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Chapter - 23
Comparative Issues and Conclusions

The country chapters have dealt with the incidence of public enterprises in twenty-one countries. In this concluding chapter some important issues pertaining to accountability of public enterprises are highlighted and discussed. Some significant new trends - such as requirements of governments for rates of return on capital invested, viability of operations, and privatisation - are also considered.

It would be surprising, indeed unexpected, if in a work of this nature a great degree of congruence country by country was observed. The member countries differ greatly as between one another in their forms of government, the parliamentary (or equivalent) institution, social and geographical environments, and their public sector audit institutions. A number of the countries included in the study, such as Cyprus, India, Pakistan, Sri Lanka, Australia, Papua New Guinea, New Zealand and Malaysia, were either former colonies of Great Britain or came under the influence of that nation as part of the British Empire. One might well expect some commonality in systems for the control and accountability of public enterprises among these countries and, indeed, the Westminster tradition and influence is well in evidence although many years have passed since their independence and national political influences have been at work. Others, such as Japan, Thailand and Korea, were not subject to this kind of influence and developed with different traditions. Nonetheless the studies revealed in the country chapters do evidence a degree of commonality in a number of important respects. These matters are relevant to accountability.

The Tokyo Declaration of May 1985 defines public accountability in these terms - "Public accountability means the obligations of persons/authorities entrusted with public resources to report on the management of such resources and be answerable for the fiscal, managerial and programme responsibilities that are conferred." It is open to each country to pursue public accountability in the manner in which its government and legislature consider most appropriate. While the Tokyo Declaration provides some excellent guidelines, that is what they are - guidelines. ASOSAI does not seek to impose them on member countries - indeed it would be improper for such a body to attempt to do so. The value of the Declaration therefore lies in the common sense and internationally acknowledged tenets of good practice that have been embodied in the guidelines. Equally the conclusions reached in this work will nottake the form of a judgement that any one path to accountability is the correct one or an example to be followed by others whatever form their governmental institutions and political/social/ economic philosophies may take.

The underlying principle is that government agencies and public enterprises are universally regarded as accountable to the government, the legislature, and hence the people. In no country included in this study is there evidence that any form of public enterprise is not accountable for its actions. There are widely varying degrees of autonomy as between the major categories of public enterprise. But even in the case of the most autonomous form - the government owned or controlled company - it is evident that in the long run its continued existence depends on the government and/or the legislature being satisfied with its performance within the parameters of the public interest and the objectives of the government of the day. And there is ample evidence of the willingness of governments to make changes in membership of Boards of Directors if such action were needed to improve performance.

TYPES OF PUBLIC ENTERPRISES

Departmental Undertakings

Public enterprise first existed in the form of departmental undertakings either as departments specifically created for the purpose of operating enterprises such as railways, posts and telegraphs and port facilities, or as separate divisions or units of ministerial departments. The departmental form no longer predominates but nonetheless remains in virtually every country studied. Management forms part of the departmental structure even if given a degree of autonomy; funding may be via the departmental budget as part of the state revenues and expenditures or may be via a "special account" system within the central accounting system of the govern­ment.

Tariffs or prices for services are generally fixed within the departmental struc­ture, by the government or the controlling Minister. Further, staffing arrangements for such undertakings fall within the normal public service arrangements, often co­ordinated by a central personnel authority.

By its very nature the departmental undertaking form of public enterprise is subject to the greatest degree of accountability via ministerial control, central budgetary and financing arrangements and accounting processes. This form of enterprise existing in departmental structures commonly operates a commercial form of accounting, i.e. accrual accounting is used instead of normal departmental cash appropriations with transactions being passed through a revolving fund such as a special account (Japan, Korea, Sri Lanka) or trust account (Australia). All are subject to audit by the SAI of the country concerned. In Australia legislatural action has been recently taken to require such undertakings to improve their accountabil­ity by preparing proper annual reports and audited financial statements, conforming to accounting standards and the discipline of annual reporting to the Parliament through the responsible Minister within six months of the year end.

It is worth noting that in China public enterprises first operated as units of departments which directly controlled and supervised their operations. Economic reforms of the early 1980s brought about marked changes whereby more enter­prises became independent economic entities enjoying full decision making powers subject only to broad policy directions and supervision of controlling departments.

Public Corporations and Statutory Authorities

The second category is the form of public enterprise created by a specific law or, as in the case of Sri Lanka, by a notification by a Minister pursuant to the provisions of an "omnibus" Act. A further example is the process of establishment of an enterprise by Royal Decree such as in the case of the Bangkok Mass Transit Authority.

