1. Auditing decentralised policies: The challenges for Brazil
This chapter looks at the issues facing external audit in tracking crosscutting issues and policies that are delivered through different levels of government. It first lays the groundwork by defining multi-level governance and noting trends in decentralisation. Then, drawing on OECD studies and best practices, it takes up the various aspects involved in auditing policy delivery in a decentralised landscape, placing the focus squarely on Brazil with its exceptional degree of local autonomy. Touching on the subject of public accountability, the discussion goes on to clarify the distinction between centralised and decentralised external audit structures, and between exclusive and complementary/concurrent mandates. After highlighting external audit challenges specific to Brazil, the chapter concludes with a roadmap of key priority areas for improving the audit of decentralised policies in complex accountability structures, with the emphasis on co-ordination among audit bodies.
In many countries, policies and public services are increasingly developed and delivered through different levels of government. This is especially true of policies that deliver key services to citizens, such as those dealing with education, health, infrastructure and sanitation (OECD, 2017[1]). While decentralisation might improve local public service delivery and lead to greater citizen engagement, it may also pose challenges for supreme audit institutions (SAIs) in terms of their ability to assess the entire policy cycle through following the chain of delivery.
SAIs wishing to present a view of how processes and programmes function across government may want to consider incorporating the multi-level governance dimension in their audits (see Chapter 3 for details on how that can be done).
The challenge can be more complex in countries where the external audit system comprises not only the SAI, but also multiple subnational external audit bodies with specific mandates to audit regional and local government. In such cases, decentralised policy areas may require strategic collaboration among those bodies, so that they can indeed deliver crosscutting views on the value that policies bring to the lives of citizens.
In Brazil, this combination of decentralised policy delivery through a complex system of multi-level governance and a decentralised external audit system is an established reality. The country’s federal, state, and local courts of accounts may improve their own performance, impact and relevance, through more co-ordinated oversight of decentralised policies. This chapter introduces key concepts and challenges for decentralised policy making and delivery to set a foundation for subsequent chapters in the report and recommendations for the courts of accounts in Brazil to strengthen their auditing and co-ordination in a decentralised context.
Decentralisation generally refers to the transfer of powers and responsibilities from the central government level to elected authorities at the subnational level (regional governments, municipalities, etc.) having some degree of autonomy. Fiscal and institutional indicators both show that the overall trend in government around the world has been towards decentralisation (OECD, 2019[2]) (see Box 1.1).
Much of the decentralisation that has taken place in the past decade has been motivated by political concerns. In Latin America for example, decentralisation has been an essential part of the democratisation process, as discredited autocratic central regimes are replaced by elected governments operating under new constitutions. In Africa, the spread of multi-party political systems is creating demand for a more local voice in decision making.
The transition economies of the former socialist states have also become massively decentralised with the crumbling of the old central apparatus. In many countries, decentralisation simply has occurred in the absence of any meaningful alternative governance structure to provide local government services. In some cases, and particularly in East Asia, decentralisation appears to be motivated by the need to improve service delivery to large populations and recognition of the limitations of central administration.
Today, regions and cities account for 40.4% of public spending and 56.9% of public investment in the OECD area. They play an increasing role in key policy areas linked to megatrends, such as transport, energy, broadband, education, health, housing, water and sanitation. They are responsible, for example, for 64% of environment and climate-related public investment.
Decentralisation trends around the world have gone hand in hand with an increase in metropolitan governance and the strengthening of regions. Municipal fragmentation has driven policies encouraging or imposing amalgamations and co-operation among municipalities. However, fragmentation still remains high in some countries. Municipalities having less than 5 000 inhabitants represent 44% of all municipalities in the OECD area. In ten countries, this ratio exceeds 80%.
The number of metropolitan governance authorities created, regardless of type, has especially increased since the 1990s. The rising role of administrative regions has also been striking: of the 81 countries that are measured by the Regional Authority Index, 52 experienced a net increase in the degree of regional authority since the 1970s. In parallel with decentralisation, there has been an increase in asymmetric decentralisation, i.e. governments at the same subnational government level having different political, administrative or fiscal powers. While asymmetric decentralisation would seem a more natural characteristic of federal countries, it is increasingly appearing in unitary countries.
Source: (OECD, 2019[2]) (World Bank, 2020[3]).
Reforms aiming at greater decentralisation must involve a shift of in the role of central governments: from a direct role in service delivery to one of enabling, advising and facilitating the work of subnational governments, while ensuring consistency. In a setting of shared responsibilities, decentralised policies must manage mutual dependence to achieve common objectives (OECD, 2019[2]).
