Fiscal responsibility statement as a to for efficient

Fiscal responsibility statement as a to for efficient and effective financial management and control Ivana Jakir-Bajo, Ministry of Finance, Croatia

INTRODUCTION • Fiscal Responsibility Act (FRA) came into force on January 1 2011 • FRA set forth the rules aimed at • limiting government spending • strengthening responsibility for a legal, earmarked and purposeful spending of budget resources • and reinforcing the system of controls and supervision for the purpose of ensuring fiscal responsibility. • By this Act, the Council Directive 2011/85/EU of 8 November 2011, on requirements for budgetary frameworks of the Member States (OJ L 306, 23. 11. 2011. ) was transferred into the Croatian legal system

3 INTRODUCTION • OBJECTIVE: to ensure and maintain fiscal responsibility, transparency and medium- and long-term sustainability of public finance achieved through the establishment and strengthening fiscal rules aimed at ensuring fiscal discipline&responsibility fiscal responsibility statement

4 FISCAL RESPONSIBILITY STRENGHTENING RULES • • Draft laws, orders, bylaws and other regulation adopted or proposed to Parliament by Government may not be adopted or drafted without the opinion of the Ministry of Finance on their fiscal impact In executing the state budget the Ministry of Finance may audit the legal compliance and appropriateness of the expenditure funds from the national budget and budgets of end beneficiaries Anticipation and control of future expenditures Strengthening system monitoring and control

5 FISCAL RESPONSIBILITY STATEMENT - LINK BETWEEN BUDGET ACT AND PIFC ACT • Fiscal Responsibility Act ties provisions of the Budget Act and provisions of the Public Internal Financial Control Act • A statement of the heads verifying • legal, earmarked and purposeful spending of funds - as requested by the Budget Act • efficient and effective functioning of the financial management and control system within the framework of funds defined by the budget or the financial plan - as requested by the Public Internal Financial Control Act

6 FISCAL RESPONSIBILITY STATEMENT • Annual statement by which the heads of the entities using the budgetary and extra budgetary funds are confirming that, while performing the work, they have: • ensured legal, earmarked and purposeful use of funds, and • an efficient and effective functioning of the financial management and control system

7 FISCAL RESPONSIBILITY STATEMENT – APPLICATION • Up to 2014 - applicable to the state budget and local and regional self-government units’ budgets, budgetary and extra-budgetary users of the state budget and of the local and regional self-government budgets as identified in the Budget and extra-budgetary user Register • From February 2014 - applicable also to the companies owned by the Republic of Croatia or by one or more local and/or regional governments, as well as other legal entitles founded by the Republic of Croatia or by one or more local and/or regional governments, as identified in the Register of Companies and Other Legal Persons Obliged to Issue a Fiscal Responsibility Statement

8 REASONS FOR BRODENING THE SCOPE OF APPLICATION • As Croatia became the EU member there are new possibilities for using the resources from the EU funds • the abovementioned companies and other legal persons are the biggest potential users of these funds • considering the obligations that have to be fulfilled before and during the use of the EU funds, potential users of these funds are requested to have an established and transparent financial management and control system • Growing liabilities – as the local government units are transferring their own commitments to their companies • Statistical reasons – part of those entities are classified to the general government sector according to ESA methodology

FISCAL RESPONSIBILTY STATEMENT GIVING PROCESS • Decree on the Fiscal Responsibility Statement and the Fiscal Rules Application Production and Submission consists of Report • layout and the contents of the Fiscal Responsibility Statement • procedure and deadlines for the Statement production and submission • the manner and deadlines for reporting the Ministry of Finance on irregularities identified on the basis of reviews of statements’ contents

BASIS FOR FISCAL RESPONSIBILITY STATEMENT • The Statement is made on the basis of the • Fiscal Responsibility Questionnaire • available information • results of work of internal and external audit and • own judgment

11 STATEMENT FORMS

FISCAL RESPONSIBILTY STATEMENT GIVING PROCESS • The Statement can be given even if weaknesses and irregularities have been identified if the weaknesses and irregularities bear no influence • on legal, earmarked and purposeful spending of funds and on an efficient and • effective functioning of the financial management and control system within the framework of funds defined by the budget or the financial plan

13 STATEMENT FORMS – IF WEAKNESSES OR ISSUES WERE FOUND

STATEMENT ANNEXES • Annexed to the Statement are: • a completed Questionnaire; • a Weaknesses and Irregularities Removal Plan; • a Report on the removed weaknesses and irregularities detected in the previous year; • an Opinion of internal auditors on the financial management and control system for the areas audited a year earlier

15 FISCAL RESPONSIBILITY QUESTIONNAIRE • Questionnaire is covering questions from the areas of • planning, • execution, • public procurement, • accounting and • reporting • Based on the questions contained in the Questionnaire, one is preforming a self-assessment of the system operation and is able to verify the legal, earmarked and purposeful spending of funds and the efficiency and effectiveness of the financial management and control system

16 FISCAL RESPONSIBILITY QUESTIONNAIRE • Questions contained in the Questionnaire are based on the relevant legal framework • Budget Act • Public Procurement Law Checking the obligations from existing laws as well as procedures that are explaining the basic principles stated in the Budget act and by which one can see is financial management and control system effective and efficient

17 FISCAL RESPONSIBILITY QUESTIONNAIRE • The manner of testing is specified in order to assess of the extent to which the relevant legal framework has been complied with • Testing can be carried out throughout a budget year • Replies can be affirmative, partially affirmative or negative • If the question is inapplicable, the answer to the question is: “Not applicable (N/A)” • For the filling of the Questionnaire a template is used that is included in Annex 2 of the Decree

18 FISCAL RESPONSIBILITY QUESTIONNAIRE PLANNING THE BUDGET/FINANCIAL PLAN A strategic plan produced and published on websites (to be answered by the ministries and other state administration bodies at first organisational classification level) 1. Heads of local and regional self-government units have forwarded the proposed budget and the projections to the representative body for adoption 11. within the legally prescribed deadline The adopted budget was published in the official journal of the local and regional self-government 12. units Together with the next year’s local and regional self-government units’ budgets, i. e. the financial plants of budget and extra-budgetary users, projections for the following two budgetary years 13. have also been provided link to a website copy of or reference to the relevant letter official journal issue number and publication date

19 FISCAL RESPONSIBILITY QUESTIONNAIRE BUDGET/FINANCIAL PLAN EXECUTION 16. The procedure for assuming the commitments has been clearly defined and is available to all organisational units/administrative departments Funds disbursement grounded upon credible documentation 23. Monitoring and control exercised over earmarked disbursement of donations, aid, subsidies and other transfers to end beneficiary and their utilisation 24. copy of or reference to a written procedure no less than five randomly selected disbursements for each expense type sample of 5 per cent from the overall transfer population and at least 5 per cent of total transfer value Copies of or references to contracts underlying the disbursements are available copies of or references to the contracts On-the-spot checks on a sample basis conducted with final beneficiaries copy of or reference to minutes of the check conducted A final beneficiary’s spending/project implementation report at hand copy of or reference to the report All necessary checks performed during goods delivery/service rendering/works execution 24. 1. check on a sample of 5 per cent from the overall procurement population and at least 5 per cent of total procurement value enclose relevant proof 24. 2. 24. 3. 25. 1. 25. 2. 25. 3. 25. 4. 25. 5. 25. 6. 25. 7. Goods delivered/services rendered/works executed as contracted Goods delivered/services rendered/works executed within the contracted deadlines Goods delivered/services rendered/works executed observing the contracted quantity and quality requirements Goods delivered/services rendered/works executed at locations stipulated in the contract Goods delivered/services rendered/works executed as per contract description Goods delivered/services rendered/works executed in accordance with the design, analyses, models and contract samples Goods installed and in use enclose relevant proof

20 FISCAL RESPONSIBILITY QUESTIONNAIRE PUBLIC PROCUREMENT provide proof using a 5 per cent sample of contracts/notices/ public procurement contracts executed 28. 29. 30. 31. 32. Security instruments and contractual penalties provided for in the copies of or contracts entered into reference to contract For all public procurement files with an estimated value in excess publication date of HRK 70, 000. 00, public procurement procedures have been carried out in pursuance of the Public Procurement Act Relevant notices published in pursuance with the Public publication date Procurement Act for public procurement procedures conducted via the Electronic Public Procurement Classifieds The works execution contracts entered into contain instruments copies of or securing quality of works and removal of deficiencies within the reference to warranty period contracts Public procurement plan adopted in keeping with the Public copy of or reference Procurement Act to the plan

