Most public enterprises in Cyprus were established after national independence in 1960. The earliest enterprises were public utilities such as the electricity authority, water boards and the telecommunications authority. Over the last three decades, a number of public enterprises have been created to operate in other important areas such as agricultural marketing, land development, tourism and the arts. Some of these enterprises are commercially viable but others rely heavily on state subsidies.
Public enterprises were created to provide more efficient and effective services free from bureaucratic constraints. Further, their activities have ranged into areas which for various reasons were not developed by private investors or the government. Some enterprises were established to operate and control strategic industries . in the national interest, others to control monopolistic operations which could not legitimately be left to the private sector to exploit. The various public enterprises have been able to utilise their resources and facilities flexibly in a more competitive commercial environment.
In Cyprus there are 31 public enterprises which may be divided into two broad groups:
The 25 statutory corporations - such as the Telecommunications Authority, Broadcasting Corporation and Electricity Authority - are legal entities with perpetual succession. Their capital is wholly subscribed by the government from appropriations and borrowings. These corporations, which provide services or produce goods for consumption, were created to foster social and economic development of the nation. All corporations are expected to operate profitably, or at least break even.
The six government-owned companies, such as Cyprus Airways Ltd, are quoted companies (i.e. listed on the Stock Exchange) set up under company legislation in common with other commercial firms. The government ventured into the commercial areas involved because such activities were considered vital to the economy. Furthermore, as the capital involved is large and risks high, without government participation private sector involvement would be negligible.
The objectives and activities of government companies are set out in their respective Memorandum and Articles of Association. The degree of government control is commensurate with its shareholding.
Statutory corporations are operated by management boards appointed by the Council of Ministers for a specific term of office, usually five years. The Board determines policy and is responsible for the general administration of the corporation. The number of members on the Board varies according to the size of the entity. Members include government representaand private individuals with commercial and financial knowledge or with expertise in the relevant fields. Boards function independently of the government but are responsible to the appropriate Ministers. All enterprises are required to adhere to policy guidelines as laid down by the Minister or government. The budget of some of the corporations are approved by the House of Representatives and the Council of Ministers but, where the law so provides, some boards are entrusted with such authority.
The number and composition of the management board of companies are detailed in the Memorandum and Articles of Association establishing the company. Appointment and removal of members is by the Council of Ministers. The Board is responsible to the shareholders, be it the government or others. Board membership is mixed and government representatives oversee compliance with government policies.
The Chief Executive is usually appointed by the Board with the approval of the Council of Ministers or the appropriate Minister. Other personnel are recruited by the Boards. Some trained personnel may be selected from the civil service but the majority are recruited externally. Matters relating to personnel administration, conditions of service, salary scales and other benefits are approved by the Council of Ministers. To ensure uniformity among public enterprises, an ad hoc Ministerial Committee chaired by the Minister of Finance advises the Council of Ministers. There are also regulations issued under the respective laws governing each enterprise dealing with such matters as appointments, dismissals and other administrative procedures.
No particular problems are encountered in obtaining qualified financial and accounting staff. Although salaries tend to be higher in the private sector, working conditions in the public enterprise sector are sufficiently attractive to retain the services of experienced personnel. There are no special institutes set up for training staff of public enterprises, but personnel in government companies normally receive extensive in-service training.
The income and pricing policies of public enterprises in Cyprus are based on the assumption that they will break even in their operations. In most cases, the income generated by individual enterprises is sufficient to meet operational costs, but the majority of statutory corporations are dependent on the state for their capital requirements. Some of the enterprises are authorised to issue debenture bonds secured by government. Although the capital of corporations is wholly subscribed by government appropriations and borrowings, no guidelines are prescribed on the rate of return expected on capital employed except where loans are from the World Bank.
Corporations which at one time were able to fix product prices, rates and fees, cannot do so now and are unable, therefore, to make adjustments for shortfalls in revenue. This change was made for economic reasons and also for ensuring uniformity in pricing policies among all bodies. In fact, with some exceptions where government companies are concerned, these determinations are now subject to approval by the government and the House of Representatives. However the element of cost is not always the deciding factor in fixing rates. Much depends on the nature of the services rendered and on the anticipated repercussions on the national economy. National socio-economic goals and targets are also taken into consideration when determining income and price policies.