Decentralisation requires sound multi-level governance
Decentralisation is not just a simple increase in the power of local governments. The reality is much more complex, as in all countries most responsibilities are shared across levels of government. Independent of a country’s degree of decentralisation, individual governments or government departments rarely have all the power and resources that are required to respond adequately on their own to policy challenges under their responsibility. It follows that, regardless of the degree to which policies are decentralised, different levels of government need to work together in order to achieve their objectives (Allain-Dupré, 2018[4]). Decentralisation is, therefore, about reconfiguring the multi-level governance system.
Multi-level governance refers to the interaction among levels of government and a broad range of stakeholders – including private actors and citizens – when designing and implementing public policies with a subnational impact. When observing these interactions it is important to note the conditions that make them work and produce the desired policy outcomes, in particular for decentralised policies. These conditions relate to the fiscal framework and financial management, as well as to the regulatory processes involved.
Equally important, the capacities of all levels of government, and particularly of those at the subnational level, are a key dimension of the multi-level governance system. Capacities here refers to the institutional arrangements, technical capabilities, economic resources and policy practices that affect policy outcomes, including the monitoring and evaluation processes linked to policy delivery, stakeholder engagement, and expertise.
Multi-level governance of decentralised policies is characterised by a mutual dependence among levels of government. It runs vertically, horizontally, and in a networked manner with a broader range of stakeholders (citizens and private actors), through greater citizen engagement and government’s accountability.
Multi-level governance practices are part of every country’s governance system, regardless of its degree of decentralisation and whether its institutional form is federal or unitary. These practices are strongly related to local and regional contexts; political conjuncture; and structural constraints, including countries’ specific features such as geography, population, economy, historical and cultural context, constitutional arrangements, and organisational patterns. In this sense, multi-level governance practices must be flexible and reformed to enable public administration at all government levels to adapt continually to a permanently evolving environment.
Multi-level governance thus differs from “monocentric governance”; the latter refers to an approach in which the central government is the core of political authority and exercises its control over society, the economy and resources by setting, on its own, the agenda of societal problems and policy goals and means, and by top-down implementation of its policies. With its focus on activating relevant cross-level interactions, multi-level governance is considered to have greater potential to deal with complex, multi-scale, multi-sector problems.
Source: (OECD, 2017[1]); (OECD, 2019[2]); (Termeer, Dewulf and Lieshout, 2010[5]).
There is evidence that when decentralisation is properly designed and implemented it yields a number of benefits, from improved local public service delivery and greater citizen engagement to reduced corruption and a positive impact on growth. This usually goes hand in hand with better co-ordination and alignment across sectors and stakeholders, and improved multi-level governance (OECD, 2019[2]).
However, weak design/implementation of decentralisation and lack of appropriate multi-level governance may lead to suboptimal policy delivery due to gaps, duplication and overlap. This not only affects value for (public) money, but also may have consequences for delivery of public services and thus for the lives of citizens who depend on these services.
Decentralisation and multi-level governance in Brazil
Brazil stands out as an exception among federal countries, with a more prominent role played by municipalities, a high degree of local autonomy, and no hierarchical relationship between state governments and municipalities. The 1988 Federal Constitution raised Brazilian municipalities to the status of federative entities, on equal footing with states and the federal level. Local governments are not subordinate to the federal government; municipalities are autonomous, although some municipal matters hinge on legislation of the municipality’s state (Constitution of the Federative Republic of Brazil, Art. 21-24).
In Brazil, as is the case in all OECD countries, responsibilities for decentralised policies are shared among all levels of government – healthcare, education, social security, welfare, agriculture and food distribution, housing and sanitation, among others. Each level is autonomous in legislating and providing services, as long as these do not conflict with the powers exclusively provided or legislated by the Federal Union. The Federal Constitution explicitly reserves certain powers for the federal government while providing broad and general mandates to states and municipal governments. States are granted “all powers not otherwise prohibited to them” by the Constitution, whereas municipalities are assigned "the power to legislate over subjects of local interest" and to provide "services of local public interest" (Constitution of the Federative Republic of Brazil, Art. 21-24).
However, the Constitution also delineates a number of public policy areas where responsibilities are concurrently held by the federal government and the states, leading to overlaps among levels of governments. These areas include health, social protection, culture and sport, environment protection, and the protection of historic and cultural heritage (Constitution of the Federative Republic of Brazil, Article 24). Moreover, federal law usually sets general conditions that can be further detailed and regulated by the states and municipalities.