This form of enterprise is observed in each country although it may be called a statutory authority (as in Australia), a statutory corporation (Malaysia) or a public corporation as in a number of other countries. Essentially, however, the form is similar - that of a body established by law to operate outside the departmental organisation, with specific powers, functions and objectives, controlled by a board or commission with a good deal of freedom to recruit staff and operate on a day-to­day basis without ministerial intervention, but responsible to the legislature through the relevant Minister. A variety of arrangements exists for broad supervision and control by a body such as the Bureau of Public Enterprise in the Indian Ministry of Industry, or by a Finance Ministry for the supervision of both domestic and foreign borrowings.

In most countries ministers exercise broad powers ranging from the appointment of members of boards, to approval of annual work programs (Indonesia) and budgets, of contracts entered into above a specified amount, and of annual reports and financial statements. There is strong ministerial control evident in Korea, where the Minister sits on the Government-Invested Enterprises Performance Evaluation Council which is responsible for the review of the management of this form of enterprise, and reviews and co-ordinates the business objectives as submitted by the chief executive. There is also close supervision of Indian public corporations by the various ministers concerned.

The legislatural controls over statutory bodies are exercised effectively in most countries by means of annual reports, ministerial responsibility for the body, and examination of reports and financial statements by a parliamentary committee such as the Public Accounts Committee (Cyprus and others), or Committee on Public Undertakings (India). Indonesia stands out as an exception as there is no require­ment for individual enterprises to report annually to the legislature, although legislatural control is exercised through parliamentary commissions which obtain information for their reviews from the responsible Minister or the enterprise itself.

However, the legislature is not always as strong as the foregoing might suggest. In Thailand, control by the legislature is said to be largely indirect but committees do investigate particular aspects of public enterprises. Control by the Malaysian Parliament over statutory bodies, where procedural aspects affect the effectiveness of the Public Accounts Committee, is limited because, inter alia, the number of reports coming forward for review is itself a factor inhibiting close examination of enterprises. Only a small minority of all available reports are examined annually and even with these the timeliness of the reviews is uneven.

The audit of statutory authorities, with some exceptions, falls within the mandate of the SAI of each country examined. Some public corporations have the right to be audited by commercial audit firms, with the approval of the SAI, with the latter having residual power to audit if considered necessary. In India, too, while the SAI is the auditor of most public corporations, that is not, with few exceptions, universally true, although where it is not the SAI retains a supervisory role. In Indonesia, the SAI has only a limited role as external auditor and it does not conduct detailed audits, relying on the BPKP which has responsibility to audit the annual financial statements of public enterprises. The SAI focuses its attention on points such as procurement, contracts, sales and other key matters. In the case of Korea, it is interesting to note

that while the SAI is external auditor of statutory authorities, it reports to the President, not to the legislature, on these audits. In Pakistan, all public corporations were brought within the mandate of the SAI in 1973, whereas previously the SAI was restricted to the audit of departmental undertakings. In China, the SAI has a particularly strong mandate. There the SAI is required by law to supervise state owned enterprises through auditing and to strictly enforce the financial and economic discipline, raise economic returns, strengthen macro-control and management and ensure that the economic structural reform progresses smoothly.

Government Owned or Controlled Companies

The use of company legislation as a medium for the operation of a public enterprise, either on its own account or in conjunction with private interests, is a feature of each country. Such companies outnumber all other forms of public enterprise, except in Sri Lanka where the statutory corporation form is most favoured. In Malaysia, government companies (847) dominate the public enterprise scene although the 480 statutory corporations are significant.

With the exception of Israel and Korea, the reviews indicate a significantly lower degree of control over government owned or controlled companies by governments and legislatures in all aspects of operations. The principal control maintained is by a Minister having power to appoint or remove members of boards of directors. In all other traditional areas of control there is generally a relaxation or exemption from public sector norms allowing the companies greater flexibility of operation than is allowed other categories of public enterprise. Consequently there is a lower degree of accountability to the owners of the company, ie the government. This has been raised as a cause for concern in some countries by the SAI in particular, or by a centralised agency or even by a committee of the legislature.

