Comparing the audit capacity of supreme audit institutions (SAIs) in the context of European multilevel governance (MLG)
Audit institutions in the EU multilevel governance architecture
Supreme audit institutions (SAIs) are a country’s highest external audit institution and perform an important function in the European Union’s (EU) multilevel governance architecture. Up to 80 per cent of the EU’s budget management is shared with the member states. Many SAIs in the member states audit all - or at least a substantial part - of the European funds that are managed and spent by their national administrations. The ECA, as the EU’s external auditor, checks whether EU policies and programmes meet their objectives, that EU funds are raised and spent in accordance with the relevant rales and regulations, and that EU hinds are accounted for correctly. Ultimate responsibility for accounting for the budget lies at the EU level with the European Commission, the ECA and the European Parliament. But, the bulk of the EU budget is spent under what is known as ‘shared management’, with individual EU member states actually distributing and managing the funds, and controlling the expenditure. Audit has, thus, both an EU and a national dimension.
The SAIs (of the individual member states) perform a critical role in overseeing the management of the EU’s government expenditure. Yet, they operate on different legal bases, use different standards and procedures, and vary in their day-to-day practice of audit and govemance/administrative context. The treaties encourage cooperation but do not instruct that the member states need to adopt the same nonns and practices (Stephenson 2017). This variation among national audit offices has a considerable impact on the capacity to cooperate across borders and to cany' out EU-wide audits.
Good budget governance requires sustained investment in the institutional capacity for auditing, monitoring and reporting and conesponding political and financial commitments to such processes. Increasing attention is devoted to budget transparency and parliamentary' oversight (Rios et al. 2016: Stapenhurst et al. 2019). However, little scholarly work focuses explicitly on this capacity’ of audit institutions to provide effective audits, and there are very few systematic efforts to operationalise and measure this capacity. How do we determine whether or not an audit institution has the potential to contribute to budgetary' oversight? This is a pressing issue for scholars trying to classify and understand more precisely the mechanisms and incentives underlying budgetary scrutiny and regimes of government oversight, but also for EU SAIs, as these play a role in a system of financial accountability. The overall performance of these EU audit institutions in a highly complex institutional multilevel framework outlines the features of the evolving ‘interdependence’ accountability among the different governance levels. In this ‘interdependence’ SAIs are linked in the multilevel governance system in such a way that activities on one level influence the attainment of desired outcomes on the other levels (Coate et al. 2017). Cross-border cooperation within the EU and coordination across levels of governance will be a crucial determinant of audit capacity as they reduce transaction costs and facilitate communication. They enhance access to and learning from resources at national and international levels.
Research into the capacity of those institutions tasked with overseeing the EU budgets should tackle this increasing multilevel governance and international character of auditing. This chapter serves to fill the existing gap and introduces a conceptual framework for measuring and comparing audit capacity. The main purposes of this chapter are to conceptualise state audit capacity, to develop a measurement tool, and to assess - on the basis of this tool - whether European SAIs have built a powerful and effective regime to deliver audits.1 In this chapter we discuss the theoretical and empirical underpinnings of state audit capacity. We argue that the power of these SAIs to audit government activities rests on five qualities: mandate, independence, professional organisation, performance and their external relations. These institutional qualities are critical to SAIs’ capacity to implement effective audits, particularly in relation to the governing traditions and institutional environments in which they are earned out. Our exploration shows that SAIs differ in their capacity and that national factors influence the application and organisation of the audit in various countries.
SAIs’ audit capacity: a conceptual framework
What is public audit?
As watchdogs, SAIs do not focus on the primary' policy-making process but on the governance modes serving and warranting the achievement of defined policy objectives. In Tommel’s (2016) terms, SAIs deal with second-order governance. SAIs provide independent, objective assessments of the accuracy of the government’s accounting. They report whether governments spend the money in accordance with intended plans and whether public resources are managed responsibly and effectively to achieve intended results. The auditor testifies as to the believability (credibility) of the financial reporting, performance results, compliance, and other measures. Their influence stems from their expertise, credibility and legitimacy' (Posner and Shahan 2014).
Generally, EU SAIs seek to conduct three types of auditing (Worldbank 2002; Posner and Shahan 2014):
- • Legal or compliance auditing: auditor checks that governmental programmes and officials comply with relevant laws and regulations and whether government revenue and spending have been authorised and used for approved purposes.
- • Financial auditing: auditor assesses whether government accurately accounts for the spending of public funds in financial statements.
- • Performance, or value for money auditing: auditor determines whether government programmes achieve their goals in the most effective and efficient manner.
These three types form a comprehensive framework through which auditors approach fiscal control and financial accountability that can be preventive, corrective or punitive (Funnel et al. 2016). While all these functions are crucial for effective and accountable governmental financial management, the relative emphasis on one or another function will depend on the broader accountability environment, including the quality of the legislative budgetary oversight and the prevalence of the rule of law (Santiso 2006). SAIs function generally as auxiliary bodies to accountability institutions - either the judiciary or the legislature. In this context it is important to note that the role of SAIs varies in Europe. There are three models (Blume and Voigt 2011; Stapenhurst and Titsworth 2001).
First, there is the Judicial or Napoleonic model used by France, Italy, Spain and Portugal. Here the SAI forms an integral part of the judicial system, which allows for the initiation of legal proceedings against public fund managers and accountants suspected of being involved in irregularities regarding public assets and expenditure. Second, the Westminster or Parliamentary model, used in the United Kingdom and some European countries, in which the SAIs submit audit reports to a committee of Parliament. The office serves no judicial function but, when needed, its findings may be passed to legal authorities for further action. Finally, the Collegiate or Board model, used in European countries like Gennany and the Netherlands, is independent of the executive, headed by a collegial board, and helps parliament perform oversight.
The work of audit institutions consists of active police-patrol oversight (McCubbins and Schwartz 1984) and the information reports of SAIs function as fire alarms for legislative or judicial oversight). Auditing is, thus, an integral part of a system of financial accountability.