Multi-level arrangements are particularly crucial for ensuring effective co-ordination in the case of decentralised policies, which are highly fragmented in Brazil both from a vertical and horizontal perspective (OECD, 2013[6]). On the horizontal level, Brazilian institutions tend to work mostly in-silo, meaning that each sectoral ministry has its own territorial vision and does not necessarily co-ordinate with other ministries. The result is that each ministry, state, agency or publicly owned enterprise pursues its own strategy and policy objectives, creating potential policy coverage and objective gaps.
Regarding the vertical dimension, two forms of multi-level arrangements are particularly common in Brazil – contract agreements and federative pacts:
Agreements (convenios) and contracts are regularly used for co-operation among public institutions in Brazil. These standard contracts make it possible to clarify the responsibilities of each level of government: on the one hand, the co-ordination, regulation and financing roles of central government, and on the other the tasks to be assumed by the municipality.
Federative pacts (pactos federativos) are sets of constitutional provisions established by sectoral ministries with leadership from the president’s office, generally after consultation and negotiation with subnational governments. These bodies draw up a set of objectives, roles, responsibilities and financing arrangements in a specific policy area, for each level of government. When a sector is entitled to discretionary transfers, the federal ministry can make those transfers conditional on adhesion to the pact. These pacts may be wide-ranging in scope; one example is the Health Pact passed in 2006. Currently, discussions are mainly oriented towards a federative pact to set up new rules overseeing federal, state and municipal budgets.
Some ministries have developed mechanisms on their own to ensure vertical co-ordination. This is the case for instance in the health sector, which is highly decentralised to state and municipalities. The Ministry of Health co-ordinates policy design and implementation through tripartite and bipartite commissions, including health representatives from the three levels of government that meet once a month (OECD, 2013[6]). However, several initiatives at intergovernmental dialogue have been suspended in recent years (e.g. the Ministry of Cities and the National Council for Cities; the latter was in charge of implementing and monitoring the National Policy for Urban Development) (OECD/UCLG, 2019[7]; Diario Oficial da Uniao, 2019[8]).
The increasing trend toward shared responsibilities among levels of government over the past decades also has repercussions for accountability and audit. Having independent external audit is crucial in public accountability arrangements (see Box 1.3). Financial and compliance audits are necessary to assess the reliability of financial reporting and the regularity of the operations of national and subnational governments. Performance audits help both national and subnational authorities to be accountable for the effectiveness and efficiency of their policy delivery.
Accountability is the obligation of organisations and individuals to account for their activities, accept responsibility for their conduct with regard to those activities, and disclose results and outcomes.
Accountability takes place in a relationship between an “actor” and a “forum”, in which the actor has an obligation to explain and to justify their conduct. The forum can pose questions and pass judgement, and the actor may face consequences.
Public accountability is accountability in and relating to the public domain. Public accountability helps to instil confidence that the public sector is being managed appropriately. In administrative public accountability, the actors are public, semi-public or even private entities that are executing a public task or policy, funded by public financial resources. These entities may have to face multiple accountability forums, either in a hierarchical “principal agent” relation (e.g. parliament, municipal council, ministry), or a horizontal social accountability to stakeholders (e.g. public service users).
The relations between actors and forums in public accountability are institutionalised and laid down in rules, requirements and processes, constituting an accountability arrangement.
The hierarchical “principle agent” accountability relation comprises two main dimensions that shape its accountability arrangement:
answerability: the obligation to provide information, clarification, explanation and justification
enforcement: formal action against illegal, incorrect, inefficient or ineffective conduct of the accountable institution or public official.
Both answerability and enforcement require an adequate institutional setup at two levels: 1) internal mechanisms (within the bureaucratic chain of command); and 2) external oversight and control mechanisms.
Public sector audit institutions act as external oversight mechanisms; they help to create suitable conditions for accountability and reinforce the expectation that public sector entities and public servants will perform their functions effectively, efficiently, ethically and in accordance with the applicable laws and regulations.
The problems of many eyes and many hands
The “problem of many eyes” refers to the fact that public organisations are usually accountable to not just one but multiple forums, each with their own information requirements and (sometimes conflicting) criteria regarding expected conduct. This may pose complex administrative burdens on the entity and may undermine the efficiency and cost-effectiveness of its operations.
