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Evaluating The Effectiveness Of Public And Internal Audit In Local Government - The Case Of Israel

- Asher Friedberg Israel

Introduction

This article evaluates the effectiveness of public (external) and internal audit in local government in Israel in the 70s, 80s and 90s. The local government sector expanded during the period mentioned. By March 1, 1998 there were 265 local governments in Israel (including Jewish settlements in the West Bank, and the Gaza Strip): 61 municipalities, 149 towns, 2 incorporated industrial parks, and 53 regional councils. More than 100,000 workers were employed full- or part-time in more than 65,000 Ministry of Interior- approved full time jobs. The total regular budget of those local governments receiving grants from the national government (by way of the Ministry of Interior) amounted in 1992 for example, to 4.5 billion new Israeli shekels (at that time 2.5 N!SA were approximately $1 U.S.). Their total development budgets at that time, came to NIS 3 billion. Grants amounted to MS365 million (Ministry of Interior, letter, 20 December 1992).

Located on the periphery of local government are hundreds of other public bodies: special purpose districts, religious councils, and more than a hundred companies managed or financed, in full or in part, by local governments in order to carry out a variety of municipal functions.

The network of services provided by local governments for their citizens have far-reaching social, organizational, and financial implications (Elazar & Kalcheim, 1988). Local governments, whether in Israel or abroad, cannot meet public demands by themselves and need massive assistance from the national government. This raises serious questions about the contents, methods, and substance of public financial supervision and public accountability at the central government level, as well as at the local level.

Public financial audit is carried out at the local government level by a number of frameworks: "in-house" book keeping checks, internal auditors and audit committees, various supervisory frameworks by central government ministries, and sophisticated external audit (such as state audit).

Financial and organizational crises in the municipal sector have increased in the beginning of the 90's (State Comptroller, Annual Report 42,1992, p.556). Such crisis place new demands and challenges on the audit frameworks that are supposed to supervise the municipal Sector. The professional literature in public administration places great importance on local government auditors and has identified them as new actors in local politics (Wheat, 1991, pp.385-392).

For examining patterns of public and internal audit in Israeli local governments, and evaluating their efficiency and effectiveness, the author developed a special framework. The parameters suggested were: the frequency and presence of audit, its orientation, the correction of defects and their follow-up, publication of reports and the existence and degree of activity of internal audit

It was assumed that the quality of audit evaluated by these parameters, determines its overall tenor. The findings, valid for 1985 (Friedberg, 1988, pp.27-47), showed that the frequency and presence of state audit in local government has been steadily declining; state audit's orientation remains traditional and focuses mainly on administration, finances, and procedures, and less on program evaluation. The follow-up procedures of state audit raise questions as to their efficiency and effectiveness. The extent and frequency of publicity given to state audit of local governments has also declined and does not contribute to the necessary public supervision. Examination of internal audit reveals many defects: in many local governments and related bodies audit simply does not exist

Utilizing the same theoretical framework, the following analysis will show whether the findings still hold or whether the situation in the late 80's and the 90's has deteriorated.

State Audit in Local Governments

Frequency and presence

The State Comptroller Law, 1958 (Consolidated Version), Section 9(4) states:

"The following bodies (hereafter referred to as 'inspected bodies1) shall be subject to the inspection of the Comptroller: every local authority".

Subparagraphs (7) and (8) of Section 9 extend state audit to peripheral local government bodies: special purpose districts, religious councils, and corporations run fully or partly by local governments.

A previous article of the author (Friedberg, 1988, p.29) posited that the growing involvement of local government in all aspects of citizens' lives, the growth of the population, the expansion of local services, and the increase in their cost, would increase the frequency and presence of state audit in local government. However, the findings (ibid., p.31) showed a growing decline in the frequency and presence of state audit between 1970 and 1984. Similarly, cash counts and checks on financial management decreased from 112 in 1970 to 37 in 1984. The number of reports published also decreased from 25 in 1970 to 24 in 1984. Furthermore, for 28 local governments between seven and twenty years had elapsed between the publication of the latest State Comptroller report and the previous one.

In 1986 the State Comptroller adopted a new auditing approach to local government and published his first across-the-board report. It included case studies of one municipality, five towns, and one regional council. The second such report was not published until 1992. Two more reports were published in the years 1995 and 1996.

The following table shows the number of audits on local governments between 1986 and 1996 in Israel.

