The national anti-corruption strategy

Public internal financial control, external audit and protection of EU financial interests

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3.2.3 Public internal financial control, external audit and protection of EU financial interests
а) Evaluation of the situation
The concept of the Public Internal Financial Control (PIFC) as a comprehensive and effective system, was created by organizations in the public sector to ensure financial management, control, internal audits and reporting on the use of public funds, including European Union funds. This concept applies equally to all budgetary beneficiaries (direct or indirect), and to other users (local self-government, public companies, etc.). Therefore, it is extremely important to ensure its functional and operational independence and mandatory application. However, the Consolidated Annual Report on the Situation with the Internal Financial Control in the Public Sector in the Republic of Serbia for 2011 of the Central Harmonization Unit of the Ministry of Finance and Economy indicates that the abovementioned has not been provided due to an inadequate legal framework, consisting mostly of by-laws, but also due to inconsistent application of existing regulations. Another obstacle represent the fact that the existing systematized positions for internal auditors are not fully populated due to the lack of highly educated staff, low salaries, inadequacy of systematized professions in terms of the workload and complexity of work and competition of the private sector. It was also noticed that senior managers in the public sector are not sufficiently familiar with their role and responsibilities in establishing the internal control system, as well as with the role of an internal auditor in their organization. The managerial accountability and financial management and control are still understood in their literal meaning. The financial management and control is focused on the legality and regularity of financial transactions, without explicit consideration of the issue of cost-effectiveness, efficiency and appropriacy.

According to the EC Progress Report for 2012, progress was made in the field of external audit. The State Audit Institution (SAI) continued to gradually build its capacities and new auditors were employed. The SAI Council adopted the Strategic Development Plan for the period 2011–2015 in November 2011. The SAI continued to work on the improvement of the audit methodology. It also increased the scope of the audit. However, the Law on the State Audit Institution (“Official Gazette of the RS”, 101/05, 54/07 and 36/10) does not envisage full financial and operational independence in accordance with standards of the International Organization of Supreme Audit Institutions (INTOSAI). The SAI is still in the process of institutional construction because it has been operating only for five years, and also due to the fact that not all conditions for its successful operation were provided timely. The SAI has insufficient resources and the number audit subjects is still rather limited. Building of capacities for conducting the audit of appropriacy is under way, and this year, the SAI will commence with the pilot audit of appropriacy.

With the adoption of the Strategy for the Development of Internal Financial Control in the Public Sector in the Republic of Serbia in 2009, the Government applies principles of internal control and internal audit both, on public funds under control of the Government, and on the EU funds on the basis of internationally accepted standards of internal control for the public sector and internal audit. In addition, the Office for Auditing the EU funds management system was established in 2011. For the purposes of protecting financial interests of the European Union, managing irregularities (preventing, detecting and reporting on irregularities) and establishing close cooperation with the OLAF (European Anti-Fraud Office), the Republic of Serbia committed to establish the AFCOS (Anti-Fraud Coordination Service). The AFCOS shall be responsible for establishing coordination in combating frauds between all relevant public authorities at the national level and between the Republic of Serbia and the European Commission.

The AFCOS is also a central focal point for legal, administrative and operational cooperation with the OLAF, as well as for required assistance in investigations conducted by the OLAF. Initial meetings on establishing the AFCOS are in progress.

b) Objectives Establish and develop a system for public internal financial control in the public sector at all levels of the government. Change the legal framework to ensure complete financial and operational independence of the SAI in accordance with the standards of the International Organization of Supreme Audit Institutions (INTOSAI) and carry out the audit of appropriacy. Establish and develop the system for prevention, detection, reporting and treatment of irregularities using means from EU funds and funds of other international institutions and organizations.

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