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European practices on SAIs and law enforcement agencies’ cooperation

AVENUE CONSULTING GROUP| 21 February 2021

In January of 2018, the new Law on Audit Chamber was adopted in Armenia. The article 5(5) of new law states that in case of discovering during the audit prima facie elements of crime, the Audit Chamber (AC) immediately sends the relevant audit materials to the General Prosecutor’s Office. In 2020, the Audit Chamber defined in the Guide for drafting interim audit conclusions, that It is prohibited to use in the conclusion qualifications such as “violation”, “fraud”, “falsification” and other similar qualifications. Abstract assessments, as well as assessments not supported by sufficient evidences (e.g. “The audited entity has submitted an obviously exaggerated payment order”) cannot be provided. At the same time, if during the audit the auditor has suspected prima facie elements of crime, of which the AC has been duly informed, it is required to make a note about it in the “Summary” section of the conclusion.

Expert Ani Atoyan has conducted comparative research on the international practices existing in other countries relating to the criteria of detecting signs of criminal violations during the audit.

Q: Which countries does your research cover?

A: The research covers 3 European countries (Hungary, Latvia, Slovenia), 3 Eastern Partnership countries (Georgia, Ukraine, Moldova), as well as Germany, as a country having more advanced SAI experience.

Q: What did the comparative research show regarding the peculiarities and differences in determining the signs of criminal violation during audit? How do the auditors define if there are signs of crime or not? Are there any specific mechanisms for this?

A: Еach jurisdiction tuned out to have both similarities, but at the same time interesting differences. In Ukraine, when the Accounting Chamber informs the relevant law enforcement agencies (LEAs) of the signs of criminal or administrative violations revealed during the audit, the statement from AC must specify number of things such as: the specific articles of laws and other regulations that are violated; the officials committed the violations; the received explanations (if they were provided); the assessment of risks of material consequences of the damage caused to the state budget, if any. So, the information set forth in the statement must be objective, reliable, substantiated and contain a comprehensive description of all facts and violations revealed. It is prohibited to include in the statement any assumptions or unconfirmed information. Plus, the head of the auditing group shall be personally responsible (usually disciplinary liability) for the objectivity and validity of the facts stated in the statement.

In Moldova, the audit findings should contain only information that is sufficiently corroborated by adequate audit evidence obtained in accordance with established procedures. There are 3 basic characteristics of fraud, known as the “fraud triangle”: 1) pressure, which usually arises from a significant financial need or a problem (e.g. the need for money, keeping the service, reach more advanced position or a higher standard of living, etc.), 2) opportunity, which is created by insufficient control activities (e.g. there is no separation of duties, poor management, etc); and 3) justification, which is a conscious decision of a person to place his personal needs above the needs of other persons and/or the public entity and to justify that decision, for the most part, for himself. In order for fraud to occur, there must be all three elements. Otherwise, the fraud does not take place.

In case of fraud indices, it is important to conduct an investigation using audit methods, until the suspicion reaches a level that creates favorable conditions for a LEA to decide to initiate a criminal case. Most likely, that level should be “It could be assumed” degree of suspicion. If some of the indicators of fraud/corruption are identified, the legal department is involved for obtaining full and correct audit evidence or for ascertaining whether a concrete action represents or may be a violation of the rule of law.

In Hungary, if during the audit State Audit Office (SAO) has grounds to suspect a criminal offence, it shall notify the competent authority of its findings without delay. Evidence used by the SAO include: data and documents obtainable by the SAO from authentic sources; authentic data and documents requested by the SAO from the audited organization during the data request; authentic data and documents obtained during the on-site audit of the SAO; the results and conclusions of the statistical methods and procedures performed by the SAO on the basis of the data and documents specified above for the audit of the SAO; visual records, interviews and other minutes taken during the SAO’s on-site audit. The criteria for appropriate evidence are relevance, accuracy and reliability.

