Journal of US-China Public Administration, ISSN 1548-6591 January 2012, Vol. 9, No. 1, 8-25

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DAVID

PUBLISHING

The Era of Internal Audit in the Public Finance Sector in Poland Agnieszka Skoczylas, Wojciech A. Nowak University of Lodz, Lodz, Poland The modern internal audit was introduced to the Polish public finance sector in 2002. From this moment the evolution of internal auditing in Poland is progressing from the implementation of strict financial functions through the assessment of compliance of public sector entities, to the assessment of the effectiveness and efficiency of the institution. The aim of this paper is to present the development of internal audit in the Polish public finance sector. In this study the following are presented: Polish legislation in the internal audit, the scope of its operation in the public finance sector, as well as the direction of its changes. Keywords: internal audit, public finance, public management

Statehood in Poland has a thousand-year old tradition, after all, intermittent periods of its absence. Modern, independent Polish state was reborn in 1918, as a result of processes of surmounting the First World War. It covered the lands, which for over 120 years were under the rule of Russia, Prussia and Austro-Hungarian Empire. Its first task was to merge into one state organism the systems of government and local government which derived from 19th-century tradition, respectively: Russian, Prussian and Austro-Hungarian. This tumultuous process took more than 20 years, until the outbreak of World War II in September 1939. The already mentioned process comprised adoption of the Polish Constitution (in 1921) as well as its extensive change (in 1935), and building (in 1933) the legal foundations of a uniform system of local government functioning under the supervision of state authorities. Within the central as well as local government of the reborn state certain control and inspection functions in the financial and economic affairs were to be fulfilled. At the national level, their implementation was assigned to the heads of state offices and the Supreme Chamber of Control while at the level of local government the role was performed by the management of local government units, revision committees of representative councils, the inspection union of local government and national supervisory authorities. Control and inspection functions fulfilled by the heads of state and local government boards were focused on issues relevant to contemporary internal audit in financial and operational affairs (aspects). This situation was maintained—except for the period of World War II—without substantial changes to the early 2000s, until the beginning of preparations for accession to the European Union, except that in a centrally planned economy era and at the beginning of the period of the last political transition (to 1992) revision of local government associations did not work and their functions were performed by the local government units. Pattern of existence and mechanism of control and inspection functions in the government sector were Agnieszka Skoczylas, Ph.D., Faculty of Economics and Sociology, University of Lodz; research fields: public finance, internal audit, management control system, risk management. Corresponding author: Wojciech A. Nowak, Dr hab., professor, Accounting Department, University of Lodz; research fields: accounting (theory of accounting, public sector accounting, management accounting, accounting regulation), systems theory, organizational theory, systems auditing. E-mail: [email protected].

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governed by the law in the rank of Acts and Directives, while approaches and procedures of control and inspection functions were not standardized. Internal audit activity was not so much advanced as in other highly developed countries. Therefore, one of the first tasks to be undertaken in preparation for Polish entry to the European Union was the introduction of modern internal audit in the public finance sector. The most significance in this process was given to ensure consistency in Polish system of control and inspection with the internal audit system in the European Union. The article presents an analysis of its development since its introduction in 2002 to the present day.

Literature Review and Used Methodology Internal audit was introduced in Polish law from 2002. There were many law changes in internal audit organization from that year, and the internal audit system was not stable. Until today there is no paper about its developing in Polish public finance sector. This is one of the reasons which motivate us to deal with this topic. The second one is that there is no scientific analysis of organization and functioning internal audit in Polish public finance sector. The last reason is still existing differences between Polish internal audit rules and International Internal Audit (IIA) Standards. English and Polish academic literature presented so far internal audit development, especially in United State (Sawyer, Dittenhofer, & Scheiner, 1996; Cangemi & Singelton, 2003). There are described many types of audit like financial, operational, IT and the manner of auditing as well (Sawyer et al., 1996; Moeller & Witt, 1999; Cangemi & Singelton, 2003; Spencer Pickett, 2004; Whitely, 2005; Dittenhofer & Filios, 1975; Winiarska, 2007; Czerwiński & Grocholski, 2003; Saunders, 2003; Knedler & Stasiak, 2005). However there was no attempt to present internal audit development in Poland. This paper wanted to fulfill this gap. The methodology used in the paper is principally based on descriptive analysis and comparative local rules and regulation in internal audit in Polish public finance sector. The required information and data was obtained through study and analyse of relevant documentation and regulations. The work was accompanied by a literature research of Polish regulation and IIA. Furthermore, we have used the documents and data published by Ministry of Finance. It helped us to evaluate the approach from Polish internal audit regulation to International IIA Standards. Detailed mapping of baseline knowledge and collection of necessary regulation and data from identified study allowed us to set up a theoretical framework and draft further ones.

