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National Audit Office’s Annual Report to Parliament 2021

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Matti Okko, Deputy to the Auditor General: Public administration is being reformed in the midst of crisis management

The Finnish central government has been facing challenges because of exceptional circumstances, but it has been able to meet the requirements and safeguard the operating conditions of the economy. At the same time, when preparing and implementing major reforms, the Government should be able to ensure a reliable knowledge base and risk management. The appropriateness of financial management has been found to have deteriorated, and it is necessary to strengthen internal control in order to reverse the development. The National Audit Office should also set a better example through its own activities.

In its audit and monitoring work, the National Audit Office has focused on acute questions related to the management of the Covid-19 situation from the perspective of central and general government finances and on assessing the preparation and implementation of extensive reforms. We have conducted the annual financial audits and audits of compliance with the budget in a new manner that better takes into account, among other things, the centralized shared processes of the central government. The National Audit Office has kept on carrying out its basic task and complied with its audit plan despite the fact that the exceptional circumstances have also required new practices to be applied in auditing. As a result of the exceptional circumstances, we have also received a considerably higher number of complaints about and notifications of irregularities in the authorities’ activities.

It is necessary to scrutinize our own activities

This annual report period has been exceptional for the National Audit Office. There have been restrictions resulting from the Covid-19 situation, but there has also been unprecedented external attention directed at us. Both the agency’s financial management and the strategic priorities of its operations were discussed first in the media and then in Parliament.

The Parliamentary Audit Committee drew up an in-depth report on the financial management of the National Audit Office, the conclusions of which we immediately took up. The agency was also subject to an exceptional special audit. As a result, the agency has also itself focused more closely on its financial management practices and on cost-awareness in its activities. The situation has inevitably burdened the entire staff. Therefore, we have selected human resources management as one of the most important focus areas in 2021.

In addition to being justified, scrutiny is also useful when we turn to the future. Independent auditing of central government finances increases the transparency of society, strengthens confidence in the implementation of decisions, and produces information for future reforms. The National Audit Office is, and should increasingly be, an exemplary promoter of transparency and trust and a producer of relevant information. It is also necessary that we serve as an example, as our audits have shown that the legality of financial management has been increasingly compromised in the central government. We have also reviewed the targeting of our activities to ensure that it is appropriate and that the organization supports this, and we have taken corrective measures.

The National Audit Office assesses and develops its activities systematically.

I would like to point out that we also scrutinize our activities systematically on our own initiative. An extensive independent external assessment of the independent fiscal policy monitoring function was completed in June 2021. On the one hand, the results indicate that the function has succeeded, and on the other hand, they help us organize our activities and target our analysis work.

When planning the agency’s future activities, we will safeguard the resources required for our statutory core activities, i.e. audit and monitoring. It is important to keep the perspective of central government finances clear in mind in all audits. The selection of audit topics will continue to be steered by timeliness and significance for central government finances. This is the only way we can significantly influence the management of central government finances – in close interaction with Parliament, public administration, and other stakeholders.

As a result of government borrowing and support measures, Finland coped with the year of the pandemic better than anticipated

The period of the Covid-19 pandemic has shown that government stimulus and support measures have played an important part in safeguarding the economy under the exceptional circumstances. The possibility of raising additional debt on reasonable terms helped Finland to cope with the direct costs of Covid-19 without any significant cuts to other activities. However, in view of the sustainability of public finances, it is not good that the state has not yet returned to complying with the central government spending limits. Economic indicators and, for example, the business cycle heatmap of the National Audit Office show that the economy has started to grow rapidly. In such a situation, the state should strive to limit public expenditure.

In order for public finances to be strengthened, the central government spending limits should be returned to as soon as possible.

At the same time, it should be understood that returning to the spending limits does not prevent taking measures that are necessary for the aftercare of the pandemic. Such measures that are outside the spending limits but increase central government expenditure include, in particular, the temporary changes made to unemployment security, some of which remain in force in 2021. Finland’s flexible social security system has been regarded as one of the factors that have prevented the citizens’ livelihoods from being weakened unreasonably during the pandemic.

The additional debt made it also possible to support companies and thereby to tide the production potential of the economy over the crisis, which is also very important for public finances. However, the state did not raise all of the additional debt through normal means. In addition to issues of normal reference loans and auctions, loans were raised by using private placement, i.e. negotiating directly with different banks. This made it possible to take long-term debt despite market disturbances. The exceptional procedures were justified under the circumstances, but there should be a high threshold for their use in the future.

Several different forms of support for companies were introduced simultaneously in 2020, and because of lack of time, their suitability and award criteria were not assessed sufficiently before implementation. At least initially, the support granted was not targeted at the companies and sectors facing the greatest financial difficulties. The situation began to improve as a result of the introduction of business cost support. The numerous amendments to the Business Cost Support Act ensured that the support was targeted better at the companies whose business has suffered considerably as a result of the pandemic. Some of the legislative amendments are still in force. Regardless of the pandemic situation, the exceptional arrangements should be dispensed with as the economic outlook improves. More attention should also be paid to the range of other business subsidies.