The “problem of many hands” refers to the opposite, namely that public accountability forums are confronted with multiple actors or entities, which are all contributing one element of the policy outcome or public service. It is then almost impossible for the forum to unravel who has contributed what and decide on appropriate corrective action. This may pose a problem for supreme audit institutions, whose task usually is to provide the parliamentary forum with insight into the proper execution of government policies, so the government can be held accountable.
Source: Elaboration based on (OECD, 2020[9]; OECD-SIGMA, 2017[10]; Bovens, 2007[11]; INTOSAI, 2019[12]).
In general, external audit functions follow accountability arrangements. Decentralised responsibility goes hand in hand with multiple and decentralised accountability, exacerbating the “many eyes” and “many hands” complexity of public accountability (see Box 1.3). If the SAI is not able to follow and take part in these multiple decentralised accountability arrangements – for instance, because they are outside its jurisdiction – it will have tremendous difficulty providing a crosscutting view of policy performance.
Decentralisation and the external audit structure
External audit structures are an institutionalised element of government accountability arrangements, and as such are not prone to frequent change. They vary significantly from one country to another. In most countries, SAIs scrutinise the revenue and expenditure of public budgets at the central or federal level. The responsibility for external audit at the subnational level however, can differ considerably. Varieties of models are rooted in tradition, history, the administrative system, etc. In some countries, SAIs are mandated to audit local governments. In others, several external audit bodies, or even private sector audit firms, are responsible for auditing different levels of government. Still others have a mix of both (EUROSAI, 2020[13]).
Overall, depending on the mandates of the Supreme Audit Institution and on the existence and mandates of subnational external audit institutions, external audit structures can be organised in a centralised or decentralised manner (see Box 1.4).
In June 2020, the OECD invited all 198 supreme audit institutions (SAIs) that are member of INTOSAI community to participate in an online survey, aiming to collect data on the role of SAIs in audit at the sub-national level and the coordination between SAIs and sub-national external audit bodies.
The short questionnaire was answered by the SAIs of 60 countries.
The responses enabled the identification of three main types of external audit structures:
1. centralised audit structures, with only one audit institution and no subnational autonomous entities (34 respondents – 57%);
2. decentralised audit structures – exclusive mandates, where multiple actors are responsible for auditing the different levels of government, but the SAI and subnational audit institutions have exclusive mandates (7 respondents – 12%)
3. decentralised external audit structures – concurrent or complementary mandates, in which the SAI has a mandate to audit local levels to some extent, and the audit bodies at subnational levels may have complementary or concurrent mandates (19 respondents – 32%).
Centralised external audit structures
A country has a centralised external audit structure when there are no subnational institutions to perform the auditing. The SAI centralises the external work, and as the system’s main actor it does not share its external audit mandate with actors at any other level of government (Figure 1.1).
With this arrangement there is no risk of duplication or overlap in audit mandates, but rather a uniform approach to auditees and auditing policies across the different levels of government. In this model the transfer of powers and responsibilities from the central government level to elected authorities at the subnational level due to decentralisation, does not pose an inherent risks to auditing the full chain of policy delivery over multiple levels of governance.
The major risks that can arise in this system are the gaps in audit coverage at all levels of government due to limited resources, and geographical barriers that may make it difficult for the SAI to know the particularities of and challenges facing the local levels. Depending on the size of the country, SAIs might meet these challenges by establishing local offices, directly managed by the central office that can conduct the work on-site. This is the case for instance in Chile, Greece and South Africa.
Decentralised external audit structure – Exclusive mandates
In this structure, multiple actors are responsible for auditing the different levels of government, but the SAI and subnational audit institutions have exclusive mandates: the SAI has no mandate to audit the subnational levels of government, which is solely the responsibility of subnational audit institutions (Figure 1.2). This model is not very common. Countries adopting the structure include the Netherlands, Argentina and Lithuania.
The specific mandate of subnational audit bodies differs depending on the country. For example, it may or may not include the instruction to carry out performance audits. In addition, the subnational audit institutions may be organised at the regional and/or local level. These entities are usually autonomous and decide independently on their own audit programmes.
Overall, while allowing for greater audit coverage when compared to centralised external audit systems, this system may lead to gaps in coverage when there is no uniform professional capacity at all levels of the audit system. Also, audit of public policies delivered through multi-level arrangements may be compromised, resulting in fragmentation of coverage. Co-ordination mechanisms are needed to overcome these challenges.
