The impact and results of the internal audit activity exercised in the public sector in Romania.

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1 Available online at ScienceDirect Procedia Economics and Finance 32 ( 2015 ) Emerging Markets Queries in Finance and Business The impact and results of the internal audit activity exercised in the public sector in Romania. Alexandra Narcisa Cioban (Lucan) a, *, Elena Hlaciuc a, Ana Maria Zaiceanu a a, tefan cel Mare University of Suceava, 13 University Street, Suceava, , Romania Abstract What should we do to get favorable and measurable result of the public internal audit activity? An overall evaluation of the internal audit activity exercised in recent years in the public sector in Romania in order to identify the reasons for malfunctioning and finding possible solutions that lead to more efficient internal audit activity. Regarding this, the research disseminates information obtained from public internal audit reports; it examines audit risk, organizational framework, attributes of the audited entity and highlights the interaction of these factors that influence differently the effectiveness of internal audit. Following a thorough search, we can say that the impact of internal audit in the public sector is strongly influenced by the quality of internal audit mission and also by early and accurate identification of the risks while organizational framework and audit attributes have not a severe impact on audit efficiency Authors. Published Published by Elsevier by Elsevier B.V. This B.V. is an This open is an access open access article article under under the CC the BY-NC-ND CC BY-NC-ND license license ( ( Selection and peer-review under responsibility of of the Asociatia Emerging Grupul Markets Roman Queries de Cercetari in Finance and Finante Business Corporatiste local organization. Keywords: internal audit, impact, public sector, internal audit mission, risks, audit efficiency, results, Romania; 1. Introduction The public sector is present in the economic life in various ways. There is no market economy in which the public sector is not meant to be more or less present, directly or indirectly, between factors influencing and orienting the economic operators, respectively their activity. The progress of events linked to this field (the Corresponding author. Tel.: ; address: alexandrac@seap.usv.ro Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license ( Selection and peer-review under responsibility of Asociatia Grupul Roman de Cercetari in Finante Corporatiste doi: /s (15)

2 Alexandra Narcisa Cioban (Lucan) et al. / Procedia Economics and Finance 32 ( 2015 ) passing from the communist system to a market economy) has implicitly changed the control activity as well, the consultancy and insurance of the activity of public institutions. Thus, has been carried out an experimental mission for the application in the field of internal public audit of more and more transparent requirements, which add a greater value to the entity audited. The aim of this research is to highlight the essential aspects that influence the actuality and the impact of the internal public audit taking place in the public sector in Romania. Based on the results obtained by the missions of internal public audit carried out at the level of the Romanian public institutions, this paper examines the quality and effectiveness of the internal public audit, the emerging risks encountered, the shortcomings, as well as some proposals for the improvement of the internal audit activity. 2. Importance and functions of the public sector The public sector represents that part of the economy in which is to be found the public property and includes the public companies in the form of autonomous administrations and the patrimony of the central, local and social security public administration, as well as a substantial part of the agricultural real estate. Taking into account the fact that the borders between the public and the private sector are not strictly delimited, the public sector or the state in an economical sense, can be defined as the sum of all activities carried on by the state. The public sector plays a particularly important role in the Romanian economy since it meets a number of important functions. A schematic presentation of them is included in the table no. 1: Table 1. Public sector functions Protective function Allocation function Redistributive function Productive function Stabilization function protection of privacy and freedom of members of the society, i.e. the protection of legitimate rights of ownership, provides and protects public and private economic transactions state involvement in the market mechanism in order to define the type and quality of a public service and the possibilities of collecting the revenues to cover the expenditures redistribution of income and wealth in society, more specifically the redistribution of private property rights ensures the production of certain categories of goods the characteristics of which make them often difficult to be supplied through market price stabilization, economic growth, creating a regulatory framework governing all the actions carried out by the population We believe that the most important functions that define the public sector are: the protective function, the allocation function, the redistributive function, the productive and stabilisation function. The first function taken into consideration, the protective one, is, in our opinion, one of the most important since it is the subject of maintaining the social order and it supports the applicability of law against contraventions and law-breaking. Taking into account these characteristics, we can say that the state, through its organs, keeps the peace and guarantees the freedom of citizens. The instruments used in the protective action are the legislative acts having as object the ownership rights and implementation of contracts, provisions concerning public security, etc. The allocation function (Georgescu and Betianu, 2009) refers to the state involvement in the market mechanism in order to define the type of quality of a public service and the possibilities to raise the revenues to cover the expenditures necessary for its operation. Of course, when the market provides an effective use of resources, the state involvement is minor and consists in actions intended to encourage the competition and the free entrance on the market. The next function taken into consideration, the one of redistribution of incomes refers to the state involvement on the market through the process of adjustment of revenues and of the wealth gained from economic transactions. Therefore it should be underlined that, any change of the social status-quo involves two categories of modifications: gain or loss. Thus, we have groups which obtain benefits as a result of the redistribution of incomes, and groups that lose because of this change. The instruments used in the exercising of redistribution function are shown in the figure below:

3 396 Alexandra Narcisa Cioban (Lucan) et al. / Procedia Economics and Finance 32 ( 2015 ) Taxes; Transfers and subventions DAMAGE THE MARKET REDISTRIBUTION TOOLS NEUTRALISE THE MARKET Fixing, price controls; Legislation; Competition; Restrictions. Fig. 1. Redistribution tools of incomes The stabilization represents a function of the public sector which targets the creation of the legal framework which provides and protects the public and private economic transactions. Objectives such as the raise of employment rate, the prices stability, the economic growth are central for macroeconomic policies. The productive function of the state is highlighted by the fact that it ensures the existence of public goods. This chapter is quite delicate, because of the temptation to use goods without paying for them. In spite of this aspect, the productive function is substantiated by the fact that the state must produce goods and services which the population cannot achieve at all, or do not have the opportunity, individually and separately, to obtain them by their own forces. The formula the best government is the one which governs as much time as it should is well-known. The question that raises is: Where does the state need to stop acting in society? 3. Internal Audit: value-added to the management process from public organizations According to the literature contribution value" of internal audit is realized in the entity when internal auditors intervening through well adapted ways of resources and its culture. The notion of intake of value found in the definition of internal auditing, is applying into insurance and counseling activities, whose object is to bring added value to the entity through a systematic and methodical approach to corporate governance, risk management and control The internal audit activity performed in the public sector The notion of internal public audit represents, in accordance with the law 672/2002, a functionally independent and objective activity, which provides insurance and advice to the management in terms of sound administration of public revenues and expenditures (regardless of the source of funding). Also, this law lists the main types of internal audit, as follows (Ghita and all, 2010) : a) the system audit, which is an in-depth assessment of the systems of internal management and control, in order to determine whether they are functioning in an economic, effective and efficient manner, to identify deficiencies and to formulate recommendations for correcting them; b) the audit of performance, which examines if the criteria set out for implementing the objectives and tasks of the public entity are correct for the evaluation of the results and determines whether the results are consistent with the objectives; c) the regularity audit, which represents the examination of the actions on the financial effects on account of public funds or of public patrimony, under the aspect of compliance with the set of principles and with the procedural and methodological rules applicable to them. In carrying out our research we focused on the performance audit conducted within public organisations. This decision was taken after we consulted several internal audit reports carried out in public institutions in the previous years, presenting certain deficiencies as regards the compliance, the efficiency and the effectiveness of risk management processes. The analysis is aimed at supporting the credit release authorities in the identification and assessment of risks as well as for the improvement of the internal control/management system.

4 Alexandra Narcisa Cioban (Lucan) et al. / Procedia Economics and Finance 32 ( 2015 ) The Impact of the Internal Audit Mission Highlighted by the Risk Analysis As a first idea, we believe that it is necessary to develop the section of risk analysis. The word risk is derived from the Italian word risicare which means to dare. Thus, we can say about this concept that it represents a choice, not a destiny. Any activity which we perform shall bear some risks which influence, with us wanting it or not, one direction or another. It is best to be able to feel them as they are and to use them for our benefit. In our opinion, the auditor should know and understand very well the management and internal control system of the entity, in such a way as to identify and assess the risks corresponding to the operation of the entity and the specific risks of the activity being carried out. Since the risks are those situations/actions that are likely to affect the achievement of objectives and at the same time could lead to the creation of prejudices, the setting of auditable objectives and the risks associated with them constitute the support for the risk analysis. The risk assessment is based on two-dimensional components: the probability of occurrence and the risk impact. The probability assessment, which is a qualitative component, shall be carried out by evaluating the possibility of appearance of risks and by taking into account the qualitative occurrence factors specific to the context of achieving objectives. The impact assessment, which is a quantitative component, is carried out by assessing the effects of risk, in the case in which it would arise, by taking into account the quantitative factors specific to the financial nature of achieving the objectives. Internal auditors use for the identification and assessment of instrumental audit risks: questionnaires, acknowledgement forms (FIAPs, FCRIs) and tables for the submission of audit documents circuit (audit gangs). They also use audit techniques, namely: checking, interviewing, analyzing (sampling, brainstorming, focus groups etc), physical observations. For our research we have taken into account public institutions in the North-East of Romania and, as assessment tools, we have chosen the analysis and the evaluation. The internal public audit reports drawn up by the Ministry of Public Finance in the year 2013 for 2012 found out that the organization of the internal audit activity in the local public administration has been only carried out in a small part of the public organizations. Therefore, the problems raised by this fact are: the information contained in the annual reports of activity received is not responding faithfully to the information requested, and in some cases its quality does not rise to the standards imposed by the activity carried out. This can be explained by the lack of functional audit structures, by an insufficient training provided for internal auditors, as well as by the fact that audit missions are carried out by mass service firms which do not have qualified personnel for carrying out internal public audits. In the structure of the territorial administrative units that have carried out internal audits through contract service agreements in 2012 are to be found: a municipality of the Bihor county (the Municipality of Salonta); 22 cities in the counties of Bihor (22,73%), Suceava (22,73%), Timi (13,64%), Olt (9,09%), Boto ani (9,09%), and Br ila (4,54%), Neam (4,54%), Ia i (4,54%), Arge (4,54%), Satu Mare (4,54%). The 717 villages are located in 25 counties, 8 out of which have 68% of the contracts.