The appropriateness of business subsidies must be assessed as a whole.

Financial resources also play a key role in ensuring security of supply. However, it is unlikely that the total costs of maintaining security of supply during the Covid-19 crisis will ever be determined accurately. In spring 2020, Finland managed to secure uninterrupted freight transport, which was important for security of supply, because it was possible to mobilize the National Emergency Supply Fund very quickly.

Although Finland has coped quite well during the Covid-19 crisis, there is also a lot to learn. It has become evident that, in addition to strong government support and material preparedness, an important role in crises shaking the entire society is played by human resource management and private service providers.

Well-planned and implemented internal control also supports efficiency targets

The National Audit Office has issued more cautions than before to the central government on the legality of financial management. This turns the spotlight on the functioning of internal control in the central government. Internal control refers to such operating procedures, organizational solutions, and ways of working in an operational unit’s steering and operations by means of which the central government ensures the legality of its operations and finances, budget compliance, and the safeguarding of its assets. The procedures also ensure that true and fair information is reported on finances and performance. The centralization of central government functions has highlighted the importance of appropriate and efficient organization of internal control. Nevertheless, the central government has not fully succeeded in this.

The functions of the state’s financial and human resources management have been extensively centralized with the Finnish Government Shared Services Centre for Finance and HR (Palkeet). Palkeet is responsible for the shared information systems used in the centralized functions, their automated controls, and the development of processes. On the basis of the audits conducted, it can stated that the internal control solutions have been rather too much steered by the central government’s productivity targets. This has led to the acceptance of significant risks in supervision or to the introduction of ineffective substitute controls. Well-planned and implemented internal control also supports the operational efficiency objectives of government agencies.

The State Treasury should have overall responsibility for the division of tasks and the internal control related to the centralized functions of central government financial and human resources management.

Both Palkeet and its customer accounting offices are part of the central government, which should be taken into account in the organization of internal control. The Ministry of Finance and the State Treasury play a key role in ensuring that the control environment is developed to be positive and efficient. The ownership of steering the entire monitoring process should be strengthened by legislative amendments. The State Treasury could then assume a clearer overall responsibility for the division and supervision of centralized financial management functions.

A successful reform relies on a broad knowledge base, step-by-step implementation, and risk management

During the current parliamentary term, the central government has prepared and implemented many reforms that are important to the welfare society. These reforms are intertwined into a systemic entity and interconnected through partly the same actors, providers of financing, and customer groups. The reforms require legislative amendments or completely new legislation. Their implementation focuses on either structural or operational changes. The economic impacts of the reforms are sometimes direct but often indirect, such as an improvement in employment or exports or an increase in tax revenue. Some of the reforms cost billions of euros to the state already in the early stages of implementation, and it takes years before the benefits to public finances are realized.

Based on our audit findings and the experience gained from previous reforms, we know that the success of reforms is hampered by three factors: reforms are often prepared in haste, it is difficult to control their implementation, and there are many problems related to the information systems to be changed. Lack of time may lead to inadequate impact assessments, regulations that are open to interpretations, and problems in the implementation phase of the reform. The implementation of at least major reforms should be phased or divided into smaller entities. If the steering responsibility is not clearly defined and the knowledge base used in the steering is not comprehensive enough and of sufficiently high quality, the implementation of the reform is further complicated.

It would be necessary to establish such strategic steering for the wellbeing services counties that supports cost control while respecting their autonomy.

The reform of health and social services and rescue services, launched in July 2021, and the building of wellbeing services counties are a good example of a reform that requires extensive legislative drafting and that, at least in the early stages, focuses on structures, causing costs to the state. In the legislative drafting of the reform, it was possible to make use of the drafting carried out during the previous parliamentary term and to consider the problems identified at that time. However, the preparation was challenging because it was carried out simultaneously with the legislative drafting related to the management of the Covid-19 pandemic and other health and social services. The implementation can be expected to be challenging although the laws will enter into force in stages over a year and a half, and preparations for the implementation have been inclusive and based on project funding. It would be important to establish such strategic steering for the wellbeing services counties that supports cost control while respecting their autonomy. It would also be important to create high-quality data production, monitoring of activities, and information systems that support knowledge-based management.

The overall structural and operational reform of social security, which was launched last year, should also be based on a comprehensive situational picture and a reliable knowledge base. The reform should be based on a clear understanding and knowledge of the problems existing in the current system and how they can be solved by legislation. The National Audit Office is prepared to contribute to ensuring the reliability of the knowledge base that is used in the preparation of reforms and presented to Parliament and other decision-makers.

I would like to thank the staff of the National Audit Office for their commitment to audit and monitoring work in the challenging circumstances of the past year. The feedback we have received from our stakeholders indicates that, despite adverse attention, there is confidence in the auditors’ professional skills and the agency’s important role. We will ensure by good interaction that our independent activities continue to provide relevant information that promotes transparency and builds confidence in our society.

Further information

Matti Okko
Deputy to Auditor General, Director