO

In the activities of the State Audit Office, special emphasis is laid on analyses, too, which also strengthen the consulting role of the Audit Office and contribute to the operation of a well-governed state. In its analyses, the SAO makes no statements, but highlights relations and impacts, drawing attention to dilemmas and risks in a given area.

In the period of the pandemic, all the analyses published concentrated on current and important issues, and in many cases reflected on economic and social changes triggered by the virus situation. For instance, the analyses of the SAO presented the impacts of the coronavirus epidemic on public finances, and the consequences for the labour market and domestic tourism. In addition, analysts pointed out various aspects of re-thinking integrity controls and risks, and of the competition on the market, and contributed to the evaluation of the experiences related to digital education and working from home.

In the past period, the coronavirus epidemic has basically determined every-day life, therefore the professional authenticity of information related to the spread of the virus, the importance of vaccination and the impacts of the pandemic has special importance. As the reliability of news about the epidemic is often questionable, it is extremely important that the SAO supports decision-makers with professionally reliable analyses, and that the clear language of analyses raise interest in domestic population and contributes to their collecting information from authentic sources.

3. Determining a transparent estimate of borrowing needs in accordance with the country's financial situation.

In international practice, countries have their own guidelines for determining the need for borrowing, and these guidelines have been formally developed and approved in the course of the document.

As a result, it is recommended that the Ministry of Finance develop guidelines and guidelines for the transparency of the borrowing process that include the stages of formal borrowing procedures and include the annual debt, estimated budget deficit, estimated cost of the asset and contingent liabilities. development of regulations governing the need for unifying Borrowing.

3. Prospects for effective operation of the state debt policy

The optimal threshold in the field of public debt should be limited to borrowing directly directed to the production sectors and public capital investments in the social sphere. We consider it expedient to pay special attention to the following issues in the field of forecasting and management of public debt;

• The flexibility of public debt plans must be ensured.
• Public debt plans should be both mandatory and guiding.
• By forecasting inflation and other macroeconomic imbalances in the country, they must control the negative effects they can have on public debt management.
• The process of collecting financial information should be fully ensured in order to improve public debt planning.

The experience of developed countries is of great importance for the establishment of public debt relations. Thus, the experience of these countries in the field of public debt must be studied in depth and must be used in the development and implementation of economic reform programs. Along with all this, the peculiarities of the national economy must be taken into account. Because in international practice, any reform that has yielded positive economic results can lose its effect under the influence of demographic, national, psychological factors within the national economy. It is considered expedient to have the following main directions of the state debt policy;

Foreign loans attracted as public debt should be directed mainly to real production and services, which are more important in terms of economic development. This is mainly important in terms of public debt management in line with the requirements of the current situation.

a. The predominance of domestic public debt is also favorable due to a number of other features. As it is known, the state, as a borrower, pays for its loans. The payment of these funds to domestic entities creates conditions for them not to leave the country, and this aspect is beneficial for economic growth.

b. The country's economic needs for credit should be met not through government loans, but through banks and other credit institutions. This is due to another form of economic policy of the state - credit policy. Commercial banks and non-bank credit institutions must meet a large part of the country's credit needs. In addition, specialized banks should be established in the country, which should offer cheap and soft loans in accordance with the requirements of each sector. Although this policy is not directly related to public debt, it also reduces public debt by reducing the amount of public credit directed to the economy.

C. It is necessary to increase confidence in government securities by paying off debts on government securities in a timely and full manner, to issue securities in accordance with the current economic situation, thus ensuring the development of the government securities market.

In modern conditions, in most developing countries, public debt is repaid through public borrowing. This means replacing one problem with another, even if it prolongs the term of the obligation in terms of public debt. Thus, loans to production and services should be repaid at the expense of the profits of these sectors, so as not to become a heavy burden for the state. Based on the experience of developed countries, the role of financial regulators, especially taxes, in public debt policy is not insignificant. This is especially true for loans in a number of areas, as well as state-guaranteed loans. Thus, the state, in addition to controlling the activities of these enterprises in connection with borrowed funds, will improve their financial situation by easing the tax burden, and ultimately ensure the full repayment of loans. As a result, it is expedient to define specific methods and techniques of organizing public debt relations through the development of a strong package of laws in the country, and at the same time to include in this task the methods of organizing the work of the Ministry of Finance.

4. Contingent Liabilities

According to international practice, in many countries the obvious contingent liabilities are not reflected in the balance sheet. In addition, if any contingency is contemplated in the future and any rights or obligations are required, failure to specify contingent liabilities could lead to a critical financial and economic situation in the country. Contingent liabilities may also increase when banks provide internal or overt guarantees, when public and private enterprises are under stress, and when the government intervenes in the financial system.

Taking all this into account, based on international experience, we consider it expedient to apply the following procedures.

• - Given the significant impact of contingent liabilities on debt sustainability and fiscal resilience, it should be included in the debt sustainability analysis in conjunction with stress tests;
• - Development of regulatory rules for the purpose of constant control and effective management of contingent liabilities,
• - Management of debt burden and liabilities, including debt sustainability analysis, creation of alternative scenarios and stress tests, identification of country-specific factors (internal indicators).
• - According to international practice, in many countries, the lack of information on the measurement of contingent liabilities, terminology and their classification, as well as the non-disclosure of information about them in the financial statements violates the principle of transparency in the balance of public debt and incorrect classification of contingent liabilities.

Lack of information on contingent liabilities and their classification in terms of legal status can lead to serious problems in their management, monitoring and accountability. For the qualitative audit of public debt and contingent liabilities, first of all, the JCA requires the development of appropriate legislation and guidelines for the correct classification of contingent liabilities, and we would also like to note that it is advisable to take into account the country's goals and international experience.

• - Financial crises not only paralyze the economies of many different countries over time, but also turn them into direct debts in contingent debt. In this regard, a crisis protection system should be established;

First - the identification of potential risks

Second - effective monitoring.

Third - the detection and elimination of risky processes in debt management.

One way to effectively control the level of contingent liabilities (to determine the amount of contingent liabilities, to establish monitoring and evaluation guidelines) is to centralize all information related to contingent liabilities in a centralized manner by one financial institution.

5. Improving Public Debt Management.

One of the main sources of public debt management is to ensure control over the use of state-guaranteed loans. As it is known, while the users of these loans are various independent economic entities, the state is the entity responsible to foreign creditors for the return of these funds. Therefore, it is recommended that the relevant government agencies exercise strict control over the efficient use of borrowed funds to ensure their timely repayment and develop a new action plan to implement the above-mentioned issues of the public debt mechanism and implement it taking into account the existing economic conditions.