The National Audit Office found that the state's annual accounts for 2023 present the Estonian state's financial position, financial performance and cash flows of the concluded accounting period fairly in all material aspects. Its audit confirmed that the state's economic transactions are, in all material aspects, carried out in accordance with the State Budget Acts, according to a press release.

According to the audit, the 2023 State Budget Implementation Report provides reliable information on the state's collected revenues, expenditures made, investments and financial transactions carried out by the state, with the exception of a concern with the Ministry of Defense, which was issued a qualified opinion for not following the Estonian Financial Reporting Standard in the recording of some of its economic transactions.

As a result of the audit, the National Audit Office also sent memoranda to the ministries and the Government Office with more detailed observations and recommendations.

The audit office did, however, find that there were errors in the 2023 State Budget Act.

Financing transactions in the budgets of the Ministry of Economic Affairs and Communications (MKM) and the Ministry of Regional Affairs and Agriculture were not or were inaccurately recorded in the State Budget Act – namely, the contributions or repayments to the Estonian Business and Innovation Agency (EISA) and Rural Development Foundation (MES) trust funds and the funds' management fees. Thus, certain transactions were not planned at all in the State Budget Act, while some of them were on the wrong budget line. As a result, some €122 million more in transactions occurred in reality than in the State Budget Act.

In addition, the funds earmarked for the area of the MKM for covering the increase in energy prices were inadvertently doubled, i.e. from the €100 million needed to €200 million. This issue has already been publicly addressed.

Defense Ministry budget implementation report

The National Audit Office pointed out that the Ministry of Defense did not adhere to the Estonian Financial Reporting Standard in the recording of some of its economic transactions.

Namely, in the 2023 Budget Implementation Report, the ministry recorded nearly €190 million worth of defense-related assets that had not arrived in Estonia by December 31, 2023, and the risks and rewards associated with their possession had not been transferred from the seller to the buyer, i.e. the Defense Ministry. In financial accounting, the principle is that an economic transaction is recorded in both the accounts and the budget implementation in the period in which the transaction actually takes place – in other words, the purchase of an asset is recorded when the buyer acquires control over the goods.

The Ministry of Defense's 2023 Budget Implementation Report includes purchases of defense-related assets for which legal ownership has been taken over from foreign suppliers on the basis of an instrument drawn up following a factory acceptance test – and before the planned and actual delivery of the goods to Estonia. In the case of some transactions, the ministry has regarded the date of the instrument drawn up after the foreign factory's acceptance test as the moment of acquisition of control, although the relevant procurement contracts and the instruments of transfer of legal ownership also stated that the risks associated with the assets are transferred from the seller to the buyer when the goods are delivered. This means that the rewards and risks associated with the assets transferred under the instrument continued to remain with the seller and did not pass to the Defense Ministry.

In the course of the audit, the Ministry of Defense indicated that the current practice is based on the outcome of the 2021 discussion between the National Audit Office, the State Shared Service Center (RTK) and the Ministry of Defense. However, the situation that has now developed is not in line with the views expressed in the debate referred to by the ministry, which concerned exceptional cases. The 2023 transactions related to the qualified opinion are not exceptions, but a broader approach; the audit did not reveal any substantive reason why it was necessary to record the transactions in the Budget Implementation Report before the acquisition of control over the goods.

Similarly to previous years, the audit office also drew attention to weaknesses in the internal control system of the Estonian Center for Defense Investments (ECDI) and the Estonian Defense Forces (EDF) which affect the accounting of assets, expenses and receivables in both accounting and budget implementation.

Information on, accounting for grants

The National Audit Office's yearly audit revealed that domestic grants are not always distributed transparently, and that at times, it is not monitored that they are used for intended purpose.

In 2023, around €3.2 billion was provided from the state budget for domestic grants. However, the letter of explanation for the budget bill does not make clear in which areas of activity, why and on what basis these grants were to be distributed. The annex to the letter of explanation on grants discloses only partial information on the legal entities receiving grants, and is not consistent with the information provided in other parts of the letter of explanation. According to an analysis by the audit office, the actual amount of domestic grants awarded was almost four times higher than the amount stated in Annex 3 of the letter of explanation.

Various guidelines and rules exist on the distribution and use of foreign grants, which is subject to controls at various levels, regular reporting, etc. Despite this, ministries often award domestic grants without setting clear objectives for the beneficiary, asking for reports on the implementation of the contract afterward and assessing whether the money was used for the agreed purpose. The distribution of domestic grants is not always transparent and does not always ensure fair competition either – some institutions have no procedures in place for distributing domestic grants, and money is awarded without public competition.

According to the audit office, considering the volume of domestic grants, the public and the Riigikogu must be aware of the areas and programs in which grants are to be distributed, why and on what basis (e.g. legislation, calls for proposals, etc.), as well as grant amounts; this information must be included in the letter of explanation accompanying the state budget bill. The provision of information on grants must also become more systematic.

Institutions must have a procedure in place to implement a grant program, the audit noted. To ensure transparency, the distribution of grants must be based either on the law or on the basis of free competition, such as open calls for proposals. The distribution of grants by other means, for example by means of a decision, can only be used in exceptional circumstances and must be justified.

Budget surpluses

The large volume of unused budget surplus from the previous financial year and the late identification thereof has, according to the National Audit Office, led to a situation where no comprehensive overview exists of the money actually available for use by ministries during the financial year.

The increase in carryover balances stopped in 2023 at €1.6 billion, but it will still take around half a year to determine the unused balances for the financial year. The determination of balances, which takes six months, raises the question of whether, and for what purpose, this money was actually earmarked by the ministries, if it was not needed in the first half of the year following the financial year.

Moreover, there is a risk that it will take so long to determine the balances that there will be no time to use the funds in a reasonable way. The high volume of these budgetary balances and the delays in carryover decisions undermine the transparency of the state budget process, the audit office warned.

Background

The Consolidated Annual Accounts of the State, including the State Budget Implementation Report, provide the Riigikogu and the public with information on economic transactions that have already been carried out. However, the basis for deciding on state revenues and expenditures is the state budget act for the year, which is why it is necessary for the state budget bill together with its letter of explanation to be drawn up by the Ministry of Finance to include accurate and comprehensible information.

The Estonian state's total revenue in 2023 according to the 2023 State Budget Implementation Report amounted to €14.9 billion. The state's expenditures and investments totaled €16.6 billion, with expenditures amounting to €15.9 billion and investments €701.6 million. According to the Consolidated Financial Statements of the State, the monetary volume of the state's assets as of December 31, 2023 comprised €24.1 billion; the majority of the assets are fixed assets, including forest, roads, buildings and machinery. Compared with the previous period, the monetary value of these assets has not changed significantly, up by €100 million.

As of December 31, 2023, the state's liabilities totaled €18.4 billion, indicating an increase of €1.7 million compared with the previous period. A combined €11.9 billion in long-term liabilities account for the majority thereof. The state also has loan liabilities in the amount of €8.2 billion, having increased by €1.3 million on year.

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

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