3.2.5 Audits
An audit is an examination of the contribution and expenditure documentation, banking statements and other financial records of a submitting entity to assess compliance with existing auditing standards. Therefore, an audit is a type of review conducted in line with auditing and accounting standards and as per the legal framework which is not necessarily linked to political finance or political finance centred. In the context of political finance, the aim of an audit is to ensure that financial information included in reports submitted by political parties and electoral contestants is accurate, verifiable and prepared in compliance with accepted accounting standards.
The audit of financial reports is distinct from the review of financial reports in that the latter usually consists of a thorough control of the substance of the financial reports, while often the legislation does not give the power to audit institutions to review the entirety of the submitted financial reports. Montenegro is a good example in that regard as two separate institutions are responsible for the review and the audit of political entities’ financial reports. While the Agency for the Prevention of Corruption (APC) is tasked with the review of submitted financial reports and their compliance with the law on Financing of Political Entities and Election Campaigns, the State Audit Institution (SAI) has authority to perform audits of the reports of the same political entities benefiting from public funds in accordance with the laws on accounting and audit. The SAI’s remit is narrower than the APC’s.
One of the purposes served by audits is to provide the public with information about the contributions and expenditures of political parties and electoral contestants, as well as the oversight body’s assessment of the accuracy and completeness of reporting entities’ financial reports. In some countries, formal audits form a critical accountability and enforcement mechanism for ensuring the integrity of political finance.
According to IFES’ TIDE Political Finance Oversight Handbook, “Auditing of political finance accounts can be done by a professional, independent auditor selected by the political parties and candidates; the enforcement body; or directly by a government agency, such as another enforcement body, tax authority or auditing agency.” In countries where such a mechanism is foreseen, audits are carried out in three different ways.
In some instances, the oversight institution might actually undertake the audit, especially if the latter is an audit institution. When conducting audits, it is good practice that the political finance oversight body develop guidelines/ procedures spelling out the process and criteria to either audit or review financial reports. Indeed, depending on the oversight body’s resources, it might not be possible for it to comprehensively audit all the reports. Then, it may decide to audit a sample of reports. The selection could be random or based on risk assessment criteria (e.g. previous instances/ history of non-compliance, complaints/ media reports on irregular financing patterns, i.e. link between donors and participation in public procurement tenders and patterns in the tender awarding processes to main donors) or objective criteria (e.g. campaign finance reports of elected candidates, reports of parties or candidates receiving public subsidies). As an illustration, you can find information about the audit work of the Federal Election Commission, as well as their directive on processing audit reports.
The audit procedures should also determine what will be audited, i.e. all or just a sample of the documents, transactions, accounting and financial procedures and other records of the audited entity, and when the reports will be audited, i.e. throughout the campaign, after the end of the campaign, every year for political party annual reports or on a rotative basis.
If the legal framework applicable in your country foresees the certification of financial reports by auditors/ chartered accountants, you will have an additional channel to flag potential issues of non-compliance. It is recommended to have in place cooperation mechanisms between the oversight institution and the independent auditors as regards the type of information auditors can access and the type of system they can use (paper-based or online system), as well as the division of tasks and responsibilities. Indeed, depending on the applicable legal framework, potential shortcomings could hinder the scope of the audit as auditors may, for example, be legally prohibited from looking at other than specified documents or accessing institutional databases/ information, such as the civil registry to check the permissibility of donors or the tax registry to check the donor records against tax statement records.
For example, in Lithuania, while auditors carry out independent inspection of all candidates and political parties and report on potential breaches/ violations, the final decision is incumbent upon the CEC. Auditors conduct their audit according to legal provisions and the terms of reference defining the scope of their work. The terms of reference are approved by the CEC after consultation with the Lithuanian Chamber of Auditors - see this case study submitted by the Central Election Commission (Country example Lithuania.pdf). Independent auditors use the CEC information system, i.e. the Political Parties and Political Campaign Financing Control Subsystem of the VRK IS, to fill out and submit their reports, but also to access information as submitted by candidates and political parties. Through the CEC information system, independent auditors can access information on (the permissibility of) donations or membership fees, (e.g. if a donor can donate, if a person is a member of political party, the information received by the State Tax Inspectorate), political advertising spending, etc. The ability of the auditors to access a large amount of information increasingly optimizes the scope of their audit and aims to increase political finance accountability.
Although independent auditors/ accountants are generally appointed and paid by the political parties / candidates they certify the financial reports of, these professionals are subject to professional norms and standards, that vary between countries, and that oblige them to abide by rules on impartiality and neutrality. There are a range of possible audit outcomes: auditors can either certify the accounts without reservation, certify the accounts with reservation or refuse to certify them. Auditor’s opinions that are either qualified (with reservation) or adverse (refusal to certify) should warn the oversight institution as to the presence of potential irregularities/ breaches of the law and should be taken into consideration when the oversight body conducts a substantive / in-depth control of the concerned financial reports.
Whatever the rules in place, and in order to shelter external auditors from political pressure, it is good practice either for the oversight body to pay these external controllers directly or for the legislation to foresee a rotation procedure so the same auditors/ accountants cannot certify the accounts of the same party/ candidate for more than a set number of consecutive years or for more than a determined number of electoral cycles.
The Electoral Code of Albania, Article 92/7 for example notes that:
"1. At the start of the electoral year, the CEC shall select by competition a list of licenced expert accountants.
2. The list must contain at least 20 experts, who have been exercising this profession in the last 5 years.
3. Procedures, criteria for the selection of the preliminary list, and their appointment shall be determined by CEC instruction. In any case, one auditor may not audit the same electoral subject for two consecutive elections.
4. The budget for elections must include the fund necessary for auditing electoral subjects and monitors of electoral campaign expenditures. The CEC shall define by decision the relevant contractual terms."
In some countries, while the legislation sets thresholds for requiring external audit, the oversight institution may well want to institute some level of oversight for reports/account below the threshold based on either a random selection or other criteria, such as previous compliance issues or newcomers not familiar with the applicable legislation. In some countries, thresholds are set in the primary legislation. In the UK, party annual accounts must be submitted with an independent auditor’s certificate if the party’s income or expenditure is more than £25,000 (see page 7 of this report by the Electoral Commission). In France, political parties need to have their accounts certified by at least two auditors if the party income exceeds a set threshold. In Slovenia the Court of Audit has the obligation to audit the annual reports of all political parties that receive annually at least EUR 10,000 from the state budget, and campaign finance reports of candidates that are eligible for the partial reimbursement of their electoral expenses.
In some other countries, the oversight body will not conduct any checks or cross-checks on the submitted reports audited by external professionals and the supervision tasks will lie with the auditors. One of the issues with this sort of approach is that it could potentially lack consistency and leaves interpretation of what might be relatively complex/ambiguous rules to individual auditors who are not necessarily training in the ins/outs of political finance. Also, the absence of an institutional control over party finances could reinforce the distrust of the public in monitoring institutions especially in instances where annual reports of political parties are reportedly known to be incomplete or untruthful.