Table 1: State Audit of Local Governments 1986-1996

The table shows the decreasing frequency of audits and audit reports. Thus for example, although in his annual reports the State Comptroller had repeatedly promised to publish Report No.2 on Local Government, it was 1992 when it finally came Out. Nevertheless, Israel's then State Comptroller, Justice Maltz, counted it among the Office's annual reports (Maltz, 1988, p.38). There is no comparison between the number of specific reports on local governments during the entire period, 1986 - 1996, and the number of such reports published every year between 1970 and 1984. Total published follow-up audits for the entire period numbered seven, of which six were in 1986 and one in 1992. The number of special topics investigated decreased from six in 1986 to three in 1992, three in 1995 and four in 1996. Except for one in 1991, there were no other special investigations between 1986 and 1996. The number of across-the-board topics declined from eleven in 1986 to four in 1992, three in 1995 and three in 1996.

Table 2 shows the gap between previous and last publication dates of state audit reports for 28 local governments which were inspected between 1986 and 1996:

Table 2: The Gap Between Previous and Last Publication Dates of State Audit Reports for Local Governments audited Between 1986 and 1996

Source of data: State Comptroller's Office

Between 1970 and 1984 the frequency of state audit in bodies on the margins of local government -special purpose districts, religious councils, and corporations fully or partly operated by local governments - was especially low (Friedberg, 1988, p.32). A similar examination of the frequency of state audit in the period since then shows an even greater decline. In fact, hardly any kind of audit was reported for those bodies. The State Comptroller's intention to examine the establishment of corporations by local governments and the mutual relations between the corporations and their local government founders (Annual Report 37, 1987, p.xix) did not come to fruition during the period surveyed. In light of the declining frequency of state audit in local government, the question of the effectiveness of state audit in this sector takes on greater force. The inescapable conclusion is that state audit lacks real effectiveness in this area. Public supervision of local government, whether by the local council, by the central government, or by the Knesset, is flawed The political significance in the democratic process is that the public is denied, in many cases, the up-to-date and objective information produced by public audit on local government matters. Such data should be an element in voters' decisions regarding the election of mayors and councillors.

Audit Orientation

The orientation of state audit refers to its emphases, trends, and approaches. Basic Law: State Comptroller, 1988 and the State Comptroller Law (Consolidated Version) 1958, express a sophisticated and maximalistic orientation in terms, of functions and areas of activity (Friedberg, 1988, p.33). State audit's actual orientation for the period 1970 -1984 was examined from various angles. It was not enough to determine that the frequency and presence of state audit is more noticeable in one public sector than in another. It was necessary to determine whether these emphases stem from conscious policy or are the result of laws and regulations. It was also necessary to determine whether audit techniques differ between different segments of the public sector and if so, whether they express preference for one or another public sector.

Until the mid-Eighties, audit in the local government sector was characterized by the overall approach, i.e. audit of all activities of the audited body during the period under survey. Local government, despite its complexity, the large number of audited bodies and their geographical dispersion, received less attention than government offices. It appears that state audit has always granted government ministries greater priority, since they have always been considered "the classic goal of state audit" (Gutman, 1979, p.9). The findings related to the period 1986 - 1996 show that this trend has intensified.

The previous State Comptroller, Justice Maltz, referred to the place of local government audit, almost as an afterthought, in the course of describing the tremendous burden placed on the State Comptroller by the enormous number of audited bodies (more than a thousand)... "One suggestion brought to my attention, as part of the attempt to cut down the extent of state audit to more manageable levels, has been to gradually and cautiously transfer the burden of public audit to autonomous local government audit bodies. This revolutionary suggestion is based on two considerations. First, in many countries such an arrangement has already been adopted. And second, given that there are hundreds of local governments, state audit cannot in any case inspect all of them frequently enough. Again, this idea demands careful consideration" (Maltz, 1988, p.33). Still, it is worth mentioning that in 1986 a new trend could be discerned in the State Comptroller's approach to the audit of local government. It appeared in the first across-the-board audit report on eleven issues in a large number of local governments. General characteristics were identified and emphasis placed on inspection and public accountability both at the local government level and at the national level, i.e., the Ministry of Interior. The issues themselves indicate the sophistication of the State Comptroller's orientation. The second such local government audit report (1992) followed the same pattern but only included four across-the-board issues. Some of them were sophisticated and some traditional, relating to control and accountability at both the local and central government level. In addition, the State Comptroller published (1991) an important across-the-board audit report on subsidies by local governments to various institutions. Two more across-the-board reports were published in 1995 and 1996. These reports dealt with less across-the-board issues comparing to the reports in 1986 and 1992. The major part of these reports was dedicated to few specific reports on local governments and to reprints from the annual reports of the State Comptroller concerning local government issues.

