Commission Report (2002): Latvia

• Progress since the last Regular Report
• Overall assessment
• Conclusions

Chapter 28: Financial control

Progress since the last Regular Report

Latvia has continued to make good progress in this field since the last Regular Report.

The Public Internal Financial Control (PIFC) systems have evolved further. In December 2001, a Regulation was adopted obliging state enterprises and state institutions subordinated to ministries to establish the internal audit function. The scope of the internal audit system has now been extended to all budget income and spending centres. No new developments can be reported with regard to the Internal Audit Law. Regulations were adopted in January 2002, introducing the concept of managerial accountability in public agencies and providing for its implementation.

As regards administrative capacity in the area of internal audit, the Internal Audit Department of the Ministry of Finance, which is responsible for harmonisation of the internal audit methodology in the public sector, has received 3 new posts in addition to the 11 staff in place in 2001. Training of staff of the Internal Audit Department has continued through seminars, courses and conferences. A human resources development plan is currently being elaborated to provide for staff training on a regular basis. In terms of implementation guidelines further progress has been achieved. An Audit Charter has been developed and approved. The number of auditors in the government sector has now been increased to 196.

Latvia has made further progress in the area of external audit. A new State Audit Office Law amending the existing law entered into force in June 2002. It now ensures the operational, functional and improved financial independence of the State Audit Office (SAO). The Law provides for a wide scope of audits including the authority to audit final beneficiaries of EC funds. The SAO has adopted INTOSAI (International Organisation of Supreme Audit Institutions) auditing standards and carries out financial and performance audits. The SAO has also developed an audit manual.

To ensure implementation of the new Law, 15 posts have been created in the SAO, in addition to the 201 staff in place. The SAO`s Strategic Development Plan 2000oe2005 continues to be implemented. It provides for training for 80 staff members, currently under way, in the area of financial and performance audit. The first pilot audits were carried out in close co-operation with the European Court of Auditors and were completed in January 2002. A common audit methodology and techniques have been adopted and tested.

Latvia has made some progress in the area of control over structural action expenditure. In December 2001, the Commission adopted a Decision provisionally conferring management authority for SAPARD, on a fully decentralised basis, to the SAPARD Agency. The Commission's guidelines concerning certification of Latvia's accounting procedures have been respected and judged satisfactory. The Internal Audit Department is setting up a database for reported irregularities in the administration of SAPARD and ISPA. Concerning ISPA implementation, in general, good progress has been made to establish a management and control system. Latvia has started to establish quarterly reports on irregularities in SAPARD or ISPA programmes. Latvia has already started the gap assessment exercise which is the first step leading to the extended decentralised implementation system (EDIS).

The Latvian authorities have put forward the Ministry of Finance`s Internal Audit co-Ordination and Methodology Division as anti-fraud co-ordinating service, responsible for the co-ordination of all activities related to the protection of the financial interests of the European Communities. Further clarifications are needed in this respect.

Overall assessment

Although in Latvia the Public Internal Financial Control (PIFC) system seems to be generally in place, legislation needs to be adopted to ensure the functional independence of internal audit, including procedures for the appointment and dismissal of auditors, audit planning and reporting. The new Framework Law on Internal Audit currently under discussion needs to be adopted. Further efforts should aim at strengthening managerial accountability, in particular by refining the Law on Budget and Financial Management. Guidelines for setting performance targets for all budgetary bodies should be developed. A Code of Ethics for auditors in Latvia needs to be endorsed. Financial management and control manuals for national and EC funds remain to be completed. Further work is required to develop the concept of audit trails and prepare audit trails for Community funds.

Regarding external audit, the new State Audit Office Law has further strengthened the financial independence of the State Audit Office (SAO) by abolishing the current practice of financing the SAO from fines and surcharges imposed on auditees. A formal mechanism in Parliament to discuss the SAO`s reports and recommendations remains however to be introduced. In addition, INTOSAI (International Organisation of Supreme Audit Institutions) auditing standards including guidelines and the audit manual need to be approved and implemented. Latvia needs to further develop the operational capacity of the SAO.

With regard to the control of structural action expenditure, substantial efforts need to be made in order to enhance Latvia`s capacity to manage pre-accession funding and future structural funds, in particular through the establishment of clear PIFC rules and procedures, together with substantial reinforcement of Latvia`s administrative capacity in this regard (see also Chapter 21 -- Regional policy and co-ordination of structural instruments). The development of mechanisms for the rapid recovery of lost EC funds is equally important. Latvia needs to reinforce and accelerate efforts leading to the extended decentralised implementation system before mid 2003 in order to allow EDIS accreditation to be achieved in the second semester of 2003.

With regard to the protection of the European Communities` financial interests, Latvia needs to ensure operational independence of the anti-fraud service responsible for the co-ordination of all legislative, administrative and operational aspects of the protection of the European Communities` financial interests. Latvia also needs to put in place the necessary legislative and administrative framework to allow this service to carry out its co-ordinating role, including a definition of relations with other institutions or bodies involved in the protection of the Communities` financial interests.

Conclusions

In its 1997 Opinion, the Commission concluded that Latvia would need to make substantial efforts to establish the necessary management and control mechanisms to cope with EU requirements. The Commission added, however, that if the necessary initiatives could be taken in this respect, this field would not appear to represent a major obstacle, in the medium term, for Latvia`s accession.

Since the Opinion, Latvia has made good progress in developing its Public Internal Financial Control systems as well as completing alignment in the field of external audit.

Negotiations on this chapter have been provisionally closed. Latvia has not requested any transitional arrangements. Latvia is generally meeting the commitments it has made in the accession negotiations in this field.

In order to complete preparations for membership, Latvia`s efforts now need to focus on completing the establishment of a well-functioning Public Internal Financial Control system in compliance with EC requirements, including, in particular, the completion of alignment of internal audit legislation so as to ensure functional independence of the internal auditor. Latvia will have to take all the necessary measures to ensure that the use of EC pre-accession funding is adequately managed and controlled and further develop its legislative framework and administrative capacity to protect the Communities` financial interests.

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