Government owned companies have, so far, not been given any grants and subsidies but a few of the corporations have received such assistance mainly to meet deficits in their operating costs or for financing development projects or both. All grants are given outright on an annual basis. No other form of subsidies are given.
Public enterprises obtain long-term loans from the government and are also empowered to borrow from both domestic and foreign sources. Loans from non government sources are guaranteed by the government. All loans obtained must be applied for approved purposes and are to be repaid within the stipulated time. Interest on most loans is at market rates. So far no public enterprise has defaulted on repayments of loans.
In Cyprus the government has not ventured into business enterprises in a major way but its purpose in holding majority shares in companies is to exercise control over matters of national policy. Private participation in government companies is encouraged to foster business experience in these bodies and to foster corporate thinking in the management of individual enterprises.
Although the state has been injecting funds into public corporations, those with surplus funds are not required to surrender them to government. Instead, they are taken into account when the budget for the succeeding year is considered. In contrast, the laws pertaining to public corporations provide that surplus cash is invested as the Minister of Finance may determine. Government-owned companies, on the other hand, return surpluses in the form of dividends.
Statutory corporations which incur continuous losses can only be wound up by resolution of the House of Representatives. In such an event, both assets and liabilities are taken over by the government. However, this has not occurred to date in Cyprus. Unprofitable government companies are wound up in accordance with company law and go through the normal processes of receivership and liquidation.
In Cyprus the extent of ministerial control depends on the form of the enterprise. In the case of statutory corporations, the legislation establishing the enterprise sets out its functions and the extent of powers that may be exercised by the Board or Commission in performing those functions. The Minister concerned is generally authorised to exercise control over the activities of the Board, issue instructions of a general nature, and - in some cases - to approve the expenditure and revenue budget. Ministerial control extends to the appointment of Board members.
In the case of government-owned or controlled companies, the extent of direct ministerial control is more limited. Control is usually exercised through the ministerial appointment (through the Council of Ministers) of members of the Board of Directors, and through the issue of financial or policy directives and guidelines. The Minister concerned is accountable to the Parliament for the general performance of government companies. Usually the approval of the relevant Minister or the Council of Ministers is required for final approval of the budget of an enterprise and for any anticipated increases over the approved amounts.
There is no central agency control over the appointment and dismissal of staff of public enterprises nor over their conditions of service. Staff are appointed by their respective Boards. However, in the case of statutory bodies, appeals may be made to the Supreme Court against appointments and promotions.
It is common practice for the Minister of Finance to approve banking arrangements and to control the investment and/or borrowing of moneys by all statutory corporations. Injection of fresh funds by way of capital and investment requires government approval, with the officials of the Ministry of Finance involved in an advisory capacity. The Central Planning Agency also exercises control over investments through five-year plans.
Statutory corporations have financial autonomy to the extent specifically provided in the law which sets up the body. Government companies have greater financial autonomy. Pricing of products in some cases requires government approval. Day-to-day functioning of all public enterprises is independent of the government.
As mentioned previously, the affairs of each public enterprise are managed by Boards, the members of which are appointed by the government, either by the Council of Ministers or by the Minister concerned. The responsibility for fixing remuneration and allowances of Board members also rests with the Council of Ministers. The Board normally consists of a chairman and a few Board members, the number depending upon the size of the undertaking. The Board members include private representatives who have commercial, financial or other expertise in relevant fields. In the case of government companies, the number and composition of the management Board are specified in their Memorandum and Articles of Association. Government representatives sit as members of the management Board of companies to oversee the implementation of government policy.
The appointment and removal of Board members is generally by the Council of Ministers. The Board of a statutory corporation is responsible to the appropriate Minister, and of a government company to the company's shareholders, i.e. government - in those cases where it has the controlling interest.
As stated earlier, the respective Boards are empowered to select and recruit personnel for their public enterprises. Rules and regulations governing the day-to-day administration of a public enterprise are also approved by the Board. Budgets of government companies are approved by the particular Board, but in the case of statutory corporations this usually requires the approval of the Council of Ministers and the House of Representatives.
Public enterprises prepare periodical reports on their performance, future plans and resource requirements in order to provide their Boards with basic information for decision making.