Analysis of overall reports on specific local governments indicates that the audit orientation of most of them was traditional and emphasized administration, finance, and procedures. An examination of the orientation of state audit to the public bodies at the margins of local government during the period 1970 - 1984 revealed that it was characterized by the lesser frequency of state audit as compared to internal audit, by the emphasis on traditional areas of audit, and by the necessity to undergo a special procedure, similar to that necessary for subsidiaries of government companies, in order to be permitted to audit such bodies (State Comptroller Law, Sections 9(7) and 9(8). The State Comptroller Law does not permit state audit in such bodies without special proceedings. It appears that in the period 1986 - 1996 there was no change in the orientation of state audit in regard to bodies at the periphery of local government. The situation is even worse considering the State Comptroller's findings on the degree of supervision exercised by the Ministry of Interior on those bodies. For example, the State Comptroller found that "...the financial reports of local governments submitted in accord with the Local Government Regulations (Accounting), 1988, make no reference to the activities of municipal corporations, even though they are likely to play a significant economic role. The Municipal Ordinance (Establishment of Corporations), 1980, states that at least once a year mayors must submit a report on the municipal corporations to their councils. Likewise they must send a copy to the Minister of Interior along with a copy of the relevant council minutes. The State Comptroller's Office discovered that the Ministry does not have a single such protocol. Neither does the Ministry or the Accountant for Municipalities check whether municipal corporations submit reports on their activities. In May 1990 the inspection unit tried to gather information on municipal corporations but with little success, due to lack of cooperation by the local governments. Since then there have been no further attempts. The audit of municipal corporations is very important since a significant portion of the economic activity of the local government is implemented through those corporations" (Annual Report 42, 1992, pp.5734).

The gap in time between the two State Comptroller reports on local government, their paucity, the scarcity of reports on specific local governments, and the character of state audit itself, as described above, curtailed - in the period under discussion - the possibilities for local councils to focus steadily on those areas so important to good administration and program implementation. It also impaired the public's ability to judge the administration of the audited local governments in terms of their success or failure in carrying out their missions. It also prevents sufficient information from reaching the central government on the activities and financial complications of local governments.

In the author's opinion, the output of state audit, as per Section 20(b) of the State Comptroller Law should not have been so sparse, especially considering the State Comptroller's own findings that the supervision of the Ministry of Interior on local governments was sadly defective (ibid., pp.570-S). In that connection it clearly appears that local politicians act without restraint on the assumption that the central government will pay the bill (ibid, pp.556-572).

Follow-Up And Correction Of Defects

Follow-up, defined as the implementation of audit recommendations, is one of the most important measures of the effectiveness of audit. Follow-up data provide information to the auditors, to the legislative body, and to the audited bodies themselves on the correction process, its rate of progress, and whether defects were fully corrected. It may be assumed that the less follow-up the less defects corrected.

Until 1985, state audit of local government was characterized by overall audit. In addition, the State Comptroller devoted space in his annual reports to reports on local government which had broader implications, in terms of audit principles, for local government generally or for bodies on the periphery of local government

The emphasis since 1986 on across-the-board audit was designed to locate general problems while continuing to carry out general audit in specific local governments. The intention to publish annual reports on local government could also have improved follow-up. However the second annual report was only published six years after the first. Between those two reports, which included specific reports on a number of local governments, the State Comptroller published several individual reports on specific local governments which did not relate to follow-up. While the 1986 report contained six follow-ups on specific local governments and two general follow-ups, the 1992 report on local government did not contain any follow-up reports. The same goes for the 1995 and 1996 reports on local government.

The General Inspector's Division of the Ministry of Economics and planning systematically follows up the shortcomings mentioned in the State Comptroller's annual reports. It doesn't do so in regard to local government (unless the defects were mentioned in the annual reports).

