1. INTRODUCTION

In recent days, numerous county governors have appeared before a Senate Committee to answer audit queries emanating from Auditor General's audit report. In this article, we seek to shed light on technical details and framework that anchor public audits in Kenya, with a bias towards the county governments.

Generally, public-sector audit seeks to ensure public entities exercise responsibility for the use of resources derived from taxation and other public finances in the delivery of services to citizens and other recipients.

The scope of public sector audits ensure public entities’ accounts or other financial reports are prepared in accordance with a legally acceptable reporting framework. It aims at ensuring efficient budget implementation and other decisions on the allocation of resources.

 Further, it ensures policies, programmes or activities are defined by their legal basis or source of financing. The end result is to create suitable conditions and reinforce the expectation that public-sector entities and public servants perform their functions effectively, efficiently, ethically and in accordance with the applicable laws and regulations.

2. TYPES OF PUBLIC SECTOR AUDITS

Audits are either internal or external. Internal audits are carried out internally within an entity of government and the internal auditor reports to the top decision making organ. On the other hand, external Audit are carried out by an external party, in the Kenyan context this being the Auditor General.

There are various forms of public audit. The five main ones include:

• Financial audit: This focuses on determining whether a public entity’s financial information is presented in accordance with the applicable financial reporting and regulatory framework. The audit is accomplished by obtaining sufficient and appropriate audit evidence to enable the auditor to express an opinion as to whether the financial information is free from material misstatement due to fraud or error.
• Performance audit: This focuses on whether interventions, programmes and institutions are performing in accordance with the principles of economy, efficiency and effectiveness and whether there is room for improvement. Performance is examined against suitable criteria, and the causes of deviations from those criteria or other problems are analysed. The aim is to answer key audit questions and to provide recommendations for improvement.
• Compliance audit: This focuses on whether a particular subject matter is in compliance with authorities identified as criteria. Compliance auditing is performed by assessing whether activities, financial transactions and information are, in all material respects, in compliance with the authorities which govern the audited entity.
• Forensic Audit: This is the audits meant to establish fraud, corruption or other financial improprieties.
• Procurement audits: This involves examining the public procurement and asset disposal process of a state organ or a public entity with a view to confirm as to whether procurements were done lawfully and in an effective way.

To make a clarification, the role of the Auditor General is to certify that the reported statements of an entity are true and fair, and not to bust fraud schemes or identify financial crimes. That is the domain of forensic audit. However, the Auditor General is empowered, with approval of parliament, to conduct forensic audits.

This authority to guide any of the mentioned public audit include rules, laws and regulations, budgetary resolutions, policy, established codes, agreed terms or the general principles governing sound public-sector financial management and the conduct of public officials.

3. SUBJECT MATTER AND CRITERIA OF PUBLIC AUDITS

The three parties for public audit are the auditor general, the auditees, and intended users who are the general public or oversight bodies. The audit is conducted in line with identified subject matter and stipulated criteria.

Subject matter refers to the information, condition or activity that is measured or evaluated against certain criteria. It can take many forms and have different characteristics depending on the audit objective.

An appropriate subject matter is identifiable and capable of consistent evaluation or measurement against the criteria, such that it can be subjected to procedures for gathering sufficient and appropriate audit evidence to support the audit opinion or conclusion.

The criteria are the benchmarks used to evaluate the subject matter. Each audit should have criteria suitable to the circumstances of that audit.

In determining the suitability of criteria, the auditor considers their relevance for the intended users, as well as their completeness, reliability and objectivity (neutrality, general acceptance and comparability with the criteria used in similar audits).

The criteria used may depend on a range of factors, including the objectives and the type of audit. They should be made available to the intended users to enable them to understand how the subject matter has been evaluated or measured.

4. LEGAL FRAMEWORK FOR PUBLIC AUDITS
   • THE CONSTITUTION 2010

Article 226 (1) provides for enactment of an Act of Parliament to provide for the keeping of financial records and the auditing of accounts of governments and other public entities, and prescribe other measures for securing efficient and transparent fiscal management.