In Slovenia, only in case of a justified suspicion that a violation or criminal offence has been committed, the Court of Audit can propose the commencement of proceedings against such violation or file the motion for prosecution. Although there’s no any specification as to which evidences are consider enough to “justify” the suspicion, however, during the pre-audit period the Court may demand the user of public funds to provide all information which they consider relevant to their audit, and if the authorized representative of the Court who is performing the audit believes that suspicion exists that some violation or criminal offence has been committed, he may seize the documentation (for up to 8 days), and issue a certificate of the seizure. Additionally, the Court of Audit does have legal tools to impose the auditee to provide all the required information it might deem necessary to justify its suspicion. Particularly, the Court may impose fines in the amount of EUR 2000 on the acting officer of the audited entity for failing to submit the required data/documentation, etc.

In Georgia, in case of identifying signs of crime during audit procedures, State Audit Office (SAO) immediately prepares letter for LEAs, which describes SAO’s position and reasons for submitting special case to LEAs. Specific evidence and materials are attached to the letter. There’s no specification in the legislation to as what is considered “evidence” in this case. Basically, the same procedure is in Latvia. However, in addition to sending a case to relevant LEAs, the Latvian State Audit Office (since 2019) has the legislative power to decide on recovery of damages until a decision is made in criminal proceedings, in an administrative violation case or in a disciplinary case

In Germany there is quite a unique case.  The German SAI may communicate audit findings to the authorities responsible for prosecuting criminal offences, where the German SAI deems this to be necessary. The SAI  communicates the audit findings to the appropriate agencies for comment within a period to be set by it. Although in legal terms German SAI still can report audit findings to the relevant law enforcement agencies, however, in practice, German SAI has never directly contacted with the Prosecutor: this is to create good trust between the auditee and auditor. (The strongest message communicated by the German SAI might be something like “this does not correspond to the rules”.)  This is also common for all audit institutions in Germany – not only Federal one. The only case might be that the head of the audited institution is corrupted.  Usually, the German SAI addresses the found apparent crime to the Head of the audited institution.  They might write to the Head of the audited institution, asking to take care for the prosecution.  The Head of the institution will bear the responsibility to inform to the prosecutor. And only in the cases when the audit findings are connected to the Head of the audited institution, then it might be not rationale to report him. In this case the auditor might report directly to the prosecutor. However, these are very rare cases.

Q: After sending the findings to LEAs, how do the SAIs and LEAs collaborate? For example, in Armenia, after forwarding the audit materials with prima facie elements of crime to the General Prosecutor’s Office, the Audit Chamber may terminate the public audit to that extend. Although the Chamber has no legal obligation to conduct any follow-up on these cases, the law requires General Prosecutor’s Office to inform to the Chamber in writing about the decisions made on the basis of the provided materials. Also, at the same time, in practice the auditors might be involved in the proceedings when required by the General Prosecutor’s Office to get explanations and clarifications on the case.  Is this the case in the researched countries, too?

A: Not so much. In terms of SAI and LEAs collaboration, there are both similarities and differences. For example, in Ukraine the Accounting Chamber has legal obligation to follow-up on the cases passed to the LEAs and to include the response measures taken by LEAs in its annual report. Also, Chamber and LEAs have internally signed agreements, which determine the procedure for cooperation with LEAs. However, if LEA does not initiate an investigation (justified by the lack of sufficient evidence), there is no mechanism that AC can influence it as such. The similarity is that, if necessary, auditors can be involved as an expert.

In Moldova, the Court of Accounts has also signed Cooperation Agreements with various LEAs, which sets the areas and forms of collaboration. Moreover, in order to strengthen the mechanism of collaboration with LEAs, an Interdepartmental Council has been established, which examines cases of suspected fraud and decides on their referral to LEAs. Also, if audit material is transmitted to LEAs, the Court does not make public suspected fraud/corruption cases, so as not to jeopardize conducting the investigation.