Decentralised external audit structures – Concurrent or complementary mandates
This type of external audit structure is also decentralised. The SAI has a mandate to audit local levels to some extent, and the audit bodies at subnational levels may have complementary or concurrent mandates. This structure is also relatively common within INTOSAI and exists in Brazil, Spain and Mexico.
In this system, the subnational audit bodies are autonomous and may decide individually on their audit programmes. The extent of the SAI audit mandate at the subnational levels of government differs from country to country. Usually, the SAI has a mandate to audit central/national budget funds that are transferred to subnational levels (“follow the money” approach). In some countries, the SAI also has a mandate to audit national policies at the subnational levels, and subnational policies under certain circumstances.
This model may allow for greater flexibility and opportunities for audit institutions to promote greater audit coverage of auditees and policies, including the policies delivered through multi-level arrangements. To enable that however, the audit institutions must implement efficient co-ordination mechanisms to avoid duplication, gaps, and overlaps in the audit work.
Those three risks are present in both types of decentralised audit structures, particularly when central/national policies are delivered through decentralised mechanisms. In these cases the accountability arrangements may not match the external audit structure.
The decentralised audit system in Brazil
The external audit system in Brazil is composed of 33 courts of accounts, each court headed by a plenary college of judges who are members of the court and who take decisions jointly. The courts act at the three levels of government – federal, state and municipal. At the federal level, the Federal Court of Accounts (Tribunal de Contas da União, TCU) is responsible for scrutinising the federal budget and resources, as well as for (among other things) conducting audits at the request of the National Congress; overseeing federal public entities; and investigating complaints filed by citizens, political parties, associations or unions involving irregularities in the application of federal resources. The TCU is also responsible for overseeing the application of federal funds transferred to states, the federal district and municipalities.
The state courts of accounts (Tribunais de Contas do Estado, TCEs) are responsible for auditing at the state level. Each of the 26 states of the federation has its own court of accounts, which is financially independent and has full autonomy to manage its own structure and decide on its annual audit programme. The federal district has its own court as well.
The TCEs are also responsible for auditing the municipalities of 23 states. In addition to TCEs, the states of Pará, Goiás and Bahia have established municipal courts of accounts (Tribunais de Contas dos Municípios, TCMs) responsible for exclusively auditing the respective municipalities. Moreover, two municipalities have established their own municipal court of accounts: São Paulo and Rio de Janeiro (respectively, the Tribunal de Contas do Município de São Paulo and the Tribunal de Contas do Município do Rio de Janeiro).
The organisation, size and structure of these courts of accounts (TCs) vary considerably from one institution to another. The composition of the plenary and technical bodies and the focus of audit work can also differ (e.g. TCs in the north of the country might have a particular focus on audits relating to environmental issues). The types of audits they conduct, however, do not differ as much. For the majority of TCs, compliance audits represented at least 90% of the total number of audits carried out in 2018, and only one TC reports that compliance audits represented less than 50% of the total number of audits (OECD-TCs Survey, 2020).
The mandates of the subnational courts of accounts are described in the Constitution of each state and further defined in the bylaws and internal regulation of each of these institutions. Overall, the majority of the Constitutions of the states and courts’ bylaws replicate the provisions of the Federal Constitution applicable to the TCU – including article 71, VI that sets forth the TCU mandate over federal transfers. Therefore, in general terms each court of accounts is responsible for overseeing application of the funds transferred by the relevant level of government (e.g. a state) to other levels (municipalities or other states). Some Constitutions also delegate responsibility for the oversight of funds received from transfers by other levels of government (the case with the Federal District and the states of Minas Gerais and São Paulo).
Such provisions and mandates are necessary for the auditing of common multi-level arrangements in Brazil. These arrangements include, for example agreements (convenios), contracts that are regularly used for co-operation among public institutions in Brazil, and the federative pacts (pactos federativos), arrangements that include a set of objectives, roles, responsibilities and financing settlements in a specific policy area, for each level of government (OECD, 2013[6]). The relevance of multi-level arrangements and financing in Brazil is demonstrated by the fact that tax and own-source revenue represented 34% of total municipal revenue in 2016 in Brazil, against 65% for transfers from the Union and state governments (compared with 44.5% and 37.2% respectively on average in OECD countries) (OECD, 2019[2]).
TC mandates create a need for co-ordination structures and arrangements involving all actors of the external audit system in Brazil. In the absence of such arrangements, the mandates might lead to duplication, fragmentation and overlaps of audit coverage, particularly with policies delivered through multi-level arrangements.
