Reforms in Mongolian Government Auditing

Reforms in Mongolian Government Auditing

by BATBAYAR Badamdorj,

Deputy Auditor General of Mongolia

Distinguished Chair,

Ladies and Gentlemen,

First of all, I would like to express my deepest gratitude to the International Consortium of Government Financial Management for inviting me to this prestigious International Conference to present on the reforms in Mongolian government auditing.

I think that many of you don’t know properly about the specific condition of my country and my agency. Therefore let me give you first a very brief background information and short history.

Brief History

Before 1990, Mongolia was part of the former world socialist block and had a political system ruled by one party and a centrally planned economy. But starting in 1990, Mongolia shifted to the path of democracy and started introducing market principles in its economy. Now it is considered as a country with transitional economy.

As to the government control organization, it actually has a story of 83 years. In 1922 the division on control was established within the Peoples Government of Mongolia and this is considered as a first government control organization. Since 1922 and through 1990 government control organizations have faced a lot of changes. In this period, mandate, functions, organizational structure and title of control organizations changed 13 times. Control organizations used to have status of division, section, department, ministry, state commission and committee. In a word it actually has had status of almost all the levels of administrative bureaucracy. Even it was abolished twice: in 1932 and 1990. It is clear that during that period, the activities of government control organizations reflected the conditions of those political and socio-economic systems. The Committee of People’s Control, which is the last control organization of the former socialist system, was abolished in 1990.

Since 1990 and through 1995 there was no government control body in Mongolia. Finally in 1995 the Parliament passed the Law on State Audit and Inspection and according to this law the State Audit and Inspection Committee (SAIC) was established anew. We think that the SAIC was the first audit organization to perform the functions of government external audit in the conditions of a market economy in a democratic society. And in January 2003 the Parliament passed another law –Law on State Audit. According to this law the current Mongolian National Audit Office (MNAO) was setup. In that sense, government external audit organization can be considered as a new and young organization.

Having said that let me begin my presentation. In my presentation I would like to describe the changes in Mongolian government auditing from the following angles, namely: legal environment, functions and methodology, organizational structure, knowledge and ethics, administrative reforms and international relations. At the end of presentation I will address some challenges we face currently.

Changes in Legal Environment

The most of basic principles of external auditing of the government were stated in the 1995 Law, and therefore that law had regulated activities of state audit and inspection organizations quite successfully.

However, international reform processes have also influenced Mongolia, leading to public administrative and civil service reforms in Mongolia that, in turn, created a need to reform government auditing systems. The Public Sector Management and Finance Law of 2003, which is based on the concept of New Public Management, is introducing drastic changes in management and budget financing principles for the public sector in general and government agencies in particular. According to this law, all government agencies, as well as state-owned entities, are required to produce annual financial statements and have them audited by state audit organizations.

This practice, which is common in business entities, is started to be introduced in government agencies. The power and functions of state audit organizations had to be widened and changed in order for them to start auditing the financial statements of government agencies. This is the main reason the new Law on State Audit was developed and adopted.

In developing that law, we were guided by such basic documents as the Lima Declaration and the Generic Audit Model Law prepared by the UNDP Program for Accountability and Transparency.

The 2003 Law on State Audit has defined a new legal environment for the activities of state audit organizations and guaranteed their functional, organizational, and financial independence, as well as the independence of their members.

Changes in Audit Mandate and Methodology

When the Law on State Audit Inspection was approved in 1995, our knowledge and understanding on auditing was very limited. First private audit firm in Mongolia was set up in 1993. In a word, private sector auditing was just emerging. That time there was no clear intention and plan to introduce auditing in the government entities.

By the time of its establishment the SAIC had no standards, guidelines and audit manuals at all. Therefore we had no other choice than to employ methods of traditional documentary review (financial-related audit) which was extensively used in the former socialist system.

With the enactment of the Public Sector Management and Finance Law, we have assumed the new function of conducting financial statement audits. According to the 2003 Law on State Audit, we also have assumed a mandate to conduct performance audits and are no longer required to conduct traditional financial-related audits. The introduction of these new types of auditing has totally changed the way we carry out our work.

It is important to have well-developed methodology already in place in order to introduce new types of auditing. In this regard, we have introduced performance auditing standards, guidelines, and handbook that reflect international best practices. For example, Government Auditing Standards were introduced starting in January 1, 2002. To date, these include four general standards, five fieldwork standards, and five reporting standards for performance auditing. These standards are based upon INTOSAI Auditing Standards and the well-known “yellow book” of the US GAO.

We also developed in 2002 our own Performance Auditing Guidelines based on the Fifth ASOSAI Research Project on Performance Auditing Guidelines. In 2003, we issued a handbook on how to use government auditing standards. In developing this handbook, we benefited from GAO’s General Policies and Procedures Manual.

We believe that the above-mentioned standards, guidelines, and handbook contain the methodology needed to conduct performance audits in a professional manner and according to international best practices. Guided by these methodological documents and legal mandate, we are conducting last three years performance audits and reporting their results to the Parliament.

At the moment we are preparing methodological materials for financial statement audit. For this purpose we are working to translate and publish International Standards on Auditing issued by the International Federation of Accountants (IFAC), and develop a Financial Audit Manual.