In Australia, this concern recently manifested itself in a government review, with the outcome being that current government policy is that the use of the company legislation should generally be avoided, particularly because it is less satisfactory in terms of accountability to Parliament. Corporations should only be established under the company legislation where the legislature so authorises, or where ministerial approval is obtained, with a report to the legislature being then required of him. In some instances Australian legislation authorises the establishment of subsidiary companies and current policy corrects a previous defect in control by requiring that the powers of the subsidiary must not exceed the powers of its parent. Steps towards privatisation of certain enterprises hitherto conducted in statutory authority form do, however, involve corporatisation ie conversion by special legisla­tion into a wholly owned company to operate under the company legislation.

The reasons for taking the company law route are sometimes entirely commer­cial and pragmatic. In Cyprus, the government considered the activities to be undertaken to be vital to the economy - there was a need for substantial capital investment and the risks were high.

In India, in the interests of operational flexibility and autonomy, the government recently decided that the holding company concept was an appropriate structure for many public enterprises, the company form of enterprise being predominant in India. Under the holding company, the government's interface with the enterprises concerned is with the board of the holding company. The government sets goals and targets for the holding company and receives periodic performance reports. The government does not itself come in direct contact with the subsidiary companies.

In Pakistan and Indonesia nationalisation of particular private enterprises after national independence led to the use of the company legislation for government enterprises. It is also clear that in some countries (Indonesia) this form is used in areas vital to the economy which private entrepreneurs found unattractive. In Korea, apart from Japanese interests nationalised after World War II, joint ventures and other companies were set up to attract investment capital.

In Malaysia the company form of enterprise is also used to transfer ownership of certain commercial activities to Bumiputras. Here there must be 30% equity participation by Bumiputras, government policies must be complied with, profit motivation must be present and they must present a favourable national image.

While the appointment of members of the boards of companies is in the hands of the controlling Minister it is sometimes exercised at Cabinet level, as in Australia, while the Indonesian practice is for the Minister of Finance to make such appoint­ments in his capacity as custodian shareholder of the government - although the Minister closely concerned with the company makes the recommendation. In India, appointments to the boards of companies and public corporations are made on the recommendation of the Public Enterprises Selection Board with the approval of the Appointments Committee of the Cabinet.

In Korea, a high degree of control over government-owned companies is effectively maintained, despite their independence in day-to-day activities, by parent ministries and the Economic Planning Board ensuring that business objectives are met and reporting requirements complied with.

While, in general, greater operational autonomy is permitted for enterprises in the company form, autonomy does not extend from exemption from supervision by the legislature. The Australian Parliament, through its committees, has continually emphasised that in the interests of accountability no agency of government is beyond its purview.

The situation in Papua New Guinea is of interest in that public enterprises in company form are not required to report to the legislature. Accountability is not lost, however, as the SAI refers to companies in his report to the legislature and the Public Accounts Committee acts to uphold their accountability by following up these reports.

As regards companies in which the Malaysian government has a majority interest, control by the legislature is limited. There is no legal requirement that audited accounts of government owned or controlled companies be tabled in the legislature and the results of these subsidiary companies are often hidden in the consolidated accounts of parent companies or enterprises.

There is a mixed pattern as regards the auditing arrangements for public enterprises in company form. Generally, such enterprises are able to appoint auditors from the private sector although in several countries the SAI is empowered to carry out a supervisory or performance type of audit. In Australia, with a few minor exceptions, the SAI is appointed to audit government-owned companies - although there are signs of change emerging where statutory authorities are being restruc­tured for privatisation.

In Cyprus, where the SAI has no mandate, it is recognised by the SAI that this is a shortcoming of the existing legislation because the proper accountability of these companies is severely restricted as a result.

In Malaysia, the SAI has no direct relationship with government owned or controlled companies, but the privately audited accounts may be called for by the SAI which may comment on unfavourable aspects and include appropriate comment in reporting to the legislature. In addition, the Malaysian Audit Act provides thatthe SAI may audit companies if they receive grants or loans from the government or where more than half the share capital is held by the government and/or a government agency, if specified by order of the King. In Thailand, the mandate of the SAI is complete in that it extends to the company form of public enterprise.

CONTROL MECHANISMS BY CENTRAL AGENCIES OF GOVERNMENT

Some particular control mechanisms which emphasise the significance seen by governments in public enterprises achieving policy objectives set for them in relation to the economic development of the country were observed. Such mechanisms are specialist in nature and have their existence in addition to the normal supervision of agencies such as ministries of finance.

Chapter 5 - India, reveals a number of what may be described as particular control mechanisms. Reference to that chapter reveals the existence of, and describes the roles of, the following such agencies:

It is clear that successive Indian governments have embraced the philosophy of strong central control over the many hundreds of public enterprises as distinct from the greater degree of operational autonomy allowed in some other countries such as Australia.

In Indonesia, it is noted thatthe government has established an internal control mechanism, the Badan Pengawasan Kewangan dan Pembagunan or BPKP to examine the accountability of public enterprises. Its role extends to the evaluation of accounting systems and, as appropriate, provides directions and recommenda­tions for improvement and as already noted shares in the external auditing role with the SAI by auditing the annual financial statements of public enterprises.

In Israel, central agency control over public enterprises is generally stronger than most other countries studied, particularly with regard to government-owned companies. Supervision of such companies is through the Government Companies

Authority established under the Ministry of Finance. It must be consulted on appoint­ments of senior staff, internal auditors and legal advisers and other matters.

In Korea, the Government-Invested Enterprises Performance Evaluation Coun­cil is represented ex-officio on various boards. The Economic Planning Board - the central budgeting agency - oversees the various corporations to ensure that business objectives are met. Further, co-ordination of policies and activities of public enterprises is the responsibility of the Committee of Economic Ministers - a cabinet committee which is a decision making body which reports to the State Council in its role as Cabinet.

In Pakistan, evaluations are made by the Monitoring Cell of the Planning Division of the Ministry for Finance and in some cases by the Expert Advisory Cell of the Ministry of Production. No diversification or substantial increase in the existing activities of public enterprises can be undertaken without the sanction of the Central Planning Agency.

In Malaysia, the National Development Planning Committee (NDPC) achieves the co-ordination of public enterprises and makes recommendations for any new development projects undertaken by public enterprises to, inter alia, prevent duplication at the planning stage. Its work is complemented by that of the Economic Planning Committee of the Prime Minister's Department. The Ministry of Public Enterprises was established in 1974 to co-ordinate the policies, programmes and projects of a number of important enterprises. It approves the annual budgets of all Federal public enterprises under its jurisdiction. In 1987 the Committee for Development Project Financing (CDPF) was established and given wide powers in examining loan applications and supervising the granting of loans to all public enterprises.

In Thailand, too, a special agency has been interposed between the government and public enterprises. In 1985 the National Public Enterprises Committee, headed by a Deputy Prime Minister, was set up to monitor the activities of Thai public enterprises. Its functions are significant - to ensure all public enterprises conform with corporate plans and the national development policy and to advise on pricing, financial and labour policies and such matters as privatisation.

In China, following the introduction of economic reforms, central agencies of government exercise more indirect controls than was previously the case. Such indirect controls are of a macro nature including guidelines for national economic and social development and supervision of the economic behaviour of enterprises through auditing and other means. Thus, while enjoying considerable managerial autonomy they remain accountable to the State for the attainment of goals, profitable operation and improved economic returns.

Government-owned companies and corporations in New Zealand are required by law to prepare a statement of corporate intent. The statement is an important accountability mechanism which provides controlling ministers and managements to agree on the scope of operations for the forthcoming year and the basis on which managements will be held accountable at the year end.

OBSERVANCE OF ACCOUNTING STANDARDS

The observance of appropriate accounting standards and practices are of even greater importance in public enterprises than in the private sector although their importance throughout the entire economy cannot be set aside as of little conse­quence. Indeed, the harmonisation of accounting standards has become an objective of the International Federation of Accountants (a body comprising the national professional accountancy bodies of each country) and is supported by the United Nations and the International Organisation of Supreme Audit Institutions. Most governments have realised the importance of proper standards in the public sector although it is generally recognised that there is a difference between practices appropriate for the private sector and those for the public sector.

It is encouraging to record that conformance with standards is a requirement of governments of most of the countries included in the study. Often, the requirement is for adherence to the standards issued by the professional accounting body of the country; in others, it is for standards approved by a central agency (in Australia, the Minister for Finance) which incorporate, but add to, the standards issued by the accounting profession. In others, such as Indonesia, the responsible Minister approves financial rules and accounting standards while in China enterprises are required to adhere to systems and standards approved by the Ministry of Finance.

An associated matter is the prescription of the form that the financial statements of a public enterprise should take so that proper accountability and disclosure of assets, liabilities and accounting practices is not left to the whim of management which may have a vested interest in which aspects of the operations of the enterprise it is prepared to disclose publicly. While in some countries the form of financial statements is determined by the Minister responsible for the enterprise, the more common approach is for it to be determined centrally, e.g. by the Minister for Finance, often in consultation with the SAI. For enterprises operating under the company legislation the norm is for financial statements to be prepared in accordance with that law or in conformance with standards promulgated by the professional accounting body of the country.