The State Audit Affairs Committee of the Knesset has also not concerned itself particularly with local government or with the rectification of defects found there by the State Comptroller, in contrast to its treatment of state audit findings in government ministries. The decrease in local government audit in the period under study further reduced the Committee's interest in local government (Friedberg, 1988, p.37). Despite persistent, serious defects found by the State Comptroller in local government, there are no signs that the vital follow-up function of state audit is being carried out

Publishing Reports

Publishing reports is one of the basic norms of public audit (Friedberg, 1991, pp.110-31; Mohr, 1991, pp.131-5). "Publishing" means bringing findings to the knowledge of the public by way of the Communications media. The public is entitled to receive reliable, objective reports on the accumulation and exploitation of its resources, and on the activities of the executive branch of government. Publicity is also essential to legislative supervision of the legislator of the executive.

According to research comparing State Comptroller reports on local government published between 1979 and 1986 and the newspaper coverage they received, the method of publication then in use and the traditional content of the reports caused only a weak public response. The research showed quantitative and qualitative discrepancies between state audit reports and press reports. Press coverage was minimal and relegated to the inside pages. Newspaper readers were required, in effect, to make an effort in order to locate relevant news items. The research concluded that the public was not supplied the data necessary for an informed "public opinion" that could send messages to decision makers (Liebman, 1988, p.VI).

The State Comptroller was apparently aware of the defects of the reporting method in that sector.... "and out of an aspiration for greater effectiveness changed the system in 1985, so that alongside the (selective) publication of separate reports an annual report on state audit of local government would also appear" (State Comptroller, State Audit Manual, 1987, p.129). In fact, methods of publication did not change even in the period studied by this report. Emphases changed. The State Comptroller ceased to publish the general chapter on local government in the Annual Report in favor of separate general reports. Six years elapsed between the first and second reports. Still, the annual reports did touch upon both broad and specific issues relating to local government (State Comptroller, Annual Report 40, 1990, p.330 - "gray market" education; p.342 - school buildings; p.540 - immigrant absorption; Annual Report 41, 1991, p.424 - installation, operation, and maintenance of sewage systems; Annual Report 42, 1992, p.390 - education in the Arab sector; p.556- the settlement of local government debts - 1989; p.575 -population register offices; p.854 -sewage project in Jerusalem).

In that period the State Comptroller saw fit to publish, separately, an across the-board report on subsidies in local government. The report uncovered aberrant transfers of money to non-profit organizations involving extensive and irregular intervention by the Ministry of the Interior, and had wide public repercussions (State Comptroller, Report on the Audit of Local Government Subsidies to Institutions, 1991). It appears that public repercussions following across-the-board reports on local government are likely to be very great.

In the period surveyed the number of overall reports on specific local governments declined markedly (see Table 1). Previously, the State Comptroller's annual reports (in the chapter entitled: "The Activities of the State Comptroller's Office in the Surveyed Period") contained data as to the total number and composition of audits in local governments, e.g., "General Audit", "Cash Flow and Financial Management", "Special Follow-ups", "Across-the-Board Reports", etc. (see Table 1). Since 1986 annual reports have stinted on those data. Thus it is difficult to establish what percentage of audit activities - which had been in decline even in the 1970-1984 period - result in published reports. In any case, Table 1 supports the supposition that the percentage has continued to decline.

The declining publication of state audit reports on local governments continues to impair public supervision by the legislative bodies. The public at large knows less and less, and in vast areas knows nothing at all, about what is happening in local government. Public supervision of this sector is becoming an increasingly abstract concept.

Internal Audit in Local Governments

It is generally felt that supreme audit institutions even those with legal authority to perform comprehensive audit in local governments and other peripheral institutions prefer to concentrate on central administration. That preference stems from their concept of audit, their set of priorities, and their shortage of manpower (Sharkansky, 1991, p.6).

The modem concept of audit and its priorities is seen as shunting several traditional tasks - primarily regularity audit - to internal audit institutions which are closer to the subject (Edds, 1981, p.166; Normanton, 1966, p.60; Lutrin & Settle, 1992,p. 129). In Israel, State Comptrollers have considered transferring part of the burden of state audit to internal audit (see Maltz, 1988, p.33, quoted above). Given that, and the decrease of state audit in local government, it was necessary to examine the quality, efficiency, and effectiveness of internal auditors and internal audit committees in local government. The activities of outside certified accountants, brought in by the Ministry of Interior to monitor the finances of local governments, were also studied since in effect they took on the tasks of internal audit.