Regulation of the Internal Audit in the Polish Public Finance Sector As a result of integration with the European Union and to ensure the proper functioning of the public finance sector, Poland was obliged to build a system that would guarantee the accuracy and efficiency of the collection and disbursement of public funds and management of the property, known as the public internal financial control (PIFC) (De Koning, 2007). In accordance with European guidelines1, one of the major components of the system of public internal financial control is: An independent internal audit functioning in all required by law public institutions responsible for the creation of audit on the basis of international standards for internal audit, as well as the central body responsible for harmonizing and coordinating system auditorium in the country. (Chojna-Duch, 2002, p. 59)

Adaptation to EU requirements made it necessary to regulate the issue of internal financial control and 1

Agenda 2000—An action plan, adopted by the European Commission on July 15, 1997, in the final form approved by the European Council in Berlin in March 1999.

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THE ERA OF INTERNAL AUDIT IN THE PUBLIC FINANCE SECTOR IN POLAND

internal audit in order to improve efficiency, transparency and openness of public administration and better use of public funds (Chojna-Duch, 2002, pp. 58-59). The internal audit was introduced to the Polish law in 2002. The universally binding legal instrument in this respect was, and still is, the Public Finance Act2. It regulates not only the definition and rationale of the internal audit, but also introduces the principles of organization and coordination of internal audit, as well as eligibility requirements which must be met by internal auditors. The Public Finance Act is accompanied by other acts which complement the provisions of the Act, so-called executory provisions. These include: (1) directives concerning the detailed method and procedures for conducting internal audit; (2) announcements of the Internal Audit Standards, the Code of Ethics and Internal Audit Charter in the public finance sector. The Directives apply to the conduct of internal audit, depending on the nature of the services provided, and also indicate the most important documents that should be created as a consequence of audit. Announcements, in turn, provide a set of constructions and guidelines relating to the functioning of the audit and the activities of internal auditors. Each of the existing documents is subject to continuous evolution. List of legislation on internal audit activity in the public finance sector since its inception to the present time is presented in Table 1. Table 1 List of Legislative Acts in Force in the Polish Public Finance Sector in the Years of 2002-2010 Year 2002

2003

Acts

Act of November 26, 1998, on public finance (Law Gazette No. 155, item. 1014)

2004

2005

Act of June 30, 2005, on public finance (Law Gazette No. 249, item. 2104)

2006 2007 2008 2009

2010

2

Act of August 27, 2009, on public finance (Law Gazette No. 157, item. 1240)

Directives

Announcements

Announcement No. 2 of the Minister of Finance dated January 30, 2003, concerning the announcement of “standards for internal audit in the Directive of the Minister of Finance of public finance sector” (Official July 5, 2002, on the detailed method Journal MF No. 3, item. 14) and procedures for internal audit (Law Announcement No. 6 of the Minister Gazette No. 111, item. 973) of Finance dated April 28, 2004, on the announcement of “code of ethics of the internal auditor in the public finance sector”, and the “charter of internal audit units of public finance” (Official Journal MF No. 6, item. 28) Directives of the Minister of Finance dated June 24, 2006, on the detailed method and procedures for internal audit (Law Gazette No. 112, item. Announcement No. 11 of the Minister of Finance dated June 26, 2006, on 765) internal audit standards in the public Directive of the Minister of Finance finance sector (Official Journal MF dated April 10, 2008, on the detailed No. 7, item. 56) method and procedures for internal audit (Law Gazette No. 66, item. 406) Announcement No. 8 of the Ministry Directive of the Minister of Finance of Finance dated April 20, 2010, on on February 1, 2010, on the conduct the standards of internal audit in the and documentation of internal audit public finance sector (Official Journal (Law Gazette No. 21, item. 108) MF No. 5, item. 24)

Act of November 26, 1998, on public finances (Law Gazette No. 155, item. 1014).

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The most important changes in individual acts in force in respect of internal audit were related to the modification of the perception of its role in the organization and the nature of the services provided by it. The breakthrough brought at the time of introduction in the Polish public finance sector: the International Standards for the Professional Practice of Internal Auditing developed by the Institute of Internal Auditors in the United States3. These standards are considered as the most important guidelines for the functioning of the internal audit and are used and respected by the majority of public and private institutions in the world. In Poland, from June 26, 2006, the standards were introduced as mandatory for use by public sector institutions. This resulted in a change in existing law. The key change was introduced, however, in 2009. It was associated with a significant extension of services provided by the internal auditors, as well as a new perspective on the role and place of audit in public sector organizations.

Definition and Scope of Services Provided by Internal Audit The internal audit was introduced to the public finance sector units for the first time in the amended Public Finance Act of November 26, 1998. Given the need to fulfil the provisions in providing pre-public system of internal financial control, basic definitions, principles, and also organization and coordination of internal audit have been included alongside those relating to the functioning of financial control in Chapter 5 of the Public Finance Act of 1998, “Control of financial and internal audit in the public finance sector”. This Act defined the internal audit as “all activities through which a manager of a unit receives an objective and independent assessment of functioning in the field of finance in terms of legality, economic prudence, efficacy, reliability, and transparency and openness”. The statutory duties of the main tasks of the internal auditor were: (1) examination of accounting documents and records in the accounts; (2) evaluation system for the collection of public funds and their availabilities as well as management of the property; (3) assessment of efficiency and economy of financial management. The internal audit activity in its initial phase of development was equated with financial control. The audit was at that time seen as a mechanism for checking the functioning of transactions and financial procedures. It included the verification of the accounting operations and aimed at reviewing and highlighting errors, as well as evaluation of internal regulations in this regard. This resulted in an audit that was seen as a kind of financial control, which resulted from the tasks assigned to it. In 2005, the Public Finance Act was changed, which resulted in the change of the definition of internal audit. During this period the internal audit was a collective term comprising: All activities, such as: (1) an independent assessment of the management and control systems within a unit including the financial control procedures, which aim at providing the manager with an objective and unbiased evaluation of the adequacy, efficiency and effectiveness of these systems; and (2) consulting services, including the submission of proposals aimed at improving the functioning of the organization.4