5 398 Alexandra Narcisa Cioban (Lucan) et al. / Procedia Economics and Finance 32 (2015) Fig. 2. Administrative-territorial units which ensured internal audit service contracts the poor quality of the reports, in terms of the information contained, sent by the main credit release authority who carries out the activity through contract service agreements, mainly due to the lack of expertise of natural persons. The statement of service contracts that hold significant shares, by county, in the period is as follows: Fig 3. Statement of service contracts that counties have significant shares in the period By analyzing the above-mentioned facts, we can easily notice that three important counties in the North-East of Romania : Iaúi, NeamĠ, Suceava (303 contracts concluded in NE out of 720 at the national level) have opted for the period for contract service agreements in order to carry out the internal audit. Taking into account that internal audit outsourcing is not a good idea for the public units because their staff not sufficiently trained nor get closer to the way of organization and decision-making in the audited entity, we can say that the extra value brought by the internal audit mission is virtually nonexistent. In the year 2012, in public administration have been carried out 6,772 missions to internal audit, of which 93% are represented by missions of insurance and 7% are represented by guidance missions. Therefore, we can say that one of the reasons why internal audit in public institutions do not reflect the performance of the entities is that the advisory missions is not achieved to most entities. As it is also specified by International Standards

6 Alexandra Narcisa Cioban (Lucan) et al. / Procedia Economics and Finance 32 ( 2015 ) for Professional Practice of Internal Audit, during the guidance missions, internal auditors should address risks related to the objectives of the mission and be careful to other significant risks, or if this type of guidance is not performed at all, how can we highlight the most important risks associated with each of the institutions and the possibilities of fighting them? So we propose to perform counseling missions to all existing public units because only after these steps is really quantified the added value of internal audit. At the level of public entities, the process for the evaluation of risk management leads to: increasing the degree of carrying out the objectives; promoting an organizational culture that accepts risks; the compliance with legal requirements and international standards; the improvement of corporate management; the improvement of internal control; efficient allocation of the resources and using them for dealing with risks; improving the efficiency and effectiveness of operating activities; a better prevention and management of errors and fraud. The methods of assessing the epidemiology of the entities in the public domain (legal diagnosis, the diagnosis of human resources, technical diagnosis, financial and economic diagnosis) contribute to the achievement of overall results which help the public organizations to work more effectively as a whole. The resources of the public domain, in this case of the town halls depend either directly or indirectly on the human resources of these entities, in particular, because of the fact that the sources of management decisions are constituted by human resources. Conclusions Like any other activity, the internal audit reveals a series of irregularities arising on one hand from the contents of normative acts, and on the other hand from the confrontation with the realities of a market economy. The existence of a modern legal framework and of rules and procedures drawn up in accordance with internationally accepted audit standards and with the good practice in the European Union would constitute fundamental guarantees that the internal public audit is a true agent of the change in the public institutions. Therefore, we believe that our paper has confirmed the idea which we have started from in our research, namely, the fact that an efficient internal audit and a good administration of the public incomes can be done at the time when risks are identified and removed quickly and accurately. As a result of the procedure of analyzing the audit reports over the last year we have noticed that in our country, the shortcomings at the level of the internal public audit are due, to a large extent, to the faulty management of human resources. In this case, we can say that an analysis of the risks with the staff will improve the quality of audit missions, since the solutions and proposals made in this process of evaluation will strengthen the public organization structure, by optimizing the manner of spending the public money, and will therefore create transparency in the institution s activities. As regards our future intentions, we would want to build an econometric model for previsions in respect of expenditures made for the staff of public organizations, model which could also prove to be useful in the carrying out of expectations concerning other incomes or expenditures of a public entity depending on the subject of interest, but following the same model and stages of work. Acknowledgements This paper was supported by the project "Sustainable performance in doctoral and post-doctoral research PERFORM - Contract no. POSDRU/159/1.5/S/138963", project co-funded from European Social Fund through Sectorial Operational Program Human Resources References Georgescu I., Be ianu L., 2009,,,Calitate în contabilitatea institu iilor publice Editura Universit ii,,alexandru Ioan Cuza, Ia i, p. 34. Ghita M., Hlaciuc E., Boghean F., Ghita R., 2010,,,Guvernanta corporativa si auditul intern, Editura TipoMoldova, Iasi, p Raport privind activitatea de audit intern din sectorul public pe anul 2012 disponibil pe site-ul: