Carlos Santiso, AfDB Division Manager, Governance, Economic and Financial Management, publishes a book on integrity and accountability in government finances

01/07/2009
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Question: What is the main subject of your new book and how is it relevant to today’s governance challenges in developing countries?

Answer: My book is about how developing countries can strengthen those institutions tasked with overseeing government and holding it to account for the manner in which it manages public resources; in other words, it is about anchoring transparency and accountability in the management of public finances. It focuses on a key pillar of integrity, the external audit agencies, often called supreme audit institutions. Independent and capable audit agencies are critical tools for fighting corruption and reducing waste.

Governance and the fight against corruption have moved to the centre of the development agenda, as a global consensus has emerged around the notion that good governance is essential to reduce poverty. But citizens of poor countries are not the objects of development experts’ agendas and designs. People of developing countries are themselves demanding greater transparency and accountability from their governments. As Thomas Jefferson said in 1802, “We might hope to see the finances of the Union as clear and intelligible as a merchant’s book, so that every member of Congress, and every man of any mind in the Union, should be able to comprehend them, to investigate abuses, and consequently to control them.”

A government budget involves more than financial accounts or legislation. It reflects politically-driven choices over the allocation of scarce resources, and among competing policy priorities. In a profound way, budgeting is governing, and the budget, a trust that reflects the social pact between the state and citizens. The extent to which the budget accurately reflects the country’s policy priorities is an important indicator of the strength of the social contract underpinning the state. Sadly, that trust is too often breached in many poor, misgoverned countries, where informal practices make a mockery of budget approval and oversight processes which may exist in law. As central “pillars of integrity” and “agencies of restraint”, audit agencies are autonomous state organizations tasked with scrutinizing public spending and overseeing government finances. However, while they are amply acknowledged as central actors in the governance of the budget, they are often weak institutions failing to fulfil their prescribed role. In many countries, they are contested, criticized for their inability to curb corruption and reduce waste. Their very relevance is often questioned.

In today’s turbulent times of the global economic downturn, developing countries are facing tremendous challenges in designing fiscal responses to the crisis. They are under renewed pressure to manage their scarce resources efficiently. Ensuring good financial governance is critical to enlarge the fiscal space and devise fiscal responses to the crisis. Anchoring fiscal discipline and financial integrity remains a defining challenge for developing countries seeking to consolidate their public finances and strengthen their budget institutions; it is a central thrust of ongoing efforts at curbing corruption and ensuring that public resources effectively reach those they are intended to assist, most notably the poor. The budget is ultimately a trust between government and the people.  

Over the past decade, developing countries have made significant progress in fortifying the institutional architecture for managing public finances in a transparent and accountable manner. Nevertheless, daunting challenges remain to improve external scrutiny and oversight of the budget and, more generally, transparency and accountability in public finances. The key challenge is to ensure that auditing becomes accountability, that the information provided by audit findings is used to bring governments to account for the manner in which they manage public resources.
 
Question: What is the specific contribution of your book to the literature on the political economy of state reform and public finances?
 
Answer: The Political Economy of Government Auditing examines the contribution of autonomous audit agencies to the fight against corruption and public sector governance, focusing on the experience of Latin America, which combines examples of partial success and pending reforms. It assesses the trajectory and effectiveness of audit agencies in Argentina, Brazil and Chile.

However, unlike similar attempts in the specialised literature, the book looks at the broader political economy context in which those accountability institutions are embedded and that explain why they work or fail in fulfilling their prescribed roles. There is often a gap between formal and informal institutions.

Audit agencies are only a component of the broader system of checks and balances, albeit a critical one. The Political Economy of Government Auditing addresses some of the critical questions facing reform-minded countries seeking to enhance accountability in government finances.

How relevant are audit agencies for improving fiscal governance and curbing corruption? What determines their effectiveness?Does the choice of institutional design and the country’s legal tradition matter?

Unlike most analyses of audit systems, this book adopts a political economy approach to assess the influence of institutional design on agency performance and to comprehend the political and institutional context in which audit agencies are embedded and. It examines the cases of Argentina, Brazil and Chile which illustrate the three models of audit agencies for organising the external audit function in modern states: the parliamentary (Argentina), court (Brazil) and independent (Chile) models. It also examines the trajectories of reform of audit arrangements, or lack thereof.  As such, it constitutes a first comparative analysis of the performance of audit agencies.  