In Hungary, after the grounded suspicion on criminal offence is forwarded to the relevant LEA, the latter notifies State Audit Office of its position concerning the initiation of the proceedings usually within 60 days, and of the outcome of the proceedings within thirty days from completion of the proceedings. Additinally, in the event that the audit reveals improper or wasteful use, or damage caused by the audited entity in serious violation of the rules pertaining to the management of funds, or the hazard thereof, the SAO may, in order to prevent or mitigate the damage, apply to the competent authority or organisation for the attainment of the measures such as: freezing of the funds allocated for the utilisation of appropriations, with the exception of the disbursement of wages; suspension of the disbursement of funds from a subsystem of public finances; suspension of the possibility of receiving a portion of the pledges of 1% of the personal income tax; and where it is suspected that crime has been committed, an order for a precautionary measure with regard to the asset elements which qualify as public property and are owned or managed by the audited entity.

In Georgia, the Auditor General requests information from LEAs (on annual basis) about the status of the cases reported by the State Audit Office. Special form is sent to LEAs, where State Audit Office describes findings shortly, the time period when the finding was reported to them and asks agencies to identify the status of investigation (case in under investigation, completed, canceled, etc.). And again, if investigation starts, auditors might be questioned by LEAs representatives.  In Slovenia, the auditors’ reports pass through the quality assurance before they will be submitted to Police or Prosecutors․ LEAs usually ask professional consultancy in this regard. There are special departments in the Police which might request from the Court of Audit certain information on specific cases.

As to the Latvian State Audit Office, it is very transparent regarding the follow-up of the forwarded cases, and publishes in a separate section of its official website the process and the outcomes of all the cases it has forwarded to relevant LEA. By the way, to strengthen the efficiency of SAO’s mission and work, in 2019 another legal tool was enhanced for SAO by the Parliament. In particular, if the audit reveals illegal activity (both gross negligence and willful misconduct) with financial resources or property, the SAO may decide on compensation for losses caused by illegal activity, indicating the persons against whom the amount of damage caused by the person and the grounds for recovery of the damage from the particular person.

European practices on SAIs and law enforcement agencies’ cooperation

AVENUE CONSULTING GROUP| 21 February 2021

In January of 2018, the new Law on Audit Chamber was adopted in Armenia. The article 5(5) of new law states that in case of discovering during the audit prima facie elements of crime, the Audit Chamber (AC) immediately sends the relevant audit materials to the General Prosecutor’s Office. In 2020, the Audit Chamber defined in the Guide for drafting interim audit conclusions, that It is prohibited to use in the conclusion qualifications such as “violation”, “fraud”, “falsification” and other similar qualifications. Abstract assessments, as well as assessments not supported by sufficient evidences (e.g. “The audited entity has submitted an obviously exaggerated payment order”) cannot be provided. At the same time, if during the audit the auditor has suspected prima facie elements of crime, of which the AC has been duly informed, it is required to make a note about it in the “Summary” section of the conclusion.

Expert Ani Atoyan has conducted comparative research on the international practices existing in other countries relating to the criteria of detecting signs of criminal violations during the audit.

Q: Which countries does your research cover?

A: The research covers 3 European countries (Hungary, Latvia, Slovenia), 3 Eastern Partnership countries (Georgia, Ukraine, Moldova), as well as Germany, as a country having more advanced SAI experience.

Q: What did the comparative research show regarding the peculiarities and differences in determining the signs of criminal violation during audit? How do the auditors define if there are signs of crime or not? Are there any specific mechanisms for this?

A: Еach jurisdiction tuned out to have both similarities, but at the same time interesting differences. In Ukraine, when the Accounting Chamber informs the relevant law enforcement agencies (LEAs) of the signs of criminal or administrative violations revealed during the audit, the statement from AC must specify number of things such as: the specific articles of laws and other regulations that are violated; the officials committed the violations; the received explanations (if they were provided); the assessment of risks of material consequences of the damage caused to the state budget, if any. So, the information set forth in the statement must be objective, reliable, substantiated and contain a comprehensive description of all facts and violations revealed. It is prohibited to include in the statement any assumptions or unconfirmed information. Plus, the head of the auditing group shall be personally responsible (usually disciplinary liability) for the objectivity and validity of the facts stated in the statement.