SETTING OF TARIFFS, RATES AND CHARGE-OUT PRICES

Many governments, particularly those of developing countries, see it as impor­tant for them to control the pricing of the output of public enterprises, often granting subsidies to compensate for uneconomic tariffs. It appears that governments pay regard to repercussions on the national economy and socio-economic goals and targets. There may, however, be a lesser degree of control over the pricing policies of government-owned companies. But in some countries, control is exercised only over important commodities: in India, forexample, pricing in vital areas such as steel, fertilizers and cement requires government approval. In Japan, too, revenues of public enterprises are to a large extent subject to national policies as prices, rates and fees are determined by or with the consent of the government.

Government intervention in pricing policies often raises a conceptual issue - that of whether a public enterprise may act commercially i.e. be self-financing and operate profitably. Conflict certainly arises in some cases and, as already noted, subsidies may need to be given.

It follows, of course, that specifying rates of return on the capital invested by the government in a public enterprise is not a general feature of operation. It is noted that for some public enterprises in Australia, dividend targets are set. This is consistent with the greater autonomy given to managing boards and with the concept that sufficient revenue is earned to meet operating expenses, maintain capital, provide in part for future capital expenditure programs and to service borrowings. Government policy in Australia favours the setting of rates of return on invested capital.

THE ROLE OF THE SUPREME AUDIT INSTITUTION (SAI)

It is universally accepted that the SAI plays a significant role in the public sector - that of promoting and upholding the accountability of public sector bodies whether they be ministerial departments and agencies, public enterprises or other agencies of government. The SAI is commonly accorded a special place to enable it to discharge this particular role: a role which has no parallel in the private sector. That special place is sustained by the independence generally accorded the SAI by constitutional or legislatural means so that it is protected from

The audit mandate of each SAI is set out in legislation which appoints the SAI as external auditor or as supervisory external auditor. The mandate of the SAI of the countries included in this study is referred to earlier in this chapter and, while complete in relation to departmental undertakings, there are some gaps in terms of responsibility for the audit of other forms of public enterprise, particularly those in company form. Where gaps do occur, the accountability of the enterprises concerned is perceptibly weakened and the ability of managements to pursue accounting practices to suit their own ends is the more readily able to be concealed from the true owners of the enterprise - the government, the legislature and, in the long run, the public.

With but one or two exceptions, SAIs are mandated to carry out performance audits, sometimes referred to as efficiency audits or value-for-money audits, as well as regularity audits including the attestation of financial statements, and compliance audits. In no case, however, is the SAI empowered to review the merits of govern­ment policy, while it may audit for economy, efficiency and effectiveness. In some countries the performance audit role is notyetwell developed - in Papua NewGuinea the SAI has power to conduct performance audits but resource constraints have precluded such audits being undertaken up to the present.

The ability of the Australian SAI to carry out efficiency (performance) audits of government owned or controlled companies is severely restricted by law in that such an audit must be requested by the relevant Minister. No such audit has so far been carried out although in one instance the ministerial request would have been forthcoming had it not been for a defect in another aspect of the law.

The task of the SAI in sustaining the accountability of public enterprises becomes more difficult if the audit mandate is unduly restrictive, or the laws under which it operates are not reviewed regularly by governments and legislatures. The result is that its ability to implement modern auditing practices and techniques is inhibited and the scope of its audits and reporting arrangements is restricted. The evidence suggests that in some countries the audit law is not fully satisfactory in this respect e.g. Cyprus, Jordan and Hong Kong.

The role of the Israeli SAI includes a unique provision. There, the scope of its audits covers the manner in which enterprises have conducted their affairs to ascertain whether they are "morally irreproachable". But it is noted that difficulties arise in forming opinions on such matters and the SAI in practice has to rely on in­formation obtained through complaints and interviews.

It is noted that the SAI of Kuwait has the right to review the final accounts and general budgets of all companies having authority to manage a public utility or given a concession to exploit a natural resource of the State.

The audit arrangements of China are also unusual in that they empower the state audit institutions to direct enterprises to correct errors in data and breaches of financial rules, as well as to confiscate illegal gains, impose fines and suspend fiscal allocations or bank loans. These are extremely strong executive powers which are peculiar to China. Auditees may appeal to the SAI (the AAPRC) against audit conclusions and decisions made at a lower level but are required to carry them out pending resolution of the appeal.