The principle activity of the audit remained within the financial area. However, the auditor was entitled to 3

The definition of internal auditing, the code of ethics and standards for the professional practice of internal auditing. USA: The Institute of Internal Auditors. 4 The definition of internal auditing, the code of ethics and standards for the professional practice of internal auditing. USA: The Institute of Internal Auditors.

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perform certain additional services related to the provision of consulting activities, as well as proposals for improving the functioning of the organization. Thus, the catalogue of the activities within which the auditor could perform their duties was extended. Its tasks were to assess: (1) business compliance with the law and the applicable procedures in the unit; (2) efficiency and economy of activities undertaken in the field of management and control systems; (3) reliability of financial statements and reports on budget implementation. The last, very significant substitution in the functioning of the internal audit took place in 2009. Not only did the Public Finance Act published in 2009 introduce a new concept of internal audit, much closer to the international auditing standards, but also replaced the concept of financial control and management control. According to the above mentioned Act, “Internal auditing is an independent and objective activity designed to add value and improve organizations. Internal audit assists the unit in carrying out its activity through a systematic assessment of the management control and operations consultancy”5. Based on the above definition, the role of modern internal audit in the Polish public finance sector is the management control assessment, which according to the current law on public finance means the whole of the action taken to ensure that the objectives and tasks are consistent with the law, efficient, cost-effective and timely 6 . The most important aspects, according to the Polish legislature, which should be included in management control, are7: (1) business compliance with laws and internal procedures; (2) effectiveness and efficiency of operations; (3) the reliability of financial statements; (4) protection of resources; (5) upholding and promoting the principles of ethical conduct; (6) effectiveness and efficiency of information flow; (7) risk management. The concept of management control is associated with the implementation of relevant activities by the managing of the institution through which the organization achieves its goals. These activities should proceed in a timely manner, in accordance with the law and procedures, and thus contribute to obtain the greatest possible advantage, while making the most economical use of outlay. The legislature, therefore, does not resign from the current tasks assigned to internal audit, namely, financial control, which is much narrower than the term of management control, and it is a part of it. In the current Public Finance Act financial control was left at the discretion of heads of units, by keeping the record of director’s responsibilities for financial management of the institutions. This does not mean, however, that managers are exempt from the implementation of the remaining tasks of the exercise of financial control. On the contrary, the scope of the management of public organization has a significant extension, through the introduction of management control, which covers all types of activities and all areas and processes operating in the unit, including financial one as well. We can say that the management control absorbed the financial control and proper financial control became one of the elements of management control (see Figure 1). 5 6 7

Act of August 27, 2009, on public finance (Law Gazette No. 157, item. 1240). Act of August 27, 2009, on public finance (Law Gazette No. 157, item. 1240), art. 68. Act of August 27, 2009, on public finance (Law Gazette No. 157, item. 1240), art. 68.

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concerns the processes of collecting and distributing public funds and management of property. Financial control Management control means all actions taken to ensure that the objectives and tasks are accomplished in a manner consistent with the law, efficient, cost-effective and timely. Figure 1. Management control and financial control.

Management control in relation to the functioning of Polish public sector, refers to the concept of internal control, which is defined by international organizations such as COSO8 or INTOSAI9. According to them, internal control is a tool or a management process used to obtain reasonable assurance that management objectives have been achieved. It is performed by a board of institutions, management and other employees of the organization (COSO, 2004). Internal control from the standpoint of international organizations is perceived in a much broader way than internal control, which is formed in the culture of the Polish public organizations. So far, the internal control functioning in polish units meant comparing the actual state with the required one and was performed by a specially established organizational unit (so-called institutional control). A guideline to implementation and evaluation of management control in the public finance sector is the management control standards established by the Minister of Finance10. It is “an ordered set of guidelines that those responsible for the operation of management control should use to create, evaluate and improve management control system”11. Their purpose is to promote the implementation of a coherent and uniform model of management control in public finance sector, in accordance with international standards, taking into account the specific tasks of the implementing institution. The standards include five elements that correspond to each management control task, which are presented in Figure 2. Taking into consideration the international guidelines on internal control, as well as American literature in this field, one should emphasise that the definition of management control which is presented in the Polish Public Finance Act is not significantly different from the recognition of internal control by international organizations. Its role and scope of activities are important elements in terms of public sector institutions. The exercising of management control in terms proposed by the legislator can contribute not only to improvement of the quality of the management of these bodies, but also to the entire system of public finance. The correctness of functioning of the management control system in the public finance sector, in accordance with the current law, should be supervised by the internal audit. It is its duty to assess the adequacy, efficiency and effectiveness of its functioning. From the standpoint of the Polish law, there are new tasks for internal auditors. Analysing this issue with reference to international guidelines, it should be said that the internal audit functioning in the Polish sector of public finances has finally come closer to a global perspective 8