Multi-level governance and policy delivery
Overlapping assignments among levels of government are repeatedly mentioned as a serious challenge in OECD territorial reviews and economic surveys. Decentralisation presents risks for policy performance when not adequately managed. In general, decentralisation presents challenges to subnational governments because it requires certain economic, political and administrative capacities that may not be present in smaller municipalities.
The fiscal dimension also presents challenges. One of those most frequently mentioned is misalignment of responsibilities allocated to subnational governments with the resources available to them. Unfunded and underfunded mandates – where subnational governments are responsible for providing services or managing policies but without the requisite resources – are also common (OECD, 2019[14]).
High reliance on transfers of funds from central governments may also reduce subnational government incentives for responsible fiscal behaviour. Subnational governments need own-source revenues because these contribute to the accountability and efficiency of local public service provision. While a general rule for the optimal degree of tax autonomy is difficult to formulate, local authorities should rely on their own revenues for financing their services at the margin (OECD, 2019[14]).
Another important challenge posed by decentralisation is that of assignments that overlap between levels of government. Lack of clarity in the assignment of responsibilities makes service provision and policy making costlier; it also contributes to a democratic deficit by creating confusion among citizens regarding which agency or level of government is responsible. Unbalanced decentralisation, where the various policy areas are decentralised in different ways, can also weaken regional development policies (OECD, 2019[14]).
Decentralisation may result in the loss of certain economies of scale and fragmentation of public policies. This could happen especially if subnational governments are unable to co-operate with each other. Determining optimal subnational unit size is a context-specific task; it varies not only by region or country but also by policy area. National governments have an important role in establishing legal, regulatory arrangements and incentives to foster co-operation across jurisdictions, in particular within functional regions (OECD, 2019[14]).
These challenges can have a considerable impact on the delivery and value for money of decentralised policies. When auditing the performance of decentralised policies that are delivered through different levels of governance, SAIs may take the opportunity to consider characteristics of the multi-level governance system that pose challenges to sub-national government levels and reduce their capacity of policy delivery. Chapter 3 describes how auditors may design and apply an audit framework for multi-level governance.
Decentralised policies and decentralised external audit systems
Gaining an accurate picture of the effectiveness and efficiency of decentralised policies can be especially difficult in decentralised external audit systems, due to gaps, overlap and duplication in the mandates of the external audit bodies within the system. Decentralised policies are often policies and services that affect people in their day-to-day lives: education, healthcare, transport, water management, sanitation, etc. Underperformance in these policies have immediate repercussions for citizens, while a well-functioning external audit system can make a real, positive difference in the lives of citizens.
Despite the different structures, roles and work of the SAIs and the regional or local external audit bodies, these institutions have the collective common purpose of promoting accountability and good governance (EUROSAI, 2020[13]). In a context of decentralisation, there are shared areas of their work that offer opportunities for effective co-ordination and co-operation. Particularly, audit institutions might work in concert to audit policies that are delivered through more than one level of government.
The purpose is to put together a whole picture that will provide the centre of government with the insights needed to deliver the best possible outcome for citizens. Each external audit entity has a piece of the puzzle. Building the whole picture starts with collecting and putting all pieces of the puzzle together.
Building a shared understanding among the audit entities of decentralised audit systems about the risks of not delivering these policy outcomes is a good place to start a collaboration effort. Upon the elaboration of a shared risk map, audit entities could then work towards a strategic selection of audits and thereby amplify the impact of their work, collectively and individually.
By improving co-ordination among external audit institutions through a common risk-based approach to audit selection (see Box 1.5), SAIs can help address the challenges inherent in decentralisation, ultimately contributing to their added value. Chapter 2 describes a methodology for common audit selection through an evidence-based risk assessment.
Public sector audit institutions need to determine on a case-by-case basis which type of audit they will employ (performance, compliance, financial, etc.).
In order to decide on the annual audit programme, SAIs are required by International Audit Standards to base their selection of audit topics on a strategic planning process of analysing each of the potential topics and conducting research to identify auditable risks and problems. The relevant standard ISSAI 3000 further stipulates that techniques such as risk analysis or problem assessments can help structure the planning process. These activities, however, need to be complemented by professional judgement to ensure that they reflect the mandate of the SAI and that the topics selected are significant and auditable.
The ultimate goal of the audit selection process is to select audits that cover significant issues and that are likely to have an impact. Having impact refers to whether the audits are likely to significantly improve the conduct of government operations and programmes, e.g. by lowering costs and simplifying administration, enhancing the quality and volume of services, or improving effectiveness, impact, or the benefits to society.