Some enterprises have computerised management information systems. Performance reports are made to the Board at regular intervals. An annual report is submitted by statutory corporations to the administrative ministry concerned and to the Parliament. Government companies submit their annual reports to the government (administrative ministry and Accountant-General). These reports usually contain information on financial returns, physical production, industrial relations, pricing decisions, and completion of construction works. Topics of particular interest may be discussed between the top management of the enterprise and the officers of the administrative ministry or the Minister concerned. Information contained in the annual report is also sent to the Planning Ministry and the Finance Ministry.
Basically the accounts of public enterprises are kept on the historical cost basis and in accordance with the provisions of their respective laws and regulations. Public enterprises adopt accounting principles and standards as prescribed by the Cyprus Institute of Certified Public Accountants.
In Cyprus essential devices and means for securing accountability of public enterprises by government and the House of Representatives are defined in the respective laws and regulations. In particular, annual reports (including audited financial statements) must be submitted within six months of the close of the financial year to the House of Representatives.
The main instruments of parliamentary accountability of public enterprises are budget debates, parliamentary questions and reports on the functioning and performance of individual enterprises. Approval of the legislature is required for the annual budgets for a number of public enterprises. Furthermore legislature reviews budgetary demands if a specific subvention is to be voted (appropriated) by the legislature in favour of the enterprise. The legislature also generally controls borrowings by public enterprises.
The Public Accounts Committee investigates reports of the Auditor-General presented to the Cyprus Parliament. Other parliamentary committees, such as Budget and Finance Committee, Industry and Trade Committee, may also look into various aspects of working of statutory corporations and public companies controlled by the government. The reports of these other committees may be discussed by Parliament when a particular issue is of importance.
The Auditor General of the Republic of Cyprus, as the SAI, is the external auditor of all statutory corporations, with a statutory obligation to report on their financial statements in terms of legal compliance and financial regularity to the relevant Board, the Council of Ministers or the controlling Minister, and to the Parliament. In addition, the SAI has discretionary powers to carry out efficiency (performance) audits of particular enterprises and report the findings to the Parliament.
Until 1970 there was no clear-cut government policy in the area of auditing statutory corporations and some of these, formed before 1970, were audited by private auditors. From that date, however, the policy that all new corporations are subject to audit by all the SAI, was firmly established. In view of the controversial auditing status of the older corporations audited by private auditors, legislation was enacted in 1983 to bring such corporations under the auditing jurisdiction of the SAI. This legislation retained the right of some corporations to appoint, with the approval of the SAI, other auditors for the financial or attest audit, reserving at the same time the right of the SAI to conduct a management or any other type of audit considered necessary.
The wide role of the SAI in the audit of statutory corporations is not replicated in the case of companies established under company law in which the government has a controlling interest. These companies are not subject to audit by the SAI and accordingly engage their own private auditors. It is recognised by the SAI that this is a shortcoming of the existing legislation because the proper public accountability of these public enterprises is severely restricted as a result of existing auditing arrangements
The SAI, as external auditor of statutory corporations, does not act formally as consultant or advisor to management, in the interests of independence. However informal advice is sometimes given on the clear understanding that the SAI does not have a formal role as consultant to the corporations involved.
The SAI is not empowered to correct decisions or to issue instructions of any kind to the management of a public enterprise. Deficiencies in the financial administration of individual enterprises are corrected by the reporting role of the SAI in relation to the Council of Ministers or controlling Minister and to the Parliament. Parliamentary pressures on Ministers and the Government are generally sufficient to ensure that corrective action is taken, especially through enquiries by committees of the Parliament and publicity by the media.
Under the provisions of the Public Corporate Bodies (Audit of Accounts) Laws of 1983 and 1984, the SAI is primarily concerned with the financial audit of statutory corporations in order to attest their financial statements. Traditionally.the audit function was directed mainly to the regulatory and compliance aspects of the financial administration of these public enterprises but performance audits, including considerations of economy and efficiency, are now implemented where deemed necessary by the SAI. Accordingly areas of mismanagement - involving waste, abuse, uneconomic and inefficient operators - are part of the SAI's mandate, which does not extend to issues of policy effectiveness.
The recent expansion of the audit function to include performance auditing was influenced by the perceived need for the SAI to participate in the national development effort. Both the Government and the House of Representatives were active supporters of this change. In practice, performance auditing covers certain areas of each enterprise audited. A study is carried out, inter alia, of the system of internal control, operating procedures, pertinent legislation and regulations with the objective of identifying risk areas for in-depth review.
