Plug glaring loopholes in public expenditure

A  recent report of the Auditor General for the financial year ended 30 June 2013 indicates that out of the audited 343 statements, only 41 or 12 per cent had a clean (unqualified) audit opinion while 172 or 50 per cent, 45 or 13 per cent, and 85 or 25 per cent had qualified, adverse, and disclaimer of opinion reports respectively.

Further, the auditing of 23 revenue statements during the same period painted a damaging picture where only revenue amounting to Sh508 million received an unqualified opinion and nine statements valued at Sh10.7 billion received a qualified opinion. The remaining 13 revenue statements were in the red, with 12 statements amounting to Sh800 billion receiving adverse rating.

The Auditor General could not issue any opinion for one statement amounting to Sh1.48 billion.

What does this imply? The findings of the Auditor General’s report unmistakably demonstrate that with the exception of a few properly managed entities, the operation of most audited agencies fail the test of financial reporting and accountability.

The inability of the entities that ought to have ensured that this did not occur by enforcing transparency and accountability entail misuse and in the worst cases, loss of the country’s resources.

We continue losing millions of shillings annually. These losses  could have been plugged, with the government making a more serious effort to address non-compliance issues involving some public sector employees who opt to disregard the Government Financial Regulations and Procedures and the Public Finance Management Act.

Laid down rules

 An unqualified opinion implies that the financial statement gives a true and fair view, in all material respects — all information that could influence the decision that users make on the basis of financial information about a specific entity and in accordance with the laid down rules and regulations governing management and use of public funds.

A qualified opinion implies that there are certain issues that the auditor general believes were not adequately complied with.

However, they are not pervasive enough to warrant other forms of opinion. Such an opinion states that except for the effects of some deficiency in the financial statements or some limitation in the scope of the auditor, the financial statements were presented fairly.

A disclaimer of opinion is not really an opinion. In a statutory audit engagement, a disclaimer is required when substantial scope restricts or other conditions prevent the auditors’ compliance with generally accepted auditing standards.

An adverse opinion, which in this report, accounts for more than 98 per cent of opinions on revenue statements by value, is the opposite of an unqualified opinion. This means that the financial statements that were presented by government entities did not present fairly the financial position, performance results, and cash flows, in conformity with generally accepted accounting principles and standards (IFRS or IPSAS).

Demand information

Why audit reports in the first place? To answer this question we must appreciate the fact that the Kenyan government is accountable and that its citizens have the right to hold it accountable and are free to demand information regarding the effectiveness and efficiency of state and county governments, according to articles 226 and 229 of the Constitution.

As a matter of fact, Kenyans expect that those responsible for handling public money are held fully accountable. Other users of audit reports include the national and county governments which rely on this annual single audit of the state to ensure that the more than Sh1 trillion of the national budget is expended in compliance with national laws and regulations.

Indeed, investors, creditors, and bond rating agencies rely on the annual audit of the state’s financial statements to assess its financial condition. The recent successful Eurobond issue was hinged on the soundness of our fiscal and monetary policies.

It goes without saying that the public sector is a significant part of the economy.

Therefore, any improvement in the sector’s performance will have a net positive effect on economic growth and reduce fiscal policy strain.

Government agencies which do not discharge their obligations in accordance with government financial legislations in force need to be brought to heel.

The Auditor General has thrown the ball into the court of the Legislature and the Executive by exhorting them to bring to justice those guilty of financial mismanagement in ministries and county government agencies.

It is proposed that the government ensure that corrective action is taken to address the findings in the Auditor-General’s report for the year 2012/13.

It can only be a different set of examples highlighted by the Auditor-General’s report, but the same non-compliance pattern continues to attract media and public attention year in, year out.

There can be no two ways about it. If they fail to comply, they should be immediately removed from their jobs instead of being given a desk job or reassigned to another department.

Bad examples are set when senior staff continue to plunder the system without fear of repercussion on their job security.

It will also make a mockery of the government when the Auditor-General’s reports are not being taken seriously after they have identified the shortcomings in the administration.

Weed out non-performers

It is a fact that when there is non-compliance, it is the people managing the systems who have failed to heed the need to comply. Hence, for the government to be effective, the national and county governments must step up their efforts to weed out non-performers and those who manipulate the structures in their favour. 

The government should emulate the private sector, where productivity and compliance are important to safeguard one’s job.

All arms of government must take the lead in ensuring that those culpable are held to account and recommendations arising from the auditor general’s reports are addressed effectively.

The government should deliberately set a medium term target to weed out adverse and disclaimer reports in the next few years. This will be a significant boost to the economic growth and development of our middle-income economy.

The writer is chairman, Institute of Certified Public Accountants of Kenya.