National Audit Office: State agencies inefficient in budgeting work

Auditor General Janar Holm, addressing the Riigikogu.
Auditor General Janar Holm, addressing the Riigikogu. Source: ERR

Government agencies continue to do a lot of work on budgeting but with results which are seldom used, the National Audit Office (Riigikontroll) finds, in respect of the 2021 accounts and the rationale of the 2022 state budget, with a particular focus on the phenomenon of 'activity-based' budget entries, and with reference to the Estonian Defense Forces (EDF).

In its audit report published on Friday, September 9 2022, the audit office found that while creating an activity-based state budget is viable, the question is whether this is necessary and realistically applicable.

The state's annual accounts for 2021 present the state's financial position, financial performance and cash flows of the concluded accounting period fairly in all material aspects, aside from the qualification on the balance of fixed assets, the office says.

This qualification was the result of deficiencies in the organization of the accounting of the assets of the Estonian Defense Forces (EDF), and resulting errors.

The National Audit Office remarked on the EDF fixed assets as presented under the balance sheet item  "Tangible fixed assets", a part of of the balance sheet and totaling €419.05 million as of December 31 2021.

The National Audit Office has made the same qualification about the balance of tangible fixed assets in previous years.

One of the unavoidable operations for ensuring the accuracy of the accounting balance is the comparison of data from accounting and the analytical register of the EDFs' fixed assets as at December 31 2021, but the EDF has not done so.

Due to shortcomings in the organization of asset accounting, the EDF's fixed assets analytical register is not correct, the audit office says, as it still contains assets which have been transferred to other institutions, have been written off, are unusable or which have been listed twice, both as defense and non-defense assets.

In 2021, the EDF was engaged in organizing the fixed asset accounting, but by the time the current audit report was prepared, the EDF had not been able to verify the physical existence of some of the assets accounted for and their actual state and location.

It was also not possible to reflect the 2021 asset improvements or asset write-offs in the fixed assets analytical register, but this is planned to be rectified by October 31 this year at the latest, the audit office says.

The audit confirmed that the economic transactions of the state were in all material aspects carried out in accordance with the state budget laws.

According to the National Audit Office, the report on the implementation of the state budget for 2021 provides reliable information on the revenue accumulated, expenditure made, investments and financing transactions carried out by the state.

In the course of last year's audit, the National Audit Office pointed out accounting and calculation errors in the preparation of the State Budget Act 2020, hence the indicators for revenue, expenditure, investment and financing transactions in the consolidated part of the budget being incorrect.

The consolidated parts of the State Budget Act 2021, the State Supplementary Budget Act 2021 and the State Budget Amendment Act 2021 were correct, but, as with last year, the National Audit Office found fewer significant errors in the budget lines of the ministries in the State Budget Act 2021 and the State Budget Amendment Act.

National Audit Office notes that the comprehensibility of the explanatory memorandum to the State Budget Act 2022 as submitted to the Riigikogu has been improved, but still has shortcomings. 

The level of detail of the explanatory memorandum has increased, because from 2022 onwards, the state budget is also more detailed, as the expenditure are divided according to program activities in the State Budget Act.

In addition to the activity-based view, the budget breakdown has also been presented in more detail than before as a separate chapter in the economic content view.

Auditor General Janar Holm said: "Unfortunately, it became clear during the audit that the overall picture of the explanatory memorandum to the state budget remains flawed."

"It is impossible to understand what the money is spent on, the comparability of the periods is also not ensured, as well as there are arithmetic errors and misleading texts," Holme went on."

Issues facing activity-based budgeting have remained the same compared to last year, Holm said. "Ministries still consider activity-based budgeting as a project without central management, to be implemented at the request of the Ministry of Finance, but whose objectives and benefits they do not realize."

The activity-based budget is not comprehensible to the Riigikogu or the public, as ministries can constantly change the rules for allocating expenditure, the audit office finds.

At the same time, there has been some positive progress compared with last year, the audit office says, as the Ministry of Finance has improved the reliability of the cost accounting information system and introduced automated solutions that simplify the work of government departments.

The Ministry of Finance has launched a budget reform aimed at revising the principles of budgeting.

The ministry has also started to prepare an analysis in order for the introduction of a new budget information system.

According to the National Audit Office, the parallel update of the budget methodology and the development of the information system increases the risk that the Ministry of Finance will not be able to contribute to both projects with the necessary thoroughness and also provide methodological and technical support.

The National Audit Office draws attention to the situation associated with the development of the cost accounting information system currently in use, where the information system began to dictate the budgeting methodology and caused, among other things, the need for a new information system.

Therefore, when developing a new information system, it is important to first establish the budgeting framework.

The share of reserve fund of the Government of the Republic in the total volume of the state budget has increased over the years. The National Audit Office points out that the increase in the share of the reserve leads to a situation where the role of the Riigikogu in deciding on the expenditure of the state budget decreases.

The State Budget Act, which regulates the preparation of the state budget, lays down the principles for the use of the reserve of the Government of the Republic, but does not regulate on what basis or to what extent the reserve may be planned. In the years 2020-2021, the increase in government reserves was justified by the need to cover the additional costs caused by the COVID-19 pandemic but the National Audit Office recommends that the Ministry of Finance analyze how the continuing growth trend will affect the Riigikogu's role in deciding on the budget.

According to the National Audit Office, there are also expenditures that are made from the reserves and can also be budgeted for in the ministries' budgets (e.g. various ICT projects, improvements to fixed assets).


The Consolidated Annual Accounts of the State, inclusive of the State Budget Implementation Report, provides the Riigikogu and the public with information on economic transactions that have already been carried out.

However, the basis for deciding on state revenue and expenditure is the State Budget Act for the year, which is why it is necessary for the draft State Budget Act together with the explanatory memorandum to be prepared by the Ministry of Finance to contain correct and comprehensible information.

According to the report on the implementation of the state budget 2021, the state's revenue in 2021 stood at €12.43 billion.

The state's expenditure and investments totaled 1€3.36 billion , with expenditure making up €12.78 billion and investments €584.73 million.

According to the state's consolidated annual accounts, as at December 31 2021, the financial volume of state assets amounted to €19.43 billion, while most of the assets were non-current assets (forests, roads, buildings, machinery).

In comparison with the previous period, the financial volume of assets has increased by €1.51 billion.

As at December 31 2021, the state had liabilities in the total amount of €14.09 billion, which increased by €1.59 billion compared to the previous period. The majority of liabilities were long-term liabilities in the amount of €9.31 billion. The state had borrowings totaling €5.9 billion, which increased by €0.2 billion compared with the previous period.

The National Audit Office audits the annual accounts included in the state's consolidated annual report and the regularity of the state's transactions every year. Pursuant to the State Budget Act, the National Audit Office completes the audit no later than on August 31 in the year following the accounting year.


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Editor: Andrew Whyte

Source: National Audit Office

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