COSO—The Committee of Sponsoring Organizations Treadway Commission. INTOSAI—International Organization of Supreme Audit Institutions. 10 Communication No. 23 of the Minister of Finance dated December 16, 2009, on the Standards for the management control of public finances (Journal of Law MF No. 15, item. 84). 11 Communication No. 23 of the Minister of Finance dated December 16, 2009, on the Standards for the management control of public finances (Journal of Law MF No. 15, item. 84). 9

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on the role of internal audit in the management of the organization. The evolution of internal audit is shown in Table 2. Compliance financial

Operations strategic

Monitoring and evaluation

Control mechanisms Objectives and risk management

Public sector entity

Information and communication

Internal control

Figure 2. Elements of management control according to the standards of management control in the Polish public finance sector.

Table 2 The Evolution of the Definition and Scope of Internal Audit Units of the Polish Public Finance Sector Years

2002-2005

2006-2009

From 2010

Definition of internal audit

Scope of services The statutory duty of the main tasks of the internal auditor was: Internal audit is all activities through which manager of (1) examination of accounting documents and records in a unit receives an objective and independent assessment the accounts; of functioning in the field of finance in terms of (2) evaluation system for the collection of public funds legality, economic prudence, efficacy, reliability, and and their availability as well as management of the transparency and openness. property; (3) assessment of efficiency and economy of financial management. Internal audit is all activities, such as: (1) an independent assessment of the management and Internal audit task was to assess: control systems within a unit including the financial (1) business compliance with the law and the applicable control procedures, which aims at providing the procedures in the unit; manager with an objective and unbiased evaluation of (2) efficiency and economy of activities undertaken in the adequacy, efficiency and effectiveness of these the field of management and control systems; systems; (3) reliability of financial statements and reports on (2) consulting services, including the submission of budget implementation. proposals aimed at improving the functioning of the organization. Internal auditing is an independent and objective The correctness of functioning of the management activity designed to add value and improve control system in the public units, in accordance with organizations. Internal audit assists the unit in carrying the current law, should be supervised by the internal out its activity through a systematic assessment of the audit. It is its duty to assess the adequacy, efficiency and management control and operation consultancy. effectiveness of its functioning.

Note. Source: Authors’ calculations based on the Public Finance Act in Poland between 2002 and 2010.

Apart from the range of the internal audit services in public sector entities, which were required by the legislature, auditors are required to apply some general principles in their operations. They are carrying out their tasks on the basis of an annual audit plan, which has to be prepared by the auditor by the end of the calendar year. The auditor is also required to prepare a report presenting the realisation of audit activities. For

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eight years of audit activity, the model of audit plan and audit report was prepared by the Minister of Finance. In 2010, the idea of common model was abandoned and a list of positions required in both the plan and the report was published. Planning of the internal audit is based on documented risk analysis. In determining the scope of areas to be surveyed in a given year, the internal auditor is obliged to take into account the results of risk analysis, managers’ attentions, the priorities of the audit committee, the number and qualifications of auditors working in auditing, as well as the time needed for implementation of planned activities. The internal audit units of the Polish sector of public finance provide various services. Until 2005 in the first phase of its development the auditors were able to accomplish the tasks included in the annual audit plan and audit commission (assigned task). The people to delegate tasks were the head of the unit in which auditor was employed and the responsible minister. Since 2005, the internal auditor can also carry out consultancy services. To achieve this aim, auditors, while are preparing the annual plan, have to assign sufficient amount of time to complete it. In 2009, according to International Standards of IIA, a provision that the internal auditor performed assurance and consulting services was introduced. Assurance services are meant by a group of activities undertaken to provide an independent and objective assessment of the functioning of management control. Consulting services comprise all activities aiming at improving the institution’s activities. Despite of the adoption of International Standards and their nomenclature, interpretation of Polish legislature is not entirely consistent with them. Internal auditors can perform their tasks providing they receive a personal authorization issued by the head of the public organization. Assurance services provided by the auditor should be based on risk analysis and an audit programme. The audit programme must include a subjective and objective study, which defines who and what will be subject to assessment. Completion of the activities finishes with preparation of the audit report, which is subject to appeal. As far as consulting services are concerned, auditors have the right to prepare different audit documents, depending on type and nature of services provided. It should be emphasize that the methodology of implementation of audit assignments adopted in Poland in accordance with the national legislation does not differ significantly from the techniques presented in the International Internal Audit Standards.