A useful picture of the audit methodology employed by SAIs has not emerged from the study. Audit methods range from pre-auditing of tenders, contracts and like matters (Kuwait, Jordan, United Arab Emirates), through transaction auditing to systems-based auditing employing techniques such as risk-based analysis, com­puter assisted audit techniques and statistical sampling. Chapter 5 (India) and Chapter 12 (Malaysia) review the audit methods and techniques used by the SAI with regard to both regularity and performance audits in some depth. In India, as well, Audit Boards are constituted by the SAI and they work under its supervision and control.

It is clear that few SAIs are able to claim much competence in the use of computer assisted audit techniques. This is an area where the SAIs are perceptibly weak in regard to their capacity to audit the computer based systems operated by public enterprises. Nonetheless some SAIs are now well advanced in the development and application of such techniques (e.g. Australia) as an essential part of the audit methodology employed in financial statement audits.

USE OF SPECIALIST AUDITORS IN PUBLIC ENTERPRISE AUDITS

Some SAIs maintain a special division for the audit of public enterprises. India maintains a commercial audit wing dedicated to such audits, and Pakistan also operates a special staffing group as does Thailand. Sri Lanka does not, nor do Australia and Cyprus. Japan has moved away from the specialist audit group approach and now attention is paid to the overall compatibility of the activities of individual enterprises with the activities of the parent ministries.

No comments are offered on the merit of one approach or the other. It is an organisational matter best suited to the management concepts applied by each SAI and consideration of such issues as the general quality of its professional staff.

USE OF COMMERCIAL AUDITORS

In general, SAIs either do not have the power to engage commercial auditors on contract, or do not choose to do so. There are some situations of shared audits e.g. in Cyprus and India. In Malaysia, the power to engage commercial auditors on contract to the SAI is exercised in regard to some statutory authorities - the commercial firm being required to work under the direction of the SAI. The SAI examines the working papers, questionnaires and other material documents to assess the quality of the audit. Based on submissions by the commercial auditors, the SAI prepares its own reports on the public enterprises in question for tabling in the legislature.

The New Zealand SAI contracts audits to commercial auditors and maintains a close involvement by approving audit strategies, reviewing the work, attending major meetings with the auditee and signing the audit opinion. It is noted that the work of some contract auditors is not satisfactory and requires close supervision by the staff of the SAI.

Papua New Guinea also contracts audits to private sector auditors under direct supervision of the SAI. Public tendering for such work is the accepted procedure.

REPORTING AND FOLLOW UP BY THE LEGISLATURE

For the most part, audit reports on public enterprises are tabled in the legislature within a stipulated time. Details of country practices are contained in the country chapters. Practices vary, e.g. in Korea the SAI reports to the President on statutory authorities but is not required to send the reports to the legislature. In Malaysia the reports of private auditors on government-owned companies are not presented to the legislature. There is also some possibility of SAI reports being delayed between the date of signing by the SAI and the date of tabling because of the procedural arrangements applying.

It is usual for legislatures to follow up SAI reports on public enterprises by a reference to a committee. Here there is an interesting difference in practice as between countries. In some countries the proceedings of the parliamentary committee are open, i.e. to the media and to the public. In some other countries these committee proceedings are closed. It would seem that the open committee system better serves public accountability. But whether that is certainly the case may be questionable as witnesses may become adept at answering questions truthfully while not revealing the precise information being sought. There is also the problem of revealing confidential information in situations where the public enterprise is in open competition with private enterprise - although that argument does not apply to situations where the public enterprise has a monopoly.

It is extremely difficult to form a conclusion as to the best system and, of course, there is little point in attempting to do so as such matters depend very largely upon the traditions of governments and legislatures country by country.

SAI AS A CONSULTANT AND ADVISER TO AUDITEES

It is of interest that SAIs do not provide consultancy services to auditee management or advise management other than in an informal way. This kind of role, while common in the private sector, is universally eschewed by SAIs on the basis that it conflicts with their independence. Nor do the SAIs, for similar reasons, prepare financial statements for auditees, this being considered the responsibility of the enterprise management.

THE SAI AS SUPERVISORY AUDITOR AND CO-AUDITOR

Audit literature does not have a great deal to say about the role of a supreme audit institution in a supervisory capacity, nor in a parallel relationship as co-auditor of a public enterprise.