In Moldova, the audit findings should contain only information that is sufficiently corroborated by adequate audit evidence obtained in accordance with established procedures. There are 3 basic characteristics of fraud, known as the “fraud triangle”: 1) pressure, which usually arises from a significant financial need or a problem (e.g. the need for money, keeping the service, reach more advanced position or a higher standard of living, etc.), 2) opportunity, which is created by insufficient control activities (e.g. there is no separation of duties, poor management, etc); and 3) justification, which is a conscious decision of a person to place his personal needs above the needs of other persons and/or the public entity and to justify that decision, for the most part, for himself. In order for fraud to occur, there must be all three elements. Otherwise, the fraud does not take place.

In case of fraud indices, it is important to conduct an investigation using audit methods, until the suspicion reaches a level that creates favorable conditions for a LEA to decide to initiate a criminal case. Most likely, that level should be “It could be assumed” degree of suspicion. If some of the indicators of fraud/corruption are identified, the legal department is involved for obtaining full and correct audit evidence or for ascertaining whether a concrete action represents or may be a violation of the rule of law.

In Hungary, if during the audit State Audit Office (SAO) has grounds to suspect a criminal offence, it shall notify the competent authority of its findings without delay. Evidence used by the SAO include: data and documents obtainable by the SAO from authentic sources; authentic data and documents requested by the SAO from the audited organization during the data request; authentic data and documents obtained during the on-site audit of the SAO; the results and conclusions of the statistical methods and procedures performed by the SAO on the basis of the data and documents specified above for the audit of the SAO; visual records, interviews and other minutes taken during the SAO’s on-site audit. The criteria for appropriate evidence are relevance, accuracy and reliability.

In Slovenia, only in case of a justified suspicion that a violation or criminal offence has been committed, the Court of Audit can propose the commencement of proceedings against such violation or file the motion for prosecution. Although there’s no any specification as to which evidences are consider enough to “justify” the suspicion, however, during the pre-audit period the Court may demand the user of public funds to provide all information which they consider relevant to their audit, and if the authorized representative of the Court who is performing the audit believes that suspicion exists that some violation or criminal offence has been committed, he may seize the documentation (for up to 8 days), and issue a certificate of the seizure. Additionally, the Court of Audit does have legal tools to impose the auditee to provide all the required information it might deem necessary to justify its suspicion. Particularly, the Court may impose fines in the amount of EUR 2000 on the acting officer of the audited entity for failing to submit the required data/documentation, etc.

In Georgia, in case of identifying signs of crime during audit procedures, State Audit Office (SAO) immediately prepares letter for LEAs, which describes SAO’s position and reasons for submitting special case to LEAs. Specific evidence and materials are attached to the letter. There’s no specification in the legislation to as what is considered “evidence” in this case. Basically, the same procedure is in Latvia. However, in addition to sending a case to relevant LEAs, the Latvian State Audit Office (since 2019) has the legislative power to decide on recovery of damages until a decision is made in criminal proceedings, in an administrative violation case or in a disciplinary case

In Germany there is quite a unique case.. The German SAI may communicate audit findings to the authorities responsible for prosecuting criminal offences, where the German SAI deems this to be necessary. The SAI communicates the audit findings to the appropriate agencies for comment within a period to be set by it. Although in legal terms German SAI still can report audit findings to the relevant law enforcement agencies, however, in practice, German SAI has never directly contacted with the Prosecutor: this is to create good trust between the auditee and auditor. (The strongest message communicated by the German SAI might be something like “this does not correspond to the rules”.) This is also common for all audit institutions in Germany – not only Federal one. The only case might be that the head of the audited institution is corrupted. Usually, the German SAI addresses the found apparent crime to the Head of the audited institution. They might write to the Head of the audited institution, asking to take care for the prosecution. The Head of the institution will bear the responsibility to inform to the prosecutor. And only in the cases when the audit findings are connected to the Head of the audited institution, then it might be not rationale to report him. In this case the auditor might report directly to the prosecutor. However, these are very rare cases.