The findings relating to 1970-1984 show that the activity of internal audit in local governments was negligible. In many cases it was non-existent, in violation of the law. Many local governments took no notice of internal audit, i.e., there was no internal audit body, or if one did exist, it was not operative. Bodies on the periphery of local government (religious councils, special purpose districts, and companies fully or partly controlled or financed by a local government) took even less notice of internal audit. Following is an examination of the situation during 1986-1996.

Local Government Auditors

The Law to Amend the Municipal Ordinance No. 39), 1990, radically amended the activities of the Municipal Auditor and his relationship with the mayor, the audit committee of the local council, and the local council itself. One of the more important amendments (paragraph 167(b)) extended the need to appoint an auditor to every municipality regardless of the number of inhabitants; it stated that "...The council shall, by majority vote, appoint a full-time municipal auditor; if the number of town residents is less than 30,000 the Minister of Interior may permit the appointment of a part-time, but no less than half-time, auditor, providing that the rest of the time the auditor is employed in audit in another town, also with the permission of the Ministry of Interior". The other major amendments related to the tasks of the council audit committee, the appointment of subordinate staff to the municipal auditor's office, the preparation of a budget and staff roster to the municipal auditor's office, and municipal auditor impeachment procedures

In 1986, 25 local governments employed municipal auditors full or part time (Friedberg, 1988, p.40). Not all the local governments then required to appoint an auditor did in fact do so. The State Comptroller commented on that phenomenon as early as 1975. He found auditors in only 16 of 22 local governments required to employ one (Annual Report 26, 1976, p.1112).

Examination of the number of municipal auditors at the end of 1992 shows that 33 municipalities employed internal auditors while 15 others did not (Ministry of Interior, correspondence, 8 December 1992). In two municipalities the auditors are employed part-time while in one municipality an outside accounting firm fills the function. The municipality of Bnai Brak, which has been required since 1971 to appoint a municipal auditor, did not do so until 1990 (State Comptroller, Report on State Audit in Local Government, 1992, p.138). Findings related to 1996 show that of 61 municipalities, six did not employed internal auditors and five employed internal auditors contradictory to the law (Ministry of Interior, Audit Department of Local Authorities Annual Report No.3, 1996, P. 18). It appears that the estimate of the director of the Local Government Department in the Ministry of Interior that internal auditors cover half of the budgets and manpower of all local governments (Friedberg, 1988, p.40) still holds good.

On the basis of internal audit reports published in the surveyed period, one may conclude that "...most of the audit concentrates on administrative and financial matters" (ibid). The annual report of the local authorities audit department in the Ministry of the Interior sums up in 1996.."Findings show that some internal auditors in municipalities did not submit reports at all; others submitted reports emphasizing only marginal issues. Shortcomings were found in most of the municipalities concerning their handling of reports submitted by their internal auditors".. It is clear therefore, that internal audit in local governments continues to concentrate on traditional fields such as regularity and accounting, with scant attention paid to advanced audit areas such as economy, efficiency, and effectiveness.

Audit Committees

Until the Municipal Ordinance, 1979, was amended, the appointment of a municipal audit Committee was a matter of choice. The amendment (clause 149 C) requires the nomination of an audit committee from among members of the municipal council. Its job is to discuss the reports of the State Comptroller and the Municipal Auditor and to issue its Summaries and proposals to the municipal council. Various ambiguities regarding the methods and authority of the Committees required further amendment to the Municipal Ordinance, which culminated in the Law to Amend the Municipal Ordinance No. 39), 1990, Clause 149 C(a) now states that "...the Council shall nominate from among its members an audit committee whose job it is to consider reports of the State Comptroller and the Commissioner for Complaints from the Public (Citizens' Complaints Commissioner), Ministry of Interior reports on the municipality, and any report of the Municipal Auditor, and to follow up on the correction of any defects found, and to consider any other audit report submitted to the municipality by law; the audit committee shall submit its Summaries and conclusions to the council". Sub­sections (b) and (c) of clause 149 remained unchanged: there would be no more than seven members who would reflect the party composition of the municipal council, as far as possible; the mayor and deputy mayors would not serve on the committee; and the chairman of the committee would be from a different party to that of the mayor, unless there was only one party on the municipal council, According to an amendment to clause 170 C to the Ordinance (sub-section (d)): "The audit committee may, as it sees fit, invite office holders in the municipality or in an audited municipal body to comment on its rough draft, before it submits its conclusions and recommendations". Furthermore, sub-section (e) states that within two months of the date of submission of the summaries and conclusions of the audit committee, the municipal council shall hold a special discussion on the subject and its approval. Sub-section (f) further states that, "... no one may publish a report or sections of a report as stated in this sub-section unless the date for submitting it to the municipal council has elapsed nor shall any audit finding of the municipal auditor be published except by the mayor or by the municipal auditor, with the approval of the audit Committee".