The study underlying this work has provided evidence of countries according the SAI special audit powers while allowing certain public enterprises an option, or the right, of selecting a commercial auditor. The manner in which this power has been retained for the SAI is a strong indication of adherence, by the governments and legislatures, to the proposition that public accountability is made the more secure by means of participation, by the SAI, in the audit of public enterprises. In some countries this kind of arrangement remains in the form of a discretionary right to audit to be exercised as the SAI deems appropriate. Some details of these kinds of powers are mentioned below, and, of course, are referred to in the country chapters.

In Cyprus, the audit of statutory corporations was in the hands of private auditors prior to 1970 but legislation enacted then and in 1983 provided for the SAl to have overall jurisdiction. The right of the SAI to conduct a management or any other type of audit of a corporation which has retained other auditors was clearly established.

In India, the SAI is the supreme auditor in a very real sense. The SAI may:

In Korea, the SAI may conduct, at its discretion, audits of companies in which the government has a minority interest. In Malaysia, the SAI has the right to call for and review the privately audited accounts of government-owned or controlled subsidiary companies.

In Pakistan, the accounts of nationalised companies are still audited by commer­cial auditors but since 1977 a special unit of the SAI has been empowered to carry out performance and efficiency reviews. The private auditors retain the financial audit and the dual arrangement of the SAI auditing for the legislature and the private auditors for the shareholders was confirmed in the company law in 1984. The general rule for the audit of all government owned or controlled companies is on this basis with the SAI conducting performance audits.

In Papua New Guinea, the SAI supervises the selection of commercial auditors and reviews the audit working papers. They are required to audit to standards set by the SAI. In Sri Lanka, too, the SAI may engage commercial auditors to conduct audits as agents of the SAI. They audit subject to the SAI's directions and the SAI retains responsibility for the final report. But in Sri Lanka the SAI has no audit jurisdiction at all in respect of the accounts of government owned or controlled companies.

There has been a change in regard to statutory marketing authorities in Australia in recent years. Several such authorities e.g. the Australian Wheat Board were given, by amendment of their enabling legislation, the option of appointing a commercial auditor instead of the SAI. Certain conditions were included in the legislation, including observance of auditing standards prescribed by the SAI and the option reserved to the SAI to conduct a superimposed audit and report independently to the legislature. The right to carry out an efficiency audit is retained by the SAI. The special arrangements were agreed to by the government in the interests of public accountability being upheld through the oversight of the commercial auditor by the SAI. Only one such appointment has yet been made and the provisions have not as yet been tested fully in practice.

INTERNAL AUDITS AND AUDIT COMMITTEES

It is of interest to note that while internal audits are common, their quality is, in almost every country, uneven. This is true even in those countries where it is mandatory for public enterprises to maintain an internal audit function. SAIs invariably are left with the task of evaluating internal audit effectiveness and reporting on weaknesses to management, ministers and the legislature. Audit committees are not a general feature. In Singapore, however, it is noteworthy that the effectiveness of some internal audit units has been enhanced by requiring them to report to audit committees.

China appears to have made effective use of internal audit- it is claimed to have brought about remarkable progress in enforcing financial and economic discipline, improving management and increasing economic yields.

OTHER ISSUES

Public enterprises, no doubt, have a 'public' dimension but they also have an 'enterprise' image. There is an increasing feeling among directors and senior managers, and sometimes at ministerial level as well, that the 'enterprise' dimension should be predominant if they are to function effectively.

Deficiencies arising out of the formal and informal interface between the public enterprise management and governments are seen as the principal reason for poor performance, or as inhibiting the achievement of results consistent with the commercial approach expected of them. A government engaging in business must have a different outlook and adopt different methods of dealing with public enterprises; when the same principles of general administration are extended to their business enterprises, the results are often disappointing.

Public enterprises have to function within the framework of national planning and in many areas are the principal instruments for the realisation of objectives set by the government. Active interaction between the government and the enterprise is unavoidable in critical areas such as strategic planning, investment priorities and formulation of large projects. Co-ordination between the public enterprises through the government structure is also necessary because decisions taken in one enterprise may affect other enterprises. The relationship between public enterprises and the government in this context becomes somewhat tenuous. On the one hand, there is the recognition that the public enterprises should be run as business enterprises and that they should be kept at arm's length from the government and given freedom to manage. On the other, the consequences of their operations on the economy result in continuing government interest and involvement in the functioning of the enterprises. Soon after a public enterprise is established and distanced from the government, a reverse process often occurs whereby the enterprise concerned is brought increasingly within the ambit of government influence.