The Organization of Internal Audit Section in Public Finance Sector Units Organization of internal audit in the Polish public finance sector is diverse (Kaczurak-Kozak, 2006). It can be perceived in two ways: (1) depending on the environment in which the institution employing an internal auditor is functioning; (2) the place of the internal audit unit within the organizational structure. From the first point internal auditing in public finance sector operates at three levels: central, local government and public unit, which is presented in Figure 3. Since the beginning of internal audit in the public finance sector, the coordinating body on the level of government (central) is the Minister of Finance. Initially, between 2002 and 2005, the Ministry of Finance performed his/her tasks with the assistance of Chief Internal Auditor, working in the Ministry of Finance and his/her subordinate organizational unit. The Minister’s tasks included the setting of standards of audit and financial control, cooperation with foreign institutions, collecting information on the performance of audit and financial controls as well as improving the functioning of these areas. At the end of 2006 the position of Chief

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Internal Auditor was defuncted , and by mid-2009, the Minister of Finance performed the tasks associated with coordinating the audit, only with the assistance of an organizational unit in the form of the Audit Department of the Public Sector. Since September 2009, individual ministers have been obliged to appoint an audit committee in all the ministries supervised by them. The Committees’ responsibility is to advise the Minister in the area of internal audit and management control in public bodies subordinate to him/her. The committee must consist of at least three members, including a person appointed by the responsible minister, having the rank of secretary or undersecretary, who will perform the function of a chairman and at least two independent members who are not employees of the ministry, or its subordinate units. Public finance sector

Central level (government administration)

Level of local government

Level of public finance units Figure 3. Organization of internal audit in the Polish public finance sector.

In accordance with International Standards for the Professional Practice of Internal Auditing IIA committees should operate in each unit having an internal audit. In Poland, a different solution has been introduced, which means the committees operate at the level of ministries, not the local units. At the level of local government the internal audit organization and coordination is the responsibility of the borough leader, mayor, or the city president. It should be noted that as far as these institutions are concerned, a certain degree of freedom is given by the Minister of Finance, which results in a variety of internal auditor activities in the whole public finance sector. This is due to decentralization, and consequently the ability of the management to take decision on certain issues in a manner independent of the government. The third level of internal audit organization in the public sector consists of, listed in the Act, public sector entities and local government units which accumulate substantial public funding or carry out significant public expenditure. Conducting internal audit in those institutions is a requirement imposed by the legislature. The coordinating bodies of their activities are individual ministers and appointed by them audit committees. Another important issue in the functioning of internal auditing in public finance sector is the position of internal auditor and internal audit unit within the organizational structure (Winiarska, 2006). According to the Public Finance Act, institutions of this sector were obliged to ensure that the internal audit unit has organizational autonomy through direct subordination to the head of the organization in which this unit operates. Internal audit activities, in accordance with the Public Finance Act, are coordinated by an internal auditor employed by the head of the institution12. Subordination of business in this area is shown in Figure 4. The organizational structure presented in Figure 4 should operate in any public sector institution. In fact, the organization and place of internal audit and the internal auditor in the organizational structure of units is 12

Act of August 27, 2009, on public finances (Journal of Laws No. 157, item. 1240), art. 277, 280.

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varied. This mainly concerns the subordination of the internal audit unit and the subordination of the internal auditor. An analysis of data collected in Poland by the Audit Department of Public Finance Sector, Ministry of Finance shows that (Kubik, 2005): (1) single positions of internal auditor are mostly created; (2) there are cases of mergers of units or positions of the internal audit with internal control unit or another (the overwhelming trend in this area is in units of local government). Head of organization

Internal audit unit

The chief audit executive

Tasks of the audit coordinator Internal auditors

Other people called assistants internal audit

Figure 4. Organizational subordination of internal audit in public sector organizations.

IIA Standards raise questions related to the organization of internal audit, as well as the tasks performed by internal auditors. According to them, the internal audit unit, precisely the chief audit executive should be at the level of the organization which will give him/her the organizational and functional independence in performing their audit activity13. According to the Institute of IIA, the chief audit executive should report directly to a functional internal audit committee or its board. For administrative purposes, however, the chief audit executive should report directly to the President or the Director of the organization (Gleim, 2004). IIA Institute in its Standards emphasizes a need to establish the committee and council audit, which should be composed of people independent of the management unit and whose responsibility is to assist internal auditors in carrying out their duties independently and objectively. Standards indicate the position of the chief audit executive in the organizational structure but do not designate the place for other internal auditors. As a result of above mentioned managers are given the freedom to shape the function of the audit. One should remember that each institution is different and has its own regulations and organizational structure. The standards are meant to provide guidance and assistance in the era of internal audit organization, but do not impose a ready and unambiguous solution. Another important issue is the number of internal auditors working in institutions of the public finance sector. Some organizations employ from one to five or even 20 auditors and other auditors work half or quarter-time. There are no guidelines to regulate this issue. On the other hand, if such guidelines are occurred, it is worth considering their content. According to Saunders (2003), there were no established standards for the construction, organization of internal audit and the number of people that should be employed in it. This decision may be taken based on the assessment of the organization, its structure and specificity of function. The number of employed internal auditors should reflect the needs and development of an institution. Saunders (2003, p. 47) recommended that the number in the unit should account for 2% of the employees in the 13

The IIA Standards.