Q: After sending the findings to LEAs, how do the SAIs and LEAs collaborate? For example, in Armenia, after forwarding the audit materials with prima facie elements of crime to the General Prosecutor’s Office, the Audit Chamber may terminate the public audit to that extend. Although the Chamber has no legal obligation to conduct any follow-up on these cases, the law requires General Prosecutor’s Office to inform to the Chamber in writing about the decisions made on the basis of the provided materials. Also, at the same time, in practice the auditors might be involved in the proceedings when required by the General Prosecutor’s Office to get explanations and clarifications on the case. Is this the case in the researched countries, too?

A: Not so much. In terms of SAI and LEAs collaboration, there are both similarities and differences. For example, in Ukraine the Accounting Chamber has legal obligation to follow-up on the cases passed to the LEAs and to include the response measures taken by LEAs in its annual report. Also, Chamber and LEAs have internally signed agreements, which determine the procedure for cooperation with LEAs. However, if LEA does not initiate an investigation (justified by the lack of sufficient evidence), there is no mechanism that AC can influence it as such. The similarity is that, if necessary, auditors can be involved as an expert.

In Moldova, the Court of Accounts has also signed Cooperation Agreements with various LEAs, which sets the areas and forms of collaboration. Moreover, in order to strengthen the mechanism of collaboration with LEAs, an Interdepartmental Council has been established, which examines cases of suspected fraud and decides on their referral to LEAs. Also, if audit material is transmitted to LEAs, the Court does not make public suspected fraud/corruption cases, so as not to jeopardize conducting the investigation.

In Hungary, after the grounded suspicion on criminal offence is forwarded to the relevant LEA, the latter notifies State Audit Office of its position concerning the initiation of the proceedings usually within 60 days, and of the outcome of the proceedings within thirty days from completion of the proceedings. Additinally, in the event that the audit reveals improper or wasteful use, or damage caused by the audited entity in serious violation of the rules pertaining to the management of funds, or the hazard thereof, the SAO may, in order to prevent or mitigate the damage, apply to the competent authority or organisation for the attainment of the measures such as: freezing of the funds allocated for the utilisation of appropriations, with the exception of the disbursement of wages; suspension of the disbursement of funds from a subsystem of public finances; suspension of the possibility of receiving a portion of the pledges of 1% of the personal income tax; and where it is suspected that crime has been committed, an order for a precautionary measure with regard to the asset elements which qualify as public property and are owned or managed by the audited entity.

In Georgia, the Auditor General requests information from LEAs (on annual basis) about the status of the cases reported by the State Audit Office. Special form is sent to LEAs, where State Audit Office describes findings shortly, the time period when the finding was reported to them and asks agencies to identify the status of investigation (case in under investigation, completed, canceled, etc.). And again, if investigation starts, auditors might be questioned by LEAs representatives. In Slovenia, the auditors’ reports pass through the quality assurance before they will be submitted to Police or Prosecutors․ LEAs usually ask professional consultancy in this regard. There are special departments in the Police which might request from the Court of Audit certain information on specific cases.

As to the Latvian State Audit Office, it is very transparent regarding the follow-up of the forwarded cases, and publishes in a separate section of its official website the process and the outcomes of all the cases it has forwarded to relevant LEA. By the way, to strengthen the efficiency of SAO’s mission and work, in 2019 another legal tool was enhanced for SAO by the Parliament. In particular, if the audit reveals illegal activity (both gross negligence and willful misconduct) with financial resources or property, the SAO may decide on compensation for losses caused by illegal activity, indicating the persons against whom the amount of damage caused by the person and the grounds for recovery of the damage from the particular person.