Findings of the State Comptroller relating to those municipalities reported on in the surveyed period show that:

Bnai Brak:    In the municipality council that was elected in March 1989, nine members were appointed to the audit committee, two more than the maximum set by the Municipal Ordinance; a member of the ruling coalition committee was appointed to the audit committee, contrary to the Supreme Court's ruling that a member of the coalition committee may not concurrently be a member or chairman of the audit committee, since it represents a conflict of interests; the audit committee met for the first time in February 1992 (State Comptroller, Report on Local Government, 1992, p.137). Other municipal reports by the State Comptroller in the period under survey either do not refer to the audit committees (Report No.6 on the Audit of the municipality of Haifa, 1988), or mention them in passing (Report No.6 of the municipality of Beer-Sheva, 1988).

As for the municipality of Haifa, it is worth mentioning that the State Comptroller discovered that municipal balance sheets were "prettied up", i.e., edited in such a way that they did not reflect the true state of affairs, contrary to all accepted accounting practice (State Comptroller, Annual Report 39, 1989, p.618). This is a "classic" area for internal audit and/or audit committees. The State Comptroller's Office did not refer to the involvement (or lack of it) of the relevant internal audit bodies when revealing these grave findings.

From time to time the written media also permit a glimpse of the goings on in city halls. For example, in 1992 a failure to appoint a municipal auditor was revealed after an opposition councilman in the municipality of Bet Shemesh appealed for redress to the High Court of Justice. The councilman also claimed that the audit committee did not function and that its last meeting had taken place three and a half years earlier. In reply to a reporter's query, the chairman of the audit committee claimed that he had not convened the committee because ".. everything was in order" (Jerusalem, 20 November 1992).

The Local Council Ordinance (A), 1950 (clauses 122, 122a) states that a town council must choose an audit committee from among its members. Furthermore, the mayor and his deputies may not be members of the audit committee. The committee's job is to ascertain the implementation of council decisions, to review accounts, to check whether activities fit the approved budget, and to verify whether defects pointed out by the committee and the State Comptroller have been

corrected. As for regional councils, the Local Council Ordinance (Regional Councils) 1958, provides that the standing audit committee of the council shall review the regional council's accounts, activities, institutions, enterprises, committees, etc. It should be noted that the duties of audit committees in non-municipal local governments are greater than those of municipal audit committees, since in many cases they are the only existing internal audit bodies.

Examination of State Comptroller reports on thirty towns and regional councils, during the period 1976-86, showed that for the most part the audit committees were either inactive or sadly defective (Friedberg, 1988, p.42). The situation for the period 1986-96 showed no change. State Comptroller reports and the local authorities audit department in the Ministry of the Interior continue to point out clearly that audit committees failed to convene during the surveyed period or functioned poorly (State Comptroller, Audit Report on the Town of Bnai Ayish, 1992, p.211; Audit Report on the Town of Kiryat Malachi, 1992, pp.2634; Ministry of Interior, Audit Department of Local Authorities, Annual Reports 1 (1994), 2(7995), 3 (1996)).

From the beginning of the Eighties, scholars remarked on the defective functioning of audit committees in towns and regional councils (Kalcheim & Rozevitz, 1980, pp.80-1). A few years later, the director of the Local Government Department in the Ministry of Interior arrived at the same conclusion (Symposium, 1986, p.39). They suggested the establishment of significant internal audit in towns and regional councils, especially in the bigger ones. In this area, the findings show that there is almost no meaningful internal audit. In the author's opinion, it is still true that only 40% of the population lives in local authorities in which a significant internal audit function is being activated.