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organization. However, the quality of the human factor should be considered there because, as Czerwinski (2004, p. 32) pointed out, employing even a large number of internal auditors in the organization would not compensate for the lack of experienced people in the field of internal auditing, which may lead to limit the scope of audit work. It should be also noted that each institution operates in a changing environment and, therefore, an internal audit of the unit must keep pace with these changes, and even overtake them (Saunders, 2003, p. 47). Without questioning any of the listed solutions for the internal audit organization it should be emphasized that while creating the internal audit unit one should take into account the needs resulting from the necessity to ensure the supervision and control over the functioning of the institution. This unit should be adjusted to the size, structure and needs of individuals and consist of highly qualified people to ensure a variety of performed tasks (Czerwinski, 2004, p. 24). The main objective underlying the introduction of internal audit in any institution should be to strive for high quality of its operations by streamlining management processes, to stimulate continuous quality improvement by supporting the activities of the management, including increased efficiency of the internal control system, reducing operating costs and the elimination of waste of financial resources (Chojna-Duch, 2002, p. 61).

Audit—Still Internal or Already External—Organizations of Public Finance Sector Obliged and Empowered to Conduct Internal Audit The obligation to conduct an internal audit from the moment of its existence in the Polish sector of public finances concerned most of the institutions belonging to this sector. These included in particular: the ministries, central offices, regional offices, customs offices, tax offices, earmarked funds, and health insurance. Other organizations obliged to conduct internal audit were public sector organizations that gathered substantial public money or made a considerable expense. On this basis, the Minister of Finance defined the amounts of revenue and expenditure which, if exceeded during the year, shall be subject to internal audit14. In 2005, when the Public Finance Act was amended, the list of public organizations obliged to conduct an internal audit was extended and included: Treasury of the Chamber, Chamber of Customs, prosecution, or regional audit chambers. The number of entities obliged to conduct audit increased from year to year, as shown in Table 3. In 2009 the legislature modified the list of public sector entities obliged to conduct internal audit and their number decreased. Currently, they are such units as: the Prime Minister’s Office, Ministries, Provincial Offices, Chambers of Customs and Revenue, Department of Social Insurance, the Agricultural Social Insurance and National Health Fund. Individuals15, such as: state budgetary units, public universities, independent public health care, executive agencies, state-appropriated funds and local government units, are required to conduct an internal audit when a certain amount of income or expenditure is exceeded. In the remaining institutions internal audit can be conducted if the head of this organization has the will, or when it is imposed by the responsible minister. According to the European guidelines16 mentioned at the beginning of the article, the concept of public internal financial control is associated with the provision of “an independent internal audit, acting in all the 14

This amount was 40,000,000. Act of 27 August 27, 2009, on public finance (Journal of Laws No. 157, item. 1240), art. 272. 16 Agenda 2000—An action plan, adopted by the European Commission on July 15, 1997, in the final form approved by the European Council in Berlin in March 1999. 15

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public institutions by law”. It should therefore be considered whether the legislative requirement should differentiate internal audit units in the Polish public sector due to the amount of revenues or expenditures made. So should the financial aspect be the factor determining the proper and effective functioning of public institutions? On the one hand, internal auditing in Poland is developing through the implementation of international standards and changes of policies; on the other hand it always remains in the area of financial control, by limiting the directory of units required to conduct the audit using a single criterion—the amount of revenue or expenditure. Table 3 The Number of Public Sector Entities Obligated to Conduct Internal Audit and Internal Auditor Jobs 2002

The obligation to conduct an internal audit 1,600

The obligation to employ an internal auditor No information

2003

1,600

No information

2004

2,200

No information

2005

2,200

No information

2006

2,400

No information

2007

2,557

1,269

2008

2,643

1,358

2009

2,751

1,455

2006

1,300

577

2007

1,936

648

2008

1,959

674

2009

1,975

690

2006

1,100

No information

2007

621

621

2008

684

684

2009

776

776

Year

Number of public sector entities, including: (1) number of units of a central government; (2) number of units of local government.

Note. Source: Authors’ research based on reports of the Ministry of Finance on internal audit in the public sector in 2006-2009.

Another key issue in the field of auditing in public finance sector organizations is the obligation to employ an internal auditor. Until 2009, each public sector entity obliged to conduct an internal audit was required to hire an internal auditor. According to current legislation some institutions are given the choice between the internal audit being conducted by an employed internal auditor and by an auditor working for several organizations. This alternative results in public organizations using external audit. External service provider may be either a natural or legal person who must meet certain requirements imposed by law on public finance. They include in particular: (1) the need to meet eligibility requirements governing the profession of internal auditor in the public finance sector; (2) the obligation to conduct an audit under the provisions of the Public Finance Act and its implementing legislation. When an organization decides to use the services of an external audit, it is required to sign a contract for at least a year. The possibility of using external service is accepted by the responsible minister. The local government organizations can use external audit services only if the amount of income and the amount of

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revenues and expenses and expenditures is less than 100,000,000. From an organizational point of view of internal audit, one should also mention the protection of people employed as auditors in the public finance sector. In 2002-2005, the body authorised to terminate the contract with an internal auditor or to change conditions of contract was the Chief Inspector of Internal Audit. After the liquidation of the position of Chief Internal Auditor the responsibilities were taken over by Minister of Finance. In 2009, the amended Finance Act retained the entry defining employment and change of working conditions of the internal auditor, but limited the circle of auditors, only to chief audit executives.