Source: (INTOSAI, 2016[15]) (INTOSAI, 1977[16]).
In order to increase the efficiency and impact of the collective audit work, audits undertaken by different bodies in the external audit system should be strategically aligned, at least to the extent possible given the specific remits and legal obligations of each audit body. Rather than relying on each entity’s bottom-up audit selection, selection processes could be harmonised under a coherent strategic direction, which would be ideal.
In addition to reducing the likelihood of unnecessary gaps, overlaps and duplication of audit work – and increasing the exchange of knowledge – co-ordination among external audit institutions might also result in:
improving and maximising audit coverage, with an increased focus on risk areas
better-informed audits and consequently, more useful recommendations at all levels of government
better understanding by all parties of the results of each other’s work, which may have an impact on their respective future work plans and audit programmes
more efficient audits based on co-ordinated planning and communication.
For that purpose, external audit entities might work on the specific design issues involved in building a co-ordinated network. Chapter 4 provides guidance on how external audit institutions can design and implement such networks.
A common and co-ordinated risk-based approach to audit selection is critical for overcoming the challenges of auditing in a decentralised audit system. This is an opportunity for SAIs to contribute significantly to improving the external audit system, not only by conducting better audits but also by taking the leading role and supporting structural improvements in auditing the public sector, as required by INTOSAI Principle 12 on the Value and Benefits of SAIs (INTOSAI, 2013[17]).
Challenges and opportunities in Brazil
In Brazil, the size and complexity of the government and the existence of multiple actors with decision-making power at the three levels of government create challenges for maintaining policy coherence and guaranteeing effective policy performance.
As described previously, Brazil has an institutional and financial structure that is not only highly complex but also multi-level. This complex architecture, which poses challenges of gaps, duplication and overlap, can hinder the overall performance of the decentralised system. In addition, the country’s external audit system is also extremely decentralised, exacerbating the challenges for decentralised policy delivery. Given this “double decentralisation”, collaboration through strategic selection and alignment of audits, including assessment of multi-level governance issues, may provide a way to counter the challenges.
Brazil has to deal with great regional disparity. Whichever socio-economic indicators are used to assess this disparity, the macro-regional pattern is always the same: the country's north and northeast areas have the worst rates, its central area has intermediate rates, and the south and southeast areas have the best rates (Silva, 2017[18]). Key decentralised policies on education, health and infrastructure all have the objective of reducing this disparity, but the highly fragmented multi-level governance poses a huge challenge to equal delivery of these policies and reduction of regional inequality.
In auditing the effectiveness of these policies, the perspective from the regional level becomes crucial. When selecting audits in decentralised policy areas, gaining insights into territorial variation in socio-economic conditions and policy outcomes are key. Whenever available, evidence at the local level can provide this insight, when collected and analysed systematically. TCs are in a key position to provide this insight into territorial disparity of policy performance.
This is a potential strength of the decentralised external audit system in Brazil, if strong and strategic collaboration among TCs is established. Brazil could benefit from a comprehensive mapping of policies and programmes and their interactions at the multiple levels of governance. The TCU and the TCs can play an important role in collaboratively assessing the performance of policies or programmes that are delivered through multi-level arrangements.
In relation to the challenges and opportunities described in this chapter, there are three key areas of priority.
Audit of decentralised policies requires the strong collaboration and co-ordination between all external audit bodies that have a role in auditing elements of policy delivery
National and subnational audit institutions can establish systematic collaboration and co-ordination with each other, with the objective of delivering to the centre of government insights on crosscutting improvements for the performance and cost-effectiveness of decentralised policies.
The collaboration of external audit bodies might focus primarily on the strategic selection of audits based on evidence and risks
SAIs can share and analyse knowledge that will allow strategic selection of audits within the whole system—national and subnational levels—for greater impact, while respecting each entity’s unique position and mandate. As part of this effort, SAIs can develop a shared, outcome-oriented risk assessment method that is structured around indicators to facilitate sharing of knowledge and the selection of audits, using a common language and building a common risk map.
To ensure that audits take into account specific issues of decentralised policy making and delivering, SAIs can systematically consider multi-level governance factors when auditing
Effective auditing in a decentralised context requires SAIs to take into account multi-level governance for each policy sector that will be analysed and audited. A multi-level governance assessment framework can help SAIs in taking a structured approach to pinpoint multi-level governance weaknesses, particularly when conducting performance audits.