The first general objective of the SAI in conducting the audits of public enterprises is to improve their economy, efficiency and accountability to the Parliament and community by undertaking comprehensive auditing and reporting to Ministers and the Parliament, and assisting parliamentary committees. This object reflects the statutory responsibilities of the SAI by seeking to make explicit the fundamental reason for the institution of the SAI and the contribution it should make to the proper, efficient and effective operation of government.
The primary element of the initial goal of the SAI refers to the comprehensive
audit approach which encompasses planning, programming and conduct of a cycle of audits that examine legal compliance, financial regularity, and economy and efficiency. The secondary element of the initial goal refers to the SAI's reporting responsibilities which, in common with those for most government agencies, specify constitutionally a requirement of dual reporting to the President of the Republic and to the Parliament The relevant legislation, however, gives the SAI considerable discretion in determining the nature and extent of his reports, with the ultimate end of ensuring that all material audit findings are reported fully and timely to auditees, Ministers and the Parliament.
The second general objective of the SAI in conducting the audits of public enterprises is to develop and sustain the SAI as a centre of auditing excellence. In pursuit of this objective three developments are envisaged, viz:
Although there is no statutory requirement for public enterprises in Cyprus to have an internal audit function, all enterprises (with the exception of some small ones) have such a function as an integral part of their organisation. This function, however, is relatively recent development. No specific regulations govern the establishment of internal audit departments within individual enterprises, but very little effort is made to employ professionally qualified staff, and to ensure that relevant reports are directed to impartial executives who are strategically placed to act on them as effectively as needed.
The general understanding among the public enterprises of Cyprus, as elsewhere, is that effective internal control depends on the proper functioning of all its constituent elements. However the absence of one element does not automatically result in the rejection of the whole system of internal control and, in practice, other elements may compensate for the missing one. The most important controls are those which are irreplaceable and whose absence might cause considerable weakness in the whole system of internal control. On this basis, the availability of sufficient trained personnel ranks as first in line of importance.
The effectiveness of internal control varies from one public enterprise to another. In those cases where internal control is ineffective or non existent, such deficiency is mentioned in the SAI's report to the responsible Minister and to the Parliament.
Public enterprises in Cyprus do not commonly have audit committees to advise on internal auditing procedures and generally oversee the auditing function. Further, commercial auditors are not engaged to perform the internal audit function.
The SAI does not have the power to engage commercial auditors on contract. However, statutory corporations have been empowered since 1984 to appoint commercial auditors provided their appointment and remuneration are . approved by the SAI. So far this arrangement has been applied in only three cases but the statutory corporations involved have been major ones, viz. the Electricity Authority, Telecommunications Authority and Broadcasting Corporation. Before 1984 these three corporations appointed their own commercial auditors independently of the SAI. The auditors involved now undertake only regularity audits attesting the financial statements. Any operational or management audits considered necessary by the Auditor-General are carried out by his office.
Before the commencement of the above type of audit involving commercial auditors, a meeting is held between the SAI and the commercial auditor at which the proposed audit is discussed and planned. At this meeting care is taken to ensure that the proposed audit work is adequate and in accordance with international standards. Also, the commercial auditor is advised of any areas to be covered by the Auditor General himself so as to minimise duplication of work.
Once the audit programme is agreed upon, the audit work is carried out by the commercial auditor unsupervised by the SAI, although some consultation may occur as the need arises. On the completion of the audit work, the working papers of the commercial auditor are submitted to the SAI for examination and review, followed by a final meeting at which any explanations required by the SAI are given by the commercial auditor. If these explanations are satisfactory to the SAI, the audit report is then accepted. However, in certain circumstances the SAI, may require further audit work to be carried out.
This co-operative approach between the SAI and commercial auditors has so far proved successful. The SAI has been able to direct the commercial auditors in their work in such a way as to ensure the auditing standards applicable to public sector bodies are applied and the work of the commercial auditors is of acceptable quality. Considerable care is exercised in the selection of commercial auditors to avoid undesirable practices, such as quoting a low fee in order to gain the audit engagement. To date only well known international auditing firms have been nominated for these audits and the SAI has had no f reservations in approving their appointments. However any future expansion of the use of commercial auditors would need to be accompanied by formal criterion for selection. On the limited scale of present operations of this kind, there have been no serious difficulties and, in fact, the SAI has benefited from the study of the working papers and methods employed by the commercial auditors. The SAI intends to continue these co-operative audits involving commercial auditors on the same scale for the next few years, because a rapid expansion of the arrangement could cause problems.