Licence to Practice as an Internal Auditor Since 2002, namely, the emergence of internal audit in the Polish law, the internal auditor could be anyone who : (1) has the Polish citizenship18; (2) has full legal capacity and makes full use of public rights; (3) has not been penalized; (4) has a higher education; (5) passed the test organized by the Examination Commission. These conditions gave, on the one hand, the possibility of applying for internal auditing to a large numbers of Polish citizens, on the other hand imposed an obligation to pass a state exam. The legislature, taking into account the impossibility of finding suitably qualified auditors, in the first phase of the internal audit activity in Poland, introduced a so-called transitional period. The period meant that anyone who wanted could be employed in the internal audit but the guarantee of employment was obtain only after passing the state exam by the end of 2004. The examination was held by a specially appointed Examination Committee, which began functioning in 2003 and finished its activity in 2006. It consisted of two parts: written and spoken and its requirements were clearly defined by law. As a result, the right to work in internal audit in the public finance sector was gained by 2,181 people19. It was noted that the period between 2003 and 2006 was the moment when significant financial resources, including the EU, were involved, internal audit in the Polish public sector developed and qualification of auditor were substantially improved. In 2006 numerous changes in access to the profession of public sector auditor were introduced. The idea of state exam was abandoned but people who previously passed the state exam preserved their rights. Promotion, however, was given to people who20: (1) completed controller application and passed an exam conducted by the Examining Board appointed by the President of the Supreme Chamber of Control; (2) passed an exam qualifying for the post of inspector of fiscal control; (3) were certified accounting auditors. These alterations resulted in changing number of auditors employed in the public finance sector, which is presented in Table 4. 17

17

Act of November 26, 1998, on public finances (Journal of Laws No. 155, item. 1014), art. 35k. From January 1, 2006: The citizenship of European Union member state. 19 Retrieved from http://www.mofnet.gov.pl/_files_/koordynacja_kontroli_finansowej_i_audytu_wewnetrznego/egzamin_na_ audytora/wykaz_audytorow_wewnetrznych.pdf?PortalMF=76324c402bab57e742b82bbe4f. 20 Act of June 30, 2005, on public finances (Journal of Laws No. 249, item. 2104), art. 58. 18

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Table 4 The Number of Auditors Working in the Public Finance Sector Required to Maintain an Internal Audit Year

Audited units (approximately)

2004 2005 2006 2007 2008 2009

2,200 2,200 2,400 2,550 2,640 2,751

Total 663 709 1,054 980 972 918

Number of people employed in internal auditing Internal auditors Auxiliary 415 118 537 137 859 107 742 67 821 123 800 118

Note. Source: Authors’ research based on reports of the Ministry of Finance on internal audit in the public sector in 2006-2009.

The results presented in Table 4 show a significant increase in the number of internal auditors by the end of 2006, an average of more than 200 people a year. Since 2007 the decreasing trend can be observed, while the number of staff employed in the sections of the internal audit units of public sector finance increased at a fairly rapid pace. Finally, in 2009, another modification in acquiring audit rights was introduced. As a result, the Supreme Chamber of Control controllers and fiscal control inspectors were deprived of the right to work as internal auditors and the right to work in this profession was given to whose who have obtained a post-graduate diploma in internal audit and have a two-year practice. The legislator defined the practice in internal audit as: conducting audit, performing control activity in the area of UE funds by tax inspectors and supervising and performing inspection activities by the auditors of the Supreme Chamber of Control. The legislator did not, however, define the scope of law which should be included in the programme of postgraduate studies in this area, but pointed out that units entitled to issue diplomas were the ones with the right to award the degree Ph.D. in economics or law. It is difficult to assess the impact of these changes on the profession of internal auditor, and the functioning of public sector entities. There is currently no available data on the number of auditors employed in these institutions, or providing services to them in 2010. However, taking into account the provisions and requirements of laws, and thus the possibility of resigning from audit given to selected units, one can expect a further decline in these numbers. However, taking into consideration changes in the qualifications for the job of internal auditor—post-graduate studies in the field of internal audit, you can count on a significant increase in the number of people interested in gaining permission to perform the profession. But the public sector will respond to this interest with proper supply, there will be the managers of public entities who will want to hire an auditor, or use such services.