It further requires designation of an accounting officer in every public entity at the national and county level of government. The accounting officer of a national public entity is accountable to the National Assembly for its financial management, and the accounting officer of a county public entity is accountable to the county assembly for its financial management.

The Constitution further clarifies that accounts of all governments and State organs shall be audited by the Auditor-General, established under Article 229

Within six months after the end of each financial year, the Auditor-General is required to audit and report, in respect of that financial year, on, among others the accounts of the national and county governments; and the accounts of all funds and authorities of the national and county governments.

An audit report is supposed to confirm whether or not public money has been applied lawfully and in an effective way. The audit reports are submitted to Parliament or the relevant county assembly.

Within three months after receiving an audit report, Parliament or the county assembly is required to debate and consider the report and take appropriate action. In practice, there has been delays in considering reports by the legislatures. This had an impact in revenue sharing of revenue at the national level.

• THE PUBLIC FINANCE MANAGEMENT ACT 2012 (PFM)

The PFM, Section 155 require entities of county governments to maintain internal auditing arrangements.

A county government entity is required to compliance with PFM and to put in place appropriate arrangements for conducting internal audit according to the guidelines issued by the Accounting Standards Board.

The arrangements for the conduct of internal auditing for a county government entity include—

• reviewing the governance mechanisms of the entity and mechanisms for transparency and accountability with regard to the finances and assets of the entity;
• Conducting risk-based, value-for-money and systems audits aimed at strengthening internal control mechanisms that could have an impact on achievement of the strategic objectives of the entity;
• verifying the existence of assets administered by the entity and ensuring that there are proper safeguards for their protection;
• providing assurance that appropriate institutional policies and procedures and good business practices are followed by the entity; and
• Evaluating the adequacy and reliability of information available to management for making decisions with regard to the entity and its operations.

A county government entity is required to ensure that the arrangements for conducting internal audits in respect of the entity are in accordance with international best practices for internal auditing.

In relation to urban areas, Section 180 of the PFM provide for separate reporting mechanisms. The Board of an urban area or city is required to ensure that the urban area or city follows the guidelines prescribed by the Accounting Standards Board.

Further, the annual report of an urban area or city shall contain such additional information as is necessary to enable an informed assessment of the activities of the urban area or city.

The PFM establishes the Public Sector Accounting Standards Board, that is responsible for providing accounting frameworks and to set generally accepted standards for the development and management of accounting and financial systems by all State organs and public entities.

In particular, the Board is required to perform the following functions—

• set generally accepted accounting and financial standards;
• Prescribe the minimum standards of maintenance of proper books of account for all levels of Government;
• prescribe internal audit procedures which comply with this Act;
• prescribe formats for financial statements and reporting by all state organs and public entities;
• publish and publicise the accounting and financial standards and any directives and guidelines prescribed by the Board;
• in consultation with the Cabinet Secretary, Gazette the dates for application of the standards and guidelines; and
• perform any other functions related to advancing financial and accounting systems management and reporting in the public sector.
  • THE PUBLIC AUDIT ACT 2015

The Act establishes the Office of the Auditor General (OAG). The office comprise of the Auditor General as its statutory head and all other staff appointed by the Auditor General.

The Act provide for additional functions over those stipulated under Article 229 of the Constitution. For instance, the OAG has a responsibility to give assurance on the effectiveness of internal controls, risk management and overall governance at national and county level.

The Act further gives the Auditor General Powers to require a public body or any person employed by the public body to produce any official document in the body's custody, care or control; and provide the Auditor General with information or an explanation about any official information, system or asset.

The Auditor-General may in the course of exercising his or her functions, duties or powers, track a transaction into the account of any person in any bank through an order of the courts, if the Auditor General has reason to believe that the money belonging to a public body has been fraudulently or wrongfully paid into such person's account.

For purposes of carrying out the functions, the Auditor General is empowered to outsource audit services from duly registered audit firms whose partners and staff are not employees of the Office of the Auditor-General and the public service to assist in an examination and audit of accounts.

The Act under Part III establishes the Audit Advisory Board to advise the Auditor General on the exercise of his or her powers and the performance of his or her functions. This outfit has since been declared unconstitutional by court.