Moreover, we have started introducing such new audits as IT Audit, Environmental Audit in compliance with requirement of the Law to improve the forms of audit in connection with the achievements of financial management, science and technology.

Changes in Organizational Structure

The MNAO, which was established with the enactment of the Law on State Audit in January 2003, has a different organizational structure than its predecessor, the SAIC. While the SAIC consisted of a chairperson and eight non-staff members, the MNAO has an Auditor General who makes decision individually. Thus, the organization has shifted from a board model to a hierarchical organizational structure (Westminster Model).

The need to cooperate with external audit service providers has brought about another change in organizational structure. There are currently 34 private audit firms in the capital city Ulaanbaatar (with 13 branch offices outside the city) and 15 audit firms in provinces of Mongolia. Because we are not limited to using our own staff for financial statement audits of government agencies, we need to contract with these firms for audit services. A legal environment for such arrangements is already in place.

New Requirements for Knowledge and Ethical Behavior

The 2003 Law on State Audit sets high standards for the knowledge and skills required of government auditors. This is not only legal requirement, but also requirement of the auditing standards.

To meet this requirement, we are taking measures directed to continuously upgrade and maintain the knowledge and skills of auditors, develop training program and training materials and prepare our own trainers. As a first step, we have approved 3 year training plan for government auditors. Within the framework of this plan we have prepared 4 training packages in Mongolian on “Performance Audit”, “Financial Statement Audit”, “Information Technology Audit”, and “Environmental Audit” using the training materials developed by ASOSAI and IDI. These materials are already being used in local and regional training workshops.

Of course, it is not enough to rely solely on our own in training auditors. Therefore we cooperate with other training institutions and send our auditors to training programs organized by those institutions. For example, as a result of CPA training workshops especially conducted for government auditors during last 4-5 years, more than 60 per cent of government auditors have been awarded with certificate of CPA.

Our next agenda is to introduce Continuing Professional Education (CPE) Requirements for government auditors.

Besides requirement for knowledge and skills, the new Law on State Audit also sets a higher standard for ethical behavior. In this connection, we have developed and introduced a new Code of Ethics for government auditors based on the INTOSAI Code of Ethics approved by the XVI INCOSAI in Montevideo in 1998. The new Code of Ethics for government auditors includes requirements for integrity, independence, objectivity, impartiality, political neutrality, professional secrecy, and speaking and writing activities.

When the Mongolian version of ISA would be ready, our auditors will be required to follow the Code of Ethics for Professional Accountants approved by IFAC in addition to the above-mentioned Code of Ethics.

SAI and Public Administration Reform

From the beginning, our SAI supported the government policy on reforming the management and financing systems of government agencies. We knew from our audit findings that the former budget planning, financing, and reporting systems were outdated, and therefore we continuously recommended that those systems be changed.

For this reason, we agreed to be one of the first five agencies to pilot the new public management and financing systems in 2001. Within the framework of this pilot project, we have introduced into our in-house activities such new elements as a business strategic plan, output planning and reporting, financial statements, and performance agreements.

The results of the piloting have been promising. As former Speaker of Mongolian Parliament Mr.S.Tumur-Ochir noted, the positive results of this pilot project facilitated the enactment of the Public Sector Management and Finance Law, which had been under debate in the Parliament and other levels of government for almost 5 years since its submission in November 1997. Therefore, we can say that the former SAIC and the four other pilot agencies have contributed to and played a leading role in the public administration reform process in Mongolia.

Currently, the MNAO is also contributing to promote democratic governance, principles of transparency and accountability in Mongolian public administration. For instance, we are making our performance audit reports public. The Law on State Audit requires that the MNAO publish a quarterly list of audit reports and provide copies to all those who want them. This will also help to ensuring citizens’ rights to get information from public agencies.

The MNAO not only audits others but is also a subject for auditing. We produce yearly financial statements which are audited by independent external auditors nominated by the Parliament.

International Cooperation

We attach much attention to international cooperation. We joined INTOSAI and ASOSAI in 1996 and INTOSAI Working Group on Environmental Auditing in 2004. Apart from multilateral relations we are trying to develop bilateral relations with our foreign colleagues. So far we have signed MOU on cooperation with 10 SAIs. Although there are no MOUs officially signed by the respective parties, some SAIs as well as international organizations have provided or continue to provide assistance to us.

It should be noted that the above-mentioned multi-lateral and bilateral relations contributed a lot in our change process. For example, assistance provided by our colleagues such as US GAO, Courts of Audit of Hessen and Berlin in Germany, Victorian Auditor General’s Office in Australia, UK NAO, international professional organizations like INTOSAI, ASOSAI, IDI, WGEA, and international financial institutions such as World Bank, ADB played an important role in improving capacity and competence of mongolian government auditors.

Challenges

Although we have achieved certain results and improvements so far, there are still a lot of difficulties and challenges we need to solve. But I just want to name two of them.

In general, the main challenge is to train our auditors and maintain their knowledge and skills updated on regular basis. In a word, we look forward to introduce Continuing Professional Education (CPE) Requirements for government auditors.

Moreover, we need to pay much attention to ensure and guarantee an independence of government auditing at the highest possible level by making appropriate amendmends to the Mongolian Constitution.

The change process in Mongolian government auditing is still going on. We are open to cooperate with everybody who has an interest and is willing to share their knowledge and experiences and assist us.

Thank you very much for the attention.

1