EU accession and sound financial management: before allowing 10 new countries to join its ranks, the European Union insisted that they develop independent internal audit professions to monitor controls on spending. Now, following the accession, much work remains to be done

Internal Auditor, June, 2004 by Neil Baker

IT IS A LINGUISTIC QUIRK OF LATVIAN THAT THE WORD for "audit" is the same as that for "controller." Given that internal controllers were hated figures under the Soviet regime that once ran the country, it is no surprise that the country's new breed of internal auditors have had a hard time persuading people not to be afraid of them.

But persuade them they have. Since Latvia started negotiating to join the European Union (EU) in 1998, the number of internal auditors working in government departments has gone from zero to about 400, says Phil Tarling, an IIA board member who has worked on projects to develop the profession in Latvia. "I don't think people are scared of them anymore," he says.

The changes that have been taking place in Latvia are mirrored across the seven other former Soviet bloc countries that became members of the EU on May 1. Before allowing the new countries to join, the 15 existing member states insisted that they modernize across a wide range of areas. To help fund these reforms, in the years running up to accession the new members received [euro]30 billion in support from the EU and are promised another [euro]40 billion by the end of 2006. The EU wants to make sure this money goes where it is supposed to, which is why developing sound public-sector financial management and establishing an independent internal audit profession to monitor controls on spending have been priorities.

As part of the membership process, the eight former Soviet countries--along with Malta and Cyprus, which also joined in May--have each had to sign a Treaty of Accession confirming that they comply with what is known as the acquis, the 85,000-page book of EU laws, regulations, policies, and court rulings. Under Chapter 28 of these treaties, each country confirms that it has an effective system of internal financial control in its public sector, a basic feature of which is a clear demarcation separating internal auditing from financial management and control.

Although all of the accession states signed off on this chapter by December 2002, they were not up to speed with internal auditing. Even when their membership applications were approved in April 2003, each had more work to do in this area. And when the European Commission--the EU's executive arm--published its final reports on the countries in November 2003, there were still boxes left unticked.

Poland, for example, had not established internal audit groups covering all of its budget-spending centers, and the units it had set up needed to be staffed with well-trained personnel. The Poland report added that the system of training and examining internal auditors should be revised. The head of public sector internal auditing in Poland was also responsible for financial management and control, so was not independent, the report also found.

Like Poland, Slovakia and the Czech Republic lacked internal audit teams. And Hungary was criticized for not guaranteeing its internal auditors' independence. The country was also told to pay attention to providing adequate training to the auditors.

Estonia, Latvia, Lithuania, and Slovenia were closer to complying with the acquis, although the monitoring reports mentioned that even these countries need to strengthen the people and systems in place.

Giving an update to the European Parliament in March on progress across all 31 chapters of the accession treaties, the EU commissioner responsible for enlargement, Gunter Verheugen, said that the monitoring reports had been "taken very seriously" by the accession countries. He added, "Nobody is resting on their laurels, and the monitoring has confirmed our assessment that the vast majority of the issues still to be dealt with should be cleared up by the date of accession."

That view is echoed by Nick Treen, a senior adviser in audit and financial control at SIGMA, a joint initiative of the Organisation for Economic Co-operation and Development and the EU that has been working with the accession countries to improve in this area. "Some countries are more well-developed than others, but in all the acceding countries, basic frameworks, structures, and regulations are in place to provide for a good platform for effective financial management and internal auditing," Treen says. "Much practical work still needs to be done to get the most out of this base, but with effort and continued priority, effective and sound financial management and internal auditing is being achieved."

Treen says it has taken a lot of effort to get people to understand the modern role of internal auditing supporting management. People used to see "control" as a person or an institution, rather than a system, he says, adding: "Control was someone checking that you had followed all the administrative laws and regulations." The former Soviet bloc states had enormous amounts of legislation and regulation, and the controllers enforced it with no allowance for significance or materiality, Treen says. "There was an approach of 'if it's not in the law, then you can't do it'. There were heavy penalties for not following the law or regulations, even for very trivial things, and the controllers were in charge of that, so they were much feared. Carrying over that kind of attitude into internal auditing is not very helpful at all,"