In addition, it provides that the final report by an internal auditor which has been deliberated on and adopted by an audit committee of a State Organ or public entity, may be copied to the Auditor General.

Section 42 states that the Auditors shall not question the merits of a policy objective of the national government or county government or any other public entity.

The Auditor General was also barred from disclosing security personnel involved in any misappropriation of funds. The court reaffirmed that the Auditor General is a constitutional office, and cannot be subject to controls.

The court in Transparency International (TI Kenya) v Attorney General & 2 others [2018] eKLR declared sections 4(2), 8, 12, 17(1), 18, 27, 40, 42 and 70 of this Public Audit Act as unconstitutional. The expunged sections provided, amongst others, in auditing national security organs, the Auditor General must first hold meetings with security officials to agree on areas to audit.

5. REGULATIONS AND GUIDELINES
   

• The Public Finance Management (County Government) Regulation, 2015

These Regulations, made in pursuant to the PFM, requires every public entity to establish an Audit Committee.

The Audit Committee form a key element in the governance process by providing an independent expert assessment of the activities of management, the quality of the risk management, financial reporting, financial management and internal audit, to the board of directors or a supervisory board or executive management.

It also ensures that external audit recommendations are fully addressed, that the quality of internal audit is of an appropriate standard and that line management has full regard to internal audit recommendations.

• Public Sector Accounting and Audit standards

The Public Sector Accounting Standards Board, established under the PFM, was gazetted by the Cabinet Secretary, National Treasury on 28th February, 2014. The Board is mandated to provide frameworks and set generally accepted standards for the development and management of accounting and financial systems by all state organs and public entities.

The board is mandated to issue financial reporting and internal auditing standards to be applied by all state organs and public sector entities. These standards are intended to enhance quality of financial reports and improve compliance with internal controls in all state organs and public sector entities.

The Board has approved for adoption the following:

• The use of International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board for application by State Corporations.
• The use of International Public Sector Accounting Standards (IPSAS) issued by the International Public Sector Accounting Standards Board (IPSASB) for application by all public sector entities except the State Corporations.

These standards are applied as follows:

• The National and County government and their respective entities are required apply IPSAS cash based standard
• The Semi-Autonomous National County Government Agencies are required to apply IPSAS Accrual based standards.
• The state and County Corporations carrying out commercial activities are required to apply the IFRS.
• Regulatory and non-commercial State and County Corporations are required to apply IPSAS Accrual.

The Board is required to periodically review and prescribe the applicable financial reporting standards, which includes progressive application of IPSAS Accrual standards by National and County Governments and their respective entities.

The Board has approved for adoption and application of the International Professional Practice Framework (IPPF) for internal Auditing Standards by the Institute of Internal Auditors by all state organs and public sector entities.

6. AUDIT OPINION

An audit opinion is used to convey the level of assurance. The opinion is typically in a standardised format. It could either be unmodified or modified.

An unmodified opinion is used when either limited or reasonable assurance has been obtained. A modified opinion may be:

• Qualified (except for) – where the auditor disagrees with, or is unable to obtain sufficient and appropriate audit evidence about, certain items in the subject matter which are, or could be, material but not pervasive;

• Adverse – where the auditor, having obtained sufficient and appropriate audit evidence, concludes that deviations or misstatements, whether individually or in the aggregate, are both material and pervasive;

• Disclaimed – where the auditor is unable to obtain sufficient and appropriate audit evidence due to an uncertainty or scope limitation which is both material and pervasive.

Where the opinion is modified the reasons should be put in perspective by clearly explaining, with reference to the applicable criteria, the nature and extent of the modification. Depending on the type of audit, recommendations for corrective action and any contributing internal control deficiencies may also be included in the report.

7. CONCLUSION

The Commission is currently reviewing laws on Public Audit in the country with a purpose of strengthening the public Audit function. Specifically, we have reviewed the Public Audit Act 2015 and generated an amendment bill to ensure the Act is in compliance with the judgment in TI (Kenya) v AG &others case. We track any developments in the practice of public audit, including adoption of technology, to ensure the law is reformed accordingly. As always, we are open for any proposals for law reform. Get in touch with us.