Commission Report 2002 (Hungary)

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

Chapter 28: Financial control

Progress since the last Regular Report

Since last year`s Regular Report, Hungary has made little progress in this area.

In the area of Public Internal Financial Control (PIFC), Hungary has overhauled its system for budget execution. Through amending the Public Finance Act, the Hungarian State Treasury Ltd. (HST) has been split into three separate units, (a) dealing with appropriations and commitments of the State Budget and supervising the territorial state budget offices, (b) managing the state/government debt, and (c) executing payments under the state budget. This is part of a general reform in public finances designed to separate regulatory and cash transfer functions and to make Hungary`s public finances more transparent. Furthermore, the amendment of the relevant government decree, which came into force in January 2002, stipulates, inter alia, a series of improvements concerning the supervision of budgetary commitments at the level of spending centres.

No further progress was achieved in the field of internal audit.

As regards external audit, no further developments regarding legal alignment can be reported, since the relevant legislation is already largely in line with the acquis. The administrative capacity of the Hungarian State Audit Office (SAO) has been further strengthened. A total number of 322 persons participated in financial control training between 2000 and March 2002. The SAO is currently preparing a new strategy targeting further methodological development, including training of auditors. In accordance with a parliamentary decision, the SAO informs Parliament on a regular basis on the state of follow-up of its recommendations by relevant government bodies. All SAO reports are sent to Parliament and made public.

Hungary has made some progress in the area of control over structural action expenditure. An amendment to the decree on financial planning, utilisation and control of the pre-accession instruments came into force in January 2002. It defines the audit trail, and contains the obligation to establish internal audit units that operate as independent units within the implementing organisations and to elaborate audit plans. The amendment also specifies the sanctions to be applied in case of misuse of funds. Hungary has made progress towards the establishment of the Extended Decentralised Implementation System (EDIS). In December 2001 the Government Control Office (GCO) carried out a systems audit on the financial management system for pre-accession funds. The gap assessment exercise, which is the first step leading to EDIS, has been completed in February 2002. Every institution covered by the gap assessment has elaborated its action plan for filling the gaps identified. The establishment of a financial control system for the accreditation of the SAPARD Agency is in the last phase .

In November 2001, the anti-fraud co-ordinating service was set up as a separate unit within the Ministry of Finance`s Department for Legal Affairs and co-ordination. It is responsible for the co-ordination of all legislative, administrative and operational activities related to the protection of the financial interests of the European Communities. In addition, a Standing Inter-Ministerial Committee was set up in order to facilitate co-ordination with other Hungarian institutions involved in the protection of the Communities` financial interests. While both bodies were set up as of January 2002, they have not yet become fully operational.

Overall assessment

With regard to Public Internal Financial Control (PIFC), Hungary needs to redefine its present internal audit functions and structures according to international practice and separate any managerial functions (like inspection and monitoring) from the audit function. To that end, the Ministry of Finance has decided to rewrite the relevant decree incorporating clear definitions of managerial accountability and the role of functionally independent internal audit services. It will also have to clarify the various interpretations of audit co-ordination in current laws and regulations to establish a clear hierarchy in guidelines relating to internal audit harmonisation in the entire public sector. The Ministry should consider embedding the newly defined audit function (with the main principles of modern internal audit and functional independence) into the Act on the Public Finance System.

Hungary will have two separate and fully-fledged systems for internal audit, one centralised, managed by the Government Control Office under the Prime Minister and one decentralised in the Budget Chapters and subordinated institutions, managed by the Ministry of Finance. This may lead to lack of clarity and direction gaps. The Ministry, which is also responsible for the co-ordination between both internal audit systems, should ensure that the set of criteria for appropriate audit rules and methodology be applied to both systems. All aspects of the concept of functional and political independence for the internal audit function in both systems need to be reconsidered and further developed. Finally, harmonised implementation guidelines, in particular financial management and control manuals, internal audit manuals and charters should be elaborated. In-house training facilities for PIFC should be streamlined and provided on a regular, sustainable basis within a well-defined framework.

In the area of external audit, Hungary largely meets internationally accepted standards. The independence of the State Audit Office (SAO), including its financial independence, is fully ensured by the existing legislation. The SAO has a wide audit mandate, including public finance, social security, local governments and EC resources down to the end users. However, the SAO`s audit does not yet cover the attestation of financial statements of accountable entities in line with international auditing standards. In general, the SAO has competent staff with good levels of higher educational and professional experience. It has issued a series of audit manuals relating to various types of audits based on INTOSAI (International Organisation of Supreme Audit Institutions) standards.

With regard to the control of structural action expenditure, further efforts need to be made in order to enhance Hungary`s capacity to manage pre-accession funding and future structural funds, in particular through the establishment of clear public internal financial control rules and procedures, together with a substantial reinforcement of Hungary's administrative capacity in this regard. Hungary should maintain the current pace to complete the remaining steps leading to EDIS in the first part of 2003 in order to allow EDIS accreditation to be achieved in the second part of 2003.

With a view to ensuring the suitable protection of Communities` financial interests, Hungary needs to refine the legislation necessary to allow the competent authorities to carry out on-the-spot checks, if necessary jointly with the relevant EC bodies, and to effectively exchange information regarding irregularities and investigations with OLAF and between the different competent Hungarian institutions and bodies. Furthermore, Hungary needs to provide an amendment of the national legislation with a view to the effective prevention and recovery of irregular payments and sanctions connected to irregularities affecting the protection of the Communities' financial interests. With respect to ISPA, Hungary has made significant efforts in setting up an adequate management and control system that can ensure proper implementation of ISPA assistance. In general, good progress has been made, but further efforts are needed to meet the requirements for internal financial control and internal audit.

Conclusion

In its 1997 Opinion, the Commission concluded that Hungary, in the medium term, should be able to fulfil its obligations in relation to the financial control structures without any problems, provided that measures currently envisaged were put in place.

Since the Opinion, steps forward have been taken, but sustained efforts in this area are required, especially concerning the redefining and upgrading of the internal audit function in its PIFC systems. Alignment with the acquis in this sector and the implementation of an EC-compatible PIFC have not yet been completed.

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

In order to be ready for membership, Hungary now needs to focus its efforts on implementing sound financial control systems by completing legislative alignment (protection of EC financial interests and implementation of PIFC) and completing and strengthening the required institutional structures. In order to tackle the weaknesses in the PIFC sector, Hungary is in the process of redefining its internal audit functions and structures according to international practice and to redraft the respective legislation. Efforts need, however, to be considerably stepped up.

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