SUPREME AUDIT OFFICE CZECH REPUBLIC

VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague 1

SUPREME AUDIT OFFICE CZECH REPUBLIC

Audit of state budget finances spent on the provision of investment incentives

and investment aid


Introduction

Basic details of the audit

Audit begun……..…………………. 2005Audited funds …………..…………. CZK 5.5 billionNumber of auditors ……………….. 17Number of auditees ………………. 21Shortcomings found ………………. CZK 1.5 billionAudit completed……………………. 2006


Subject of the audit

use of state budget finances spent on the provision of investment incentives awarded by the government and provided on the basis of a written Memorandum of Understanding Declaring a Common Intention (contract)

Nature of the audit

ex post audit


Auditees

ministries (Ministry of Finance [MoF] and Ministry of Labour and Social Affairs [MoLSA])

• providers of state budget finances spent on investment incentives• public entities

commercial enterprises

• beneficiaries of state budget finances spent on investment incentives• private entities


Investment incentives system

MoLSA appropriations for new job creation

appropriations for employee training (re-training)

MoF special-purpose appropriations and other special-purpose appropriations concerning legal persons’ income tax


Aims of the audit

The aim of the audit was determined by its subject and by the possibilities for scrutinising activities.

What could be checked?Use of state budget finances spent on the provision of investment incentives.

What could not be checked?The overall benefits stemming from the provision of investment incentives (it is less than 10 years since they were provided).


Scrutiny of audited activities

During audit the Office scrutinises and appraises (Section 4 (1) of Act No. 166/1993 Coll., on the Supreme Audit Office)

EfficiencyCompliance with the law

Effectiveness

Some perform

ance

audit methods and

elements used

AuditSo

me p

erfo

rman

ce

audi

t met

hods

and

elem

ents

used

Legal analysis of

contract


Performance audit methods employed

Preliminary study

Brainstorming • used to generate new ideas and techniques and for subsequent selection of the most suitable method for appraising the economy, efficiency and effectiveness of the audited activities (3E)

Benchmarking• defining individual audited activities and specifying standards for their monitoring, compiling standards

Modelling • used to check the functionality of standards, empirical units, ascertainment methods and techniques and to fine-tune them• modelling uses fictitious companies and the values measured in them for 3E appraisal of the expenditure of state budget finances on individual investment incentives


Performance audit methods employed

Audit programme

Audit block diagrams• guideline block diagrams used for scrutiny of efficiency and effectiveness, scrutiny of measures to eliminate found shortcomings and legality check

Productivity diagrams• used to express the results of efficiency indicator measurement for the public expenditure under scrutiny Value charts• used to express the results of effectiveness indicator measurement for the public expenditure under scrutiny Comparative analysis (benchmarking)• depicts the volume of output generated by input sources and makes it possible to compare the efficiency and effectiveness of expenditure of state budget finances on the provided investment incentives using measured indicators


Previous audit

Preliminary study for the audit

Audit programme

Information obtained between the end of the previous audit and the start

of this audit

Sources used during the audit


Findings from the previous audit

• CZK 1,352 million spent on investment incentives – provided by government resolution not by act of parliament

• the investment incentives manual lacked the basic requisites for demonstrating its validity

• the provision of a tax-based investment incentive was not tied to a fixed minimum period of time for doing business in the Czech Republic and to fulfilment of the terms for the provision of other investment incentives

Response:

• CZK 12.5 million was returned to the state budget; in some cases the MoF had not reached a decision on the shortcomings by 31.12.2005.


Preparation of the audit

Preliminary study

• necessary to prevent errors in the audit programme

• brainstorming done in the preliminary study stage involved three direct

participants/heads of audit groups

• modelling of the procedures contained in the preliminary study made it

possible to compile a relatively precise audit programme and enabled

auditors to work efficiently at the auditees


Audit input and output

Audit conclusion

Appeal against decisions on objections

Objections to the audit protocol

Audit protocols

Previous audit, information obtained, preliminary study,

audit programme

Input

Output

Intended for the public

Intended for auditors


Audit findings - I

• investments supported by investment incentives attained a value of over

CZK 21 billion by the end of 2005

(CZK 12 billion more than in the contracts)

• 4,810 new jobs created (1,438 more than negotiated)

• 2,481 employees trained (by the end of 2005)

• by government resolution annexes are concluded to the contracts with commercial enterprises that enable the companies to apply for increased, additional special-purpose appropriations related to legal persons’ income tax – these increased state budget outlays do not widen the range of the companies’ obligations, however

• contract annexes - companies make bigger profits

- the state merely incurs increased expenditure, with a risk of further increases


Audit findings – II

• under the signed contracts additional special-purpose appropriations were

limited by the size of the appropriation disbursed in the first five years

- the annexes removed this limitation

- the sole criterion is thus the admissible intensity

of state aid

• the state’s outlays will be greater than originally considered and cannot be precisely estimated; in five companies where a calculation could be made the expected increased expenditure amounts to at least CZK 801 million

• provision of investment aid to companies operating in the services sector -

not regulated by law


Features of the audit

• the audit scrutinised - compliance with the law - effectiveness and achieved effects

• the audit - important for parliament and citizens - performed at the right time to maximise impacts - effective – benefits outweigh the cost of resources used

in the audit (cost of CZK 7 million)

• elimination of risks represents savings in state budget expenditure of more than CZK 801 million; value added is at least CZK 794million

• eliminating the detected risks will enable better working of the public sector


Risks

under the contract annexes state budget finances are not put towards the

achievement of a new goal – risk: the expenditure will bring no further benefits

for the state

in the contracts the value of investments for calculating the admissible

public aid intensity is not limited either by the size of investment or a deadline

for investing (it is not possible to estimate the total state budget expenditure

on appropriations)

• risk – all additional finances invested in fixed assets by companies make it

possible to draw down larger additional special-purpose appropriations than

previously envisaged


the provider relaxes the new job creation condition by allowing the companies to include employees taken on before the contract was signed

non-compliance with the terms for appraising fulfilment of the obligation to create jobs – risk of unjustified drawdown of state budget finances

non-existence of legislation governing the provision of appropriations to

investors in the services sector

- risk of the shortcomings found in the audit being repeated


Recommendations to

government

when concluding annexes to contracts negotiate counter-performance from

the commercial enterprises in return for the provided financing

draft legislation for the provision of investment aid in the services sector

ensure that MoLSA adheres to the precise wording of contractual

provisions when performing control

VI. EUROSAI Training Event Better Auditing of Public Aids and Subsidies 6.-8. November 2006, Prague

20

www.nku.czwww.nku.cz

Thank you for your attention

Vladimír [email protected]

Phone: +420476140724

mailto:[email protected]








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SUPREME AUDIT OFFICE CZECH REPUBLIC