The research finds that, while the choice of institutional arrangements for government auditing matters, political economy factors ultimately condition the effectiveness of audit agencies, as well as the scope for reform. External, rather than internal governance factors have greater explanatory power on agency performance, rooted in the broader political environment, the nature of the political system, and the strength of the rule of law. Reforming audit agencies must therefore consider the trajectory of state building, the role of law in public administration and the quality of governance more generally. The effectiveness of independent auditing of government finances is linked to the strengths and weaknesses of budgetary systems overall; they are part of a larger puzzle of fiscal integrity in the complex architecture of financial governance.

The research also shows that audit agencies are part of the broader system of checks and balances in government financial management. As such, their effectiveness depends on the quality of budget institutions and the legal tradition of the bureaucracy. In Chile, for example, the audit agency is embedded in a state with a tradition of adherence to the rule of law and a centralised budget system. In particular, the book reveals the paradox of independence of audit agencies. It suggests that, while independence is critical to guarantee impartiality, it should not be an end in itself. The key question is how much independence is enough to secure credibility and how much is too much to compromise relevance. For example, while in Chile the audit agency’s performance is inhibited by its insulation within the public sector, the Argentinean audit agency has traditionally suffered from its excessive dependence on the legislature and the political filtering of audit recommendations.

Shortcomings in government financial accountability reflect deeper dysfunctions in the relations between the audit agency and the other components of the system of control, in particular, the legislature. Dysfunctional links between audit agencies and the legislature is indeed a crucial missing link in the chain of accountability. Furthermore, the structural weaknesses of legislatures in the oversight of the budget and the scrutiny of public finances are further impediments to the effective follow-up of audit findings. Lastly, the book argues that external audit systems are in transition, seeking to redefine their role in the control of public finances and their contribution to public management. They are often caught between the liberal concern for restraining government mainly through compliance auditing, and the managerial concern for improving public management through performance auditing.

Question: How relevant are the lessons from Latin America for Africa?

Answer: The research findings presented in the book have important implications for policymakers seeking to strengthen and reform external auditing arrangements. The book provides practical suggestions on ways to fight corruption by strengthening the institutions of integrity and accountability in the management of public resources. It also offers important lessons to international financial institutions seeking to strengthen financial governance, including the Bank. The strengthening of country auditing systems is indeed a central thrust of the Bank’s Governance Strategic Directions and Action Plan (GAP) for 2008-2012.

Hence, as President Kaberuka notes in his testimonial, “this book is an important contribution to our understanding of how corruption can be prevented by strengthening those institutions tasked with scrutinizing government and overseeing public finances. It provides useful lessons to reformers … in their efforts to promote integrity in the use of public resources. These lessons of experience are also relevant for African countries pursuing the same objectives.” This recognition is echoed by Terence Nombembe, Auditor-General of South Africa and current President of the African Association of Supreme Audit Institutions (AFROFAI) in his foreword, noting that the book has “broader significance, beyond Latin America, to inform policy makers seeking to reform audit institutions and strengthen government accountability.  Its finding and policy recommendations resonate in Africa too and the struggle to strengthen integrity in government finances.”

First and foremost, the book shows that politics matter to explain the effectiveness of budget oversight and external auditing of public finances. Understanding the politics of the budget and the functioning of the political system helps better understand the gap between formal systems of government auditing and their functioning in practice. Furthermore, politics often is the main catalyst or driver for reform. The relative strength of the opposition is an important factor determining the extent to which audit findings are acted upon. Thus, to build effective audit agencies, mobilising political power is often more important than increasing technical capacity.

The book shows that audit agencies cannot be strengthened or reformed in isolation, but as part of the broader systems of checks and balances in financial governance. The effectiveness of audit agencies ultimately depends on the quality and fluidity of their institutional linkages with the rest of the system of financial governance and budget oversight, in particular the bureaucracy itself but also the legislature.

Furthermore, stages of institutional development cannot be bypassed; auditing systems must grow from within and evolve gradually. They cannot be created over night. Radical reform of external audit systems, as in Argentina in 1992, is likely to fail. Gradual reforms within external audit systems, as in Brazil since 1891, are more likely to be successful. What the book shows is that radical reform strategies based on the mechanistic transplant of exogenous models from more developed countries are unlikely to succeed. Any reform of audit systems must take into consideration the overall trajectory of institutional change as well as the broader system of public budgeting in which audit agencies are embedded.

The Political Economy of Government Auditing: Financial Governance and the Rule of Law in Latin America and Beyond by Carlos Santiso (London: Routlegde, May 2009) www.routledge.com and www.amazon.com