21 FISCAL RESPONSIBILITY QUESTIONNAIRE ACCOUNTING 40. 41. 42. 43. 44. 45. Expenses recorded in the General Ledger on an accrual basis and in a reporting sample of up to 1 per cent of all period to which they refer irrespective of the payment execution documents on the basis of which business transactions have been recorded (incoming invoices, computing, requisition forms, etc. ) and a maximum of 100 Requisition forms have been validly completed to present who initiated a sample of up to 1 per cent of all procurement, who approved the procurement, types of goods/services/works to be requisition forms and a maximum of procured, with an itemised specification of the unit value, quantity, unit price and 100 total price The signed contracts with suppliers/service providers/works performers provide a sample of up to 5 per cent of all detailed determination of the type of goods/services/works to be procured contracts and a minimum of 5 per cent of total contracts value The receipt forms, shipping forms and other relevant documents signed by the copies of or references to storage clerk or other person in charge of goods receipt and suppliers clearly documents on a sample of up to 5 show that quantities, condition and quality of the received goods have been per cent of all documents established upon goods acceptance There are reports on service delivery, i. e. other type of a written authorisation or copy of or reference to the report or documentation verifying service delivery other documentation on a sample of up to 1 per cent of services rendered and a maximum of 100 There are interim and final computing balance on the executed work in copies of or references to the accordance with the defined works approval procedure, approved by a person or a approved interim or final balances body in charge of work supervision and approval on a sample of 5 per cent of all contracts

22 FISCAL RESPONSIBILITY QUESTIONNAIRE 50. 51. 52. 53. 54. 55. 56. 57. 58. Verification of the existence of a signature, stamp or other mark that may confirm the approval of the invoice for recording On the basis of a check of substance of invoices and documentation for services rendered, works executed or goods procured, budget classification identifiers have been assigned to invoices for GL recording purposes (to be answered by reporting entities subject to budget accounting application) Analytical records and general ledger reconciliation control performed (to be answered by reporting entities subject to budget accounting application) Revenue recorded in the general ledger at a point of their availability and measurability (to be answered by reporting entities subject to budget accounting application) For non-financial asset donations, the general ledger records revenues and expenses by estimated asset value, whereas non-financial asset transfers between budget and budget users recorded through the change in asset volume (to be answered by reporting entities subject to budget accounting application) The head of budget/budget user has put an Inventory Commission in place. He/she defined inventory taking date, relevant deadlines and the supply of reports with inventory lists enclosed The Inventory Commission has published the inventory of overall assets and liabilities, produced an inventory list based report and submitted it to the Head Books and accounting documents kept in keeping with the deadlines set in the Budget Accounting and Chart-of-Accounts Rulebook (to be answered by reporting entities subject to budget accounting application) The accounting records put in place enabled monitoring of spending by sources of financing and programmes (projects/activities) sample of up to 1 per cent of all invoices and a maximum of 100 proof of conducting the control at least once a month sample of up to 1 per cent of all payments and a maximum of 100 sample of up to 5 per cent of all donations and a minimum of 5 per cent of total donation value copy of or reference to the inventory taking decision copy of or reference to the report relevant proof the section of analytical records by sources of financing and programmes (projects/activities)

23 FISCAL RESPONSIBILITY QUESTIONNAIRE REPORTING 61. 64. Deadlines and manner of submission as defined by the Budget Accounting Financial Reporting Rulebook adhered to for financial reports submission (to be answered by reporting entities subject to budget accounting application) During the submission of the semi-annual and annual reports on the execution of local and regional self-government units’ budgets, deadlines and the provisions on the report content as defined in the Budget Act have been observed (to be answered by local and regional self-government units) copies of or references to reference pages in financial reports issue of an official journal and date of report publication Annual local and regional self-government units’ budget execution copy of or reference to the report delivered to the Ministry of Finance and the State Audit relevant letter Office within 15 days after the representative body has adopted it (to be answered by local and regional self-government units) 65. 66. Municipal head/mayor or county prefect has reported the copy of or reference to the representative body on reallocations within the deadline defined in relevant letter the budget execution decision (to be answered by local and regional self-government units)

24 THE WEAKNESSES AND IRREGULARITIES REMOVAL PLAN • Consists of the weaknesses and irregularities removal plans for each of the Questionnaire areas in which weaknesses and irregularities were detected • Contains • a description of weaknesses and irregularities detected during the course of completing the Questionnaire • an action plan with a list of activities to be taken to address the weaknesses and irregularities • the expected weaknesses and irregularities removal date and • data on persons responsible for the removal of weaknesses and irregularities. • Template provided in the Decree

25 THE WEAKNESSES AND IRREGULARITIES REMOVAL PLAN

26 REPORT ON THE REMOVED WEAKNESSES AND IRREGULARITIES DETECTED IN THE PREVIOUS YEAR • A report stating • whether or not the activities spelled out in the Weaknesses and Irregularities Removal Plan have been carried out • provides explanation for the unimplemented or partially implemented activities • sets a revised expected date for the weaknesses and irregularities removal • Template provided in the Decree

27 REPORT ON THE REMOVED WEAKNESSES AND IRREGULARITIES DETECTED IN THE PREVIOUS YEAR

28 INTERNAL AUDITORS’ OPINION ON THE FINANCIAL MANAGEMENT AND CONTROL SYSTEM • An opinion of internal auditors which states • internal auditors’ opinion as to the functioning of the financial management and control system for the areas audited • data on internal audits performed during the previous year and • data on internal audit recommendations made in earlier periods and implemented during the course of the preceding year • An opinion of internal auditors concerning the financial management and control system is based upon evidence collected during the course of internal audit performance in the preceding year and recommendations follow-up, including internal audit recommendations made in earlier periods and implemented during the course of the preceding year • Template provided in the Decree

29 OBLIGATION OF GIVING THE FISCAL RESPONSIBILITY STATEMENT • The Head has a possibility of requiring the persons in charge of internal organisational units to give Statements on the basis of a completed Questionnaire, the available information and own judgment from their respective scopes of competence • Greater responsibility and awareness for allocated recources

30 SUBMISSION PROCEDURE AND DEADLINES Reporting Entity Deadline Heads of the state budget and extra- February 28 budgetary users To whom is the Fiscal responsibility statement submitted? competent ministry Heads of budgetary and extra-budgetary February 28 users of local and regional self-government units’ budgets the municipality head, the mayor, i. e. the county prefect of the relevant local and regional self-government unit ministers and heads of other state March 31 administration bodies at first organisational classification level municipality heads, mayors, i. e. the county March 31 prefects Ministry of finance Heads of the Reporting Entities reporting with their Croatian Parliament directly to the Croatian Parliament respective annual performance reports

31 SUBMISSION PROCEDURE AND DEADLINES Reporting Entity Deadline The chief executive of a company owned by March 31 the Republic of Croatia, or the chief executive of another legal person founded by the Republic of Croatia The chief executive of a company owned by March 31 one or more local or regional governments and the chief executive of another legal person founded by one or more local or regional governments To whom is the Fiscal responsibility statement submitted? competent ministry the municipality head, the mayor, i. e. the county prefect of the relevant local and regional self-government unit Various deadlines – emphasising the responsibility for budget user’s work although the ministers and heads are still not giving consolidated Fiscal responsibility statement

32 CHECKING THE FISCAL RESPONSIBILITY STATEMENT FOR ITS CONTENTS • FORMAL CHECKS: competent ministries and local and regional self-government units are obliged to check recieved Statements and the Questionnaires of their budget users for their formal contents (if all of the required documents are recived, are all of the questions answerd …) • ESSENCE CHECKS: competent ministries and local and regional self-government units during the course of a budget year must check the Statement and the Questionnaire using a selected sample of questions included in the Questionnaire (are questions answerd correctly i. e. did reporting entity „lie” in the process of giving the Statement)

33 REPORTING AND OVERSIGHT • The competent ministries and local and regional self- government units are obliged to immediately and no later than within seven (7) business days notify the competent institutions, i. e. the Ministry of Finance of the irregularities detected on the basis of the conducted checks • Oversight of enforcement of the Fiscal Resposnibility Act is conducted by the Ministry of Finance

34 ACCOUNTABILITY FOR BREACHES OF FRA • Until 2014 liability for breaches of the provisions of the Fiscal responsibility act was establised on a political responsibility: • offering resignation appointment to a body that made his/her • Inefficient system – hardly any resignation arisen from FRA breaches

35 ACCOUNTABILITY FOR BREACHES OF FRA • in 2014 this system was exchanged with the penalties for a violation of FRA • Heads shall carry a monetary fine of HRK 5, 000. 00 up to 25, 000. 00: • if he/she fails to compile and submit Fiscal Responsibility Statement, • if during verification of the content of the Fiscal Responsibility Statement, the Ministry of Finance, ministries and local and regional governments observe that the documentation serving as the basis for the Fiscal Responsibility Statement is not trustworthy The misdemeanour proceedings are conducted by budgetary oversight inspectors

36 LESSONS LEARNED • Heads of the budget users (i. e. school principals, day-care heads …) realised that they are responsible for allocated funds • Stronger liaisons between ministries and local and regional self-government units and their budget users • Certain laws and bylaws provisions stressed out through questions from Fiscal responsibility Questioner • Media coverage (Everyone started to talk about fiscal responsibility!)

37 FUTURE STEPS • In 2015 for the first time Fiscal responsibility statement at the state level was submitted on line – further development of the web (on line) application • „Raising the bar” – every year new questions are introduced due to legal framework changes and setting the new and/or higher standards

38