Overview of reforms in the Mongolian SAI

Overview of reforms in the Mongolian SAI

Badamdorj, Batbayar

Although Mongolia has had a state audit organization for more than 80 years, the history of its new SAI dates only to 1995, when the State Audit and Inspection Committee (SAIC) was established by the Law on State Audit and Inspection. Before 1990, Mongolia was part of the former socialist block and had a political system dominated by one party and a centrally planned economy. During that period, the activities of state audit organizations reflected the conditions of those political and socio-economic systems. But starting in 1990, Mongolia shifted to the path of democracy and started to introduce market principles in its economy. Beginning in 1995, the SAIC was the first audit organization to perform the functions of state external audit in a democratic society with a market economy.

With enactment of the Public Sector Management and Finance Law in 2002, the Parliament of Mongolia amended about 80 laws, including the 1995 Law on State Audit and Inspection. As a result, the new Law on State Audit was passed in January 2003, and new state audit central and local organizations were established. At that time, the SAIC was replaced by the Mongolian National Audit Office (MNAO).

Change in Legal Environment

The 1995 Law on State Audit and Inspection played an important role in developing a modern state external audit organization in Mongolia. By setting up the SAIC and provincial Audit and Inspection Committees (AIC), this law filled the vacuum left in state external audit after the People’s Control Committee was abolished in 1990. The 1995 law determined the components of state control as a whole and regulated a broad range of issues covering not only state audit and inspection organizations but also the powers and duties of government and administrative and local self-governing organizations in the field of state control. The main part of this law, however, related to activities of the SAIC and provincial AICs. Because the main principles of external auditing of the government were stated in the 1995 Law and state audit and inspection organizations were functioning quite independently, a positive public opinion was created and a reliable relationship with government and public agencies was established.

In recent years, 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 2002, 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 starting 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 United Nations Development Program (UNDP) Program for Accountability and Transparency (PACT).

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 and officials.

Changes in Audit Methodology

Before the new Law on State Audit was adopted, the SAIC conducted mostly traditional financial-related audits. 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 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.

During past 3 years, we have been preparing ourselves to introduce performance and financial statement audits. We have already introduced performance auditing standards, guidelines, and handbooks 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 GAO “yellow book”.

We also developed and, in October 2002, introduced our own Performance Auditing Guidelines based on the Fifth ASOSAI Research Project on Performance Auditing Guidelines. Recently, we have 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, we have started to conduct performance audits and submitted our first audit reports to the Parliament.

In addition, preparatory activities for introducing financial statement audits have begun. For example, we are currently working to translate and publish International Standards on Auditing issued by the International Federation of Accountants (IFAC), develop a financial audit manual, and subsequently train auditors on how to use these documents.

Changes in Organizational Structure

The Mongolian National Audit Office (MNAO) 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 decisions individually. Thus, the organization has shifted from a board model to a hierarchical model.

The need to cooperate with external audit service providers has brought about another change in organizational structure. In Ulaanbaatar, there are currently 29 private audit firms with 24 branch offices in the 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. The law states that “all staff of the National Audit Office shall be of proven capacity and competence in the performance of their respective duties. For this purpose, the Auditor General of Mongolia shall develop and implement a continuing training program for staff of the National Audit Office”. The logic behind this requirement is simple: the auditors should know what they are going to audit. And this requirement is not only legal. The first general government auditing standard states that the staff assigned to conduct the audit should collectively possess adequate professional proficiency for the tasks required.

To meet this requirement, we are currently developing a continuing training program for auditors with the intention of preparing training packages according to a training curriculum and training our own trainers.

Besides the high requirement for knowledge and skills, the new Law on State Audit also sets a higher standard for ethical behavior. The law states that “in order to ensure fairness in the activity of the National Audit Office, the Auditor General of Mongolia shall approve and pursue a Code of Ethics. The Code of Ethics shall be pursued equally by the Auditor General of Mongolia, staff of the National Audit Office, and any persons who are involved in the state audit activity on behalf of the National Audit Office.” In accordance with this provision, 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. All employees of newly established state audit central and local organizations are required to sign the Code of Ethics.

The SAI and Public Administration Reform

From the beginning, our supreme audit institution 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. We believe that 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 after 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 promoting good governance-and specifically such key principles as 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 ensure citizens’ rights to get information from public agencies.

The MNAO not only audits others but is also a subject for auditing. Since 2001, we have begun to produce yearly financial statements audited by independent external auditors and include them in our Annual Reports. Starting in 2004, an independent auditor nominated by the Parliament will audit our financial statement.

These are just some examples of how government auditing systems in Mongolia are changing. The change process is still going on. We look forward to sharing with Journal readers additional developments in the future.

For additional information contact: Mongolian National Audit Office, Government Building No.4, Baga toiruu – 6, Ulaanbaatar – 46, Mongolia; tel: ++976 (11) 32 37 98, 32 20 71; fax: ++976 (11) 32 32 66; e-mail: batbayarb@mnao.pmis.gov.mn.

By Mr. Batbayar Badamdorj, Deputy Auditor General of Mongolia

Copyright International Journal of Government Auditing Oct 2003

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