Apart from statutory corporations, public enterprises in the form of companies established under company law in which the government has a controlling interest are empowered to appoint a commercial auditor rather than be subject to audit by the SAI. In these circumstances the commercial audit is restricted as in the case of statutory corporations to the regularity audits attesting the financial statements. The SAI does not have the legal power to conduct performance or any other type of alternative audits.
The principal audit methodology employed by the SAI is systems based auditing, modified to suit the nature of the particular enterprise being audited. There are some exceptions, such as the verification of specific balance sheet values. The technique commonly used in the audit of public enterprises - and for other entities - is substantive and compliance testing by statistical samples.
The SAI does not operate a special staffing group, such as a separate division or branch, for the audit of public enterprises. In Cyprus no distinction is made between the recruitment and training of staff for the audit of public enterprises and for other audits. Almost all staff of the SAI have the necessary qualifications to conduct audits of public enterprises. All thirteen sections share the total audit portfolio in approximately equal proportions of departments and public enterprises.
Specific audit guidelines are issued for the audits of public enterprises. Audit work is carried out in accordance with the International Auditing Guidelines issued by the International Auditing Practices Committee of the International Federation of Accountants. In addition, specific audit guidelines are incorporated in the Annual Audit Papers for Public Corporations issued by the SAI.
Specially trained and qualified staff are engaged in the management and supervision of the various audits conducted by the SAI, while support staff on these audits have vocational expertise. Accordingly all Principal Auditors responsible for the administration of the various divisions of the SAI are qualified accountants. Other staff have university degrees in Commerce and Economics, or the Higher Accounting Certificate of the London Chamber of Commerce. Further training in public sector auditing is given to all staff on joining the SAI.
The responsibility of the SAI to audit and report on the financial statements of statutory corporations is an annual requirement. Audits of enterprises of reasonable size are conducted in two phases - interim and final. The interim phase covers the audit of accounts, records and selected financial systems as a basis for the final audit when financial statements are received.
Although the SAI does not have statutory authority to carry out any other type of audit except regularity audits attesting the financial statements, there is an implied discretionary power for the SAI to conduct performance audits. From time to time the SAI selects particular corporations for performance auditing as the need arises, and furnishes reports in narrative form together with the relevant audit report on the financial statements. In view of the lack of specific statutory authority for performance audits, only a limited number of issues raised by the SAI in performance reports are attended to by the enterprise or government to the satisfaction of the SAI. Follow up and compliance tend to be voluntary rather than mandatory with this type of audit ancillary to the main attestation role of the SAI.
Reports of the SAI on the financial statements of statutory corporations are addressed to the Chairman of the Board of the particular corporation and copied to the relevant Minister. The Board is required by law to table the financial statements and the audit report in Parliament within fifteen days of receiving them. Parliament requires reports on the accounts of a number of statutory corporations to be tabled within six months of the end of the financial year.
As mentioned previously, the audit reports of the SAI are followed up by the Public Accounts Committee of the Parliament. Senior officials of individual enterprises appear before this committee to answer questions orally. In addition, the Ministry of Finance has a co-ordinating role in this area by following up particular matters to see that the required action has been taken.
Although pressure is exerted on audited enterprises by both the Government and the Parliament to remedy reported defects, in practice as long as four years may elapse before these defects are remedied, with the particular problems involved attracting further audit criticism or qualification each successive year. However, Ministers are generally sensitive to audit criticisms and are anxious to see that public enterprises coming within the scope of their portfolios take corrective actions where necessary, even though a parliamentary committee may not be specifically enquiring into the enterprises in question.
The form of the financial statements of public enterprises is not subject to the approval of the SAI. Usually the form is an internal matter, being determined by the particular Board involved. However, the SAI may be asked for advice on the proposed form of financial statements.
The SAI does not participate in the preparation of the financial statements of public enterprises. This is the sole responsibility of the individual enterprise concerned.