The next three chapters in this report further elaborate on these three priority areas and recommendations specific to Brazil.
Chapter 2 focuses on strategic audit selection through an evidence-based risk assessment.
Chapter 3 describes the development of a framework that can be a common basis for assessing strength and weaknesses in multi-level governance during an audit.
Chapter 4 describes strategies and structures for collaboration between external audit entities in strategic selection of audits.
References
[4] Allain-Dupré, D. (2018), “Assigning responsibilities across levels of government: Trends, challenges and guidelines for policy-makers”, OECD Working Papers on Fiscal Federalism, No. 24, OECD Publishing, Paris, https://dx.doi.org/10.1787/f0944eae-en.
[11] Bovens, M. (2007), “Analysing and Assessing Accountability: A Conceptual Framework”, European Law Journal, Vol. 13/4, pp. 447-468, https://doi.org/10.1111/j.1468-0386.2007.00378.x.
[8] Diario Oficial da Uniao (2019), Decreto Nº 9.759, de 11 de Abril de 2019, http://www.in.gov.br/materia/-/asset_publisher/Kujrw0TZC2Mb/content/id/71137350/do1e-2019-04-11-decreto-n-9-759-de-11-de-abril-de-2019-71137335.
[13] EUROSAI (2020), “Taskforce Municipality Audit”, External Audit Systems Analysis, https://www.vkontrole.lt/tf/files/files/External%20Audit%20Systems%20Analysis_final_07-01(2).pdf (accessed on 20 July 2020).
[12] INTOSAI (2019), ISSAI 100- Fundamental principles of Public Sector Auditing, https://www.issai.org/pronouncements/issai-100-fundamental-principles-of-public-sector-auditing/.
[15] INTOSAI (2016), SAI Performance Measurement Framework 2016, https://www.idi.no/en/idi-cpd/sai-pmf.
[17] INTOSAI (2013), INTOSAI-P-12 The Value and Benefits of Supreme Audit Institutions – Making a difference to the lives of citizens, https://www.issai.org/pronouncements/intosai-p-12-the-value-and-benefits-of-supreme-audit-institutions-making-a-difference-to-the-lives-of-citizens/.
[16] INTOSAI (1977), The International Standards of Supreme Audit Institutions (ISSAI) 1. The Lima Declaration, https://www.issai.org/pronouncements/intosai-p-1-the-lima-declaration/.
[9] OECD (2020), OECD Public Integrity Handbook, OECD Publishing, Paris, https://dx.doi.org/10.1787/ac8ed8e8-en.
[2] OECD (2019), Effective Public Investment Across Levels of Government – Principles for Action, OECD, https://www.oecd.org/effective-public-investment-toolkit/OECD_Public_Investment_Implementation_Brochure_2019.pdf.
[14] OECD (2019), “Making decentralisation work: A handbook for policy-makers”, in Making Decentralisation Work: A Handbook for Policy-Makers, OECD Publishing, Paris, https://dx.doi.org/10.1787/dd49116c-en.
[1] OECD (2017), Multi-level Governance Reforms: Overview of OECD Country Experiences, OECD Multi-level Governance Studies, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264272866-en.
[6] OECD (2013), OECD Territorial Reviews: Brazil 2013, OECD Territorial Reviews, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264123229-en.
[7] OECD/UCLG (2019), Report of the World Observatory on Subnational Government Finance and Investment – Country Profiles, OECD Publishing, Paris, http://www.sng-wofi.org/publications/SNGWOFI_2019_report_country_profiles.pdf (accessed on 15 June 2020).
[10] OECD-SIGMA (2017), The Principles of Public Administration: 2017 edition, OECD, Paris, http://www.sigmaweb.org/publications/Principles-of-Public-Administration-2017-edition-ENG.pdf.
[18] Silva, S. (2017), “Regional Inequalities in Brazil: Divergent Readings on Their Origin and Public Policy Design”, EchoGéo 41, https://doi.org/10.4000/echogeo.15060.
[5] Termeer, C., A. Dewulf and M. Lieshout (2010), “Disentangling Scale Approaches in Governance Research: Comparing Monocentric, Multilevel, and Adaptive Governance”, Ecology and Society, Vol. 15/4, https://doi.org/10.5751/es-03798-150429.
[3] World Bank (2020), Decentralization & Subnational Regional Economics, http://www1.worldbank.org/publicsector/decentralization/what.htm (accessed on 24 July 2020).