There is a need to find the right balance between autonomy and accountability of the enterprise. Autonomy relates to management's ability to take decisions firmly based on economic considerations, on matters for which they are to be held responsible. Accountability, on the other hand, relates to well-defined performance criteria and the degree of success in the fulfilment of specific tasks assigned to the enterprise.

Autonomy tends to be eroded by numerous instructions and interventions, formal or informal, by the government and to that extent accountability is also eroded. Therefore the question is one of how best to increase the degree of autonomy of public enterprises, enforce accountability and contribute to their better performance.

Among the problems noted in relation to public enterprises are those of a managerial performance nature referred to in Chapter 13 section 6, Nepal. It is by no means unlikely that the existence of such matters pertaining to top level accountability for performance is much more widespread than the direct evidence reveals. That this is so even among the more developed countries, is evidenced by the fact that the governments of Australia and New Zealand have recently taken decisive steps with a view to requiring improved management performance. If public enterprises are to perform well, whatever their social, political or economic roles may be, it is important that their objectives be clear and attainable and that top management is made fully accountable for achieving them.

There is need for the role of the government to move from that of controlling agency to one of providing necessary policy support to the public enterprises to achieve the goals set by the government. Equally, the enterprises must play their part by striving for the highest levels of achievement through efficient and effective management practices. The basic issue is the view that the government and the public enterprises take of each other's role in the achievement of a common objective, viz. the basic purpose for which the enterprise was set up. But in the final analysis, governments must monitor the performance of their public enterprises and take firm corrective measures by replacing non-performing managements and/or take other effective steps to wind up or restructure ailing enterprises if the public interest is to be served.

PRIVATISATION

Privatisation, or the conversion of public enterprises partly or fully to private ownership, is not a phenomenon peculiar to highly developed economies. It has come to be regarded as a means of countering uncontrolled growth in numbers of enterprises, excessive expenditures of governments and of dispensing with ines­sential and inefficient public enterprises. With the downturn in many economies in recent years, the escalation of public debt and growing budget deficits, governments have focused their attention on public enterprises because their impact on the national economy in terms of total value of investments, share of the total public sector external debt and contribution to GDP, had become a necessary considera­tion for national economic management. There is a desire by governments to shed unprofitable enterprises which are a burden on public coffers. Profitable concerns are being sold to finance development projects or to offset endemic budget deficits. Another important reason is the requirements of certain profitable public enterprises for massive injections of capital funds in the near future to sustain growth - the capital sums required being so large as to render it difficult for governments to provide them without impairing other political and social objectives. In some other cases, international lending institutions when providing loans impose conditions pressuring governments to adopt privatisation policies. Whatever the reasons, a number of governments have begun to withdraw from direct involvement in commercial enterprises in favour of the private sector.

Privatisation strategies take many forms including divesting government equity in enterprises by the sale of shares in the open market; the incorporation of public enterprises by restructuring the organisation of departmental undertakings and statutory corporations as government companies prior to divestment; and contract­ing out major ventures such as the building and maintenance of toll roads to the private sector and allowing them to recover the cost of their investments by imposing user charges.

There is always a suspicion on the part of its opponents that with the privatisation of some public enterprises, all that is achieved is a shift from a public monopoly to a private monopoly. With those public enterprises which were set up for the sole purpose of servicing public utilities or providing services, governments would find it difficult to disassociate themselves from overall responsibility even when those services are privatised. On the other hand, the private sector cannot also be expected to take over a service which is patently unprofitable. If profitable enterprises are sold, the morality of such decisions is sometimes questioned and concerns are expressed about a dilution of public accountability and the change being contrary to the public interest.

Policies and decisions of governments in favour of privatisation are of little concern to the SAI except to the extent that when a public enterprise or any of its activities are privatised, the SAI should ensure that the process is carried out with propriety and that value for money is obtained. Whether governments retain the SAI as external auditor of an enterprise in which the government retains a controlling interest is, of course, a matter for decision by governments and legislatures. One option available, if a commercial auditor is then appointed as external auditor, is for the SAI to be retained in a supervisory audit role in order to protect government interests and to ensure that public accountability is not put at risk.

Despite the perceived erosion of the public enterprise base through privatisa­tion, as evidenced by recent experience of major proponents such as New Zealand, Japan and Malaysia, public enterprises continue to operate and even flourish in a wide variety of social, political and economic environments. Globally, most countries have had some exposure to the enterprise concept of public sector management and control. Although in these countries public enterprises were established in response to different national needs and priorities, there exists a broad pattern of common institutional controls which balance the competing claims of autonomy and accountability.