Evaluation as a Determinant of the Direction of Internal Audit Development in Polish Public Finance Sector Changes in the economy necessitate the continued improvement of public organizations and more efficient management of public funds. Depending on the modification of rules for the functioning of public sector entities and the activities of these organizations the nature and extent of services provided by auditors is also subject to transformation. In order to assess the activities undertaken by public organizations, thereby improving their performance evaluation process is used. It involves a systematic examination of the value or

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characteristics of a particular program, project, activity, subject to the usual criteria, the purpose of its improvement and development (Haber & Szalaj, 2009). The amended Public Finance Act of 2009 contains a number of conditions designed to be introduce to the Polish public sector evaluation (Haber & Szalaj, 2009). One of them is to modify the tasks assigned to internal audit. As mentioned earlier, the role of internal audit since 2009 has been to assess the adequacy, efficiency and effectiveness of management control in the public finance sector. These tasks are associated with the implementation of a series of steps intended to measure the effects of these institutions. They are defined in the literature as efficiency audit (called also value for money audit). Its primary purpose is to focus on efficiency, effectiveness and economy of operation of Polish public organizations. It uses a series of indicators and metrics to measure efficiency. From the perspective of the scope of internal audit work in Poland, it is certainly a significant progress. Internal audit, since its introduction to the public finance sector, focused primarily on assessing the compatibility of the organization with the applicable rules, guidelines, particularly with regard to the financial area. Now its task is to verify the effectiveness and efficiency of all processes in the organization. Taking into account the development trends of internal audit in Poland, we can define its various forms, which have appeared in Poland since its introduction to the public finance sector. They are presented in Table 5. Table 5 Formation of Various Types of Audits in the Polish Public Finances Sector Year

Type of audit

2002

Financial audit

2005

Compliance audit

2006

Operational audit

2009

Efficiency audit Value for money audit

Description Internal audit checks the functioning of transactions and financial procedures. It included the verification of the accounting operations and aimed at reviewing and highlighting errors, as well as evaluation of internal regulations in this regard. Internal audit assesses that the organization activity is adhering to law, regulations and control standards and other guidelines. This type of audit falls within the category of services to facilitate the management unit by evaluating four management functions: planning, organizing, controlling and monitoring. The purpose of its conduct is to answer the question why the problem exists and what is its cause. Internal audit assesses the adequacy, efficiency and effectiveness of functioning of the public organizations.

Using various types of audits by the internal auditors of the Polish sector of public finances was dictated by the changes which occurred in the organization of this sector. The public sector since the 80s of the last century has undergone a metamorphosis, from the bureaucratic form defined by Weber in the direction of effective, efficient and pro-quality systems. Following these changes, transformations are also subject to internal audit role. The emergence of performance-audit related to the implementation of performance budgeting in the public finance sector, whose idea is to improve expenditure management in the public sector (Lubińska, 2007, pp. 32-45). In the implementation of performance budgeting, it is necessary to appoint suitably defined and hierarchical objectives for the collection and disbursement of public funds and the identification of specific outcomes and indicators for their verification. Budgeting allows you to determine which tasks are most important for achieving the specific targets and using indicators shows the extent to which they are completed (Bombik, 2006, p. 476). Similar basis governs the methodology used in the implementation of the efficiency audit. Due to the constant changes taking place in public finance sector, you can expect that the tasks and role of internal audit will be subject to further change, so as to provide reasonable assurance on the functioning of the institutions of this sector.

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Conclusions Internal audit in the Polish public finance sector appeared in the 21st century, and in the world it has a centuries-old tradition (Winiarska, 2008). It has gone a long way in shaping its position on the international area. The evolution of internal audit in Poland and the world is presented in Table 6. Table 6 Development of Internal Audit in the Polish Public Finance Sector and the World The development of internal audit in the world The development of internal audit in the Polish public finances 1950 Control of the accounting records Control of the accounting records and 1960 compliance with the basic operation procedures 1970 Analysis of existing procedures Evaluation of existing procedures concerning 1980 introduction of additional control Evaluation of internal control and reporting on 2000 its state managers 2001 Evaluation of risk management 1. Examination of accounting documents and records in their accounts Reducing risks and improving risk 2002 2002 2. Evaluation system for the collection of public management system funds and their availability and management of the property 1. Assessment of compliance with applicable procedures 2. Evaluation of the effectiveness and economy of 2003 Add value 2005 activities undertaken in the field of management and control systems and the reliability of financial statements 3. Improving the functioning of the organization 1. Add value 2006/2007 ? 2009/2010 2. Evaluation of the adequacy, efficiency and effectiveness of management control system Note. Source: Authors’ research based on Spencer Pickett (2004), and Peemöller and Kunowski (1997).

Based on the information provided, we can conclude that the evolution of internal auditing in Poland is progressing from the implementation of strict financial functions, to evaluation of operations of the institutions, which assist managers in managing the unit. This progress is reflected in the public sector very clearly, where the definition of internal audit and the scope of services provided by it have changed over eight years in a significant way, starting from the evaluation of financial operations through the assessment of compliance of public sector entities, to the assessment of the effectiveness and efficiency of the institution. The evolution of internal auditing in Poland took place in a similar way as in the world, however, started much later and proceeded faster. The experience which the Polish sector of public finances has drawn from the development trend of the audit in the world had significant impact. Currently, internal audit is becoming an increasingly useful tool for the Polish sector of the public finances units, and it is not only used to gather information, but also it evolves toward the provision of ready-made applications and management arrangements, which may result in increased efficiency of the organization. Given this rapid process of change which is subjected to public entities in Poland, as well as having a progressive pace of change in the world it is difficult to indicate what will be the next stage of development of internal audit, both in Poland and abroad.

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