Ministry of Interior-Appointed Certified Public Accountants

Given the random nature of state audit and internal audit in the local government sector, and public sensitivity to public fluids in local government, the Ministry of Interior decided in the mid-Seventies to appoint certified public accountants (CPAs) to audit the finances of local governments. The Ministry based itself on the Municipal and Local Government Ordinances. The Municipal Ordinance (clauses 216,217,219,221, and 227) requires that the chief financial officers of municipalities, towns and regional councils submit their accounts for audit by Ministry-appointed certified public accountants. The latter found serious shortcomings in budgeting, accounting, bookkeeping, financial reporting, and management and supervision of supplies and equipment They are indicative of the quality of internal auditing in those same local governments. At the beginning of the eighties, the State Comptroller examined the activities of the Ministry of Interior- appointed CPAs (Annual Report 34, 1984, pp.925-7). The State Comptroller found a number of defects in their functioning, mainly serious delays in submitting reports stemming from accounting lags in the audited local governments. In the circumstances the State Comptroller expressed doubts as to the effectiveness of the CPAs' activities. The Ministry of Interior published new guidelines in the mid-eighties extending the CPAs' audit authority to include wages, the National Budget Law, allocations to organized groups, and other topics that had not been previously audited.

In his 1992 annual report the State Comptroller described the Ministry of Interior's supervision of the financial activity of local governments (Annual Report 42, 1992, p.570), referring again to the activities of the Ministry-appointed CPAs. In the financial year 1988 the accounts of 52 local governments had been audited by CPAs and in 1991 and 1992 such audits were planned for 66 and 79 local governments, respectively. The State Comptroller's Office found that even though the Ministry of Interior intended to audit 66 local governments in financial year 1989, it had only contracted to audit ten local governments. As of November 1991 seven audits had been completed No contracts had yet been signed for the 79 local government audits scheduled for 1990 (op. cit., p.572). The State Comptroller added that 48 (61 %) of those 79 local governments had never been audited. In 19 local governments that had been audited (21% of all audited local governments) the last financial audit concerned accounts that were five years old at the time of the audit. The State Comptroller added that the inspection unit of the Ministry of Interior does not systematically ascertain whether defects uncovered by the CPAs are remedied. Neither does it investigate local government actions which have extensive financial implications. The State Comptroller sums up that "...given the relatively limited number of local governments whose books are inspected by external accountants and the importance of such inspections, the Ministry should consider whether it should make local governments hire their own accountants. It should consider the cost to the local government of doing so, versus the benefits of gaining a true picture of the local government's financial situation. In its reply of November 1991 the Ministry announced that, presumably by 1992, it would appoint CPAs for every local government, at their expense" (op. cit., p.573).

Following the State Comptroller's findings, the local authorities audit department in the Ministry of Interior, appointed, in the mid 90s, CPA's in every local authority in Israel. In parallel, the department processed organizational and professional procedures for the employment and guidelines for the activities of the CPA's (Ministry of Interior, Audit Department of Local Authorities, Annual Report No.3 (1996), p.1.

Summary

This article evaluates the efficiency and effectiveness of public and internal audit in local authorities in Israel, in the period 1970 - 1996, using the author's suggested theoretical framework. This framework includes a number of parameters for examining and evaluating public audit, i.e., state audit and various forms of internal audit - municipal auditors, audit committees, and CPA's appointed by the Ministry of Interior. The parameters in question are: frequency and presence of audit; audit orientation; remedy of defects and their follow up; publication of audit reports; and the degree of activity of internal audit frameworks. The author assumes that the general trend indicated by those parameters reflects the quality of audit. As the extent of audit declines, so does its quality, efficiency and effectiveness.

Examination of state audit of local government during the surveyed period showed that: its frequency and presence had declined; except for a few across-the-board audits with an advanced orientation, state audit of local government is characterized by the traditional emphasis on administration, finances, and regularity with little reference to program evaluation; questions still arise as to the efficiency and effectiveness of defect follow up; the extent of publicity of state audit reports on local government continues to shrink; the intention of the State comptroller to change the format of reports on local government and to emphasize across-the-board reports did not come to pass; naturally these processes do not contribute to the remedy of defects or to the ability of the audited bodies - local and national - to maintain proper public supervision of local government. Examination of internal audit frameworks in local government shows a series of material shortcomings in this area; and furthermore, in many local governments and bodies internal audit simply does not exist.

The budgets, number of employees, and activities of the local government sector have been growing. The decline of state audit in this sector should have encouraged the development of internal audit to fill the vacuum, but it didn't. Most of the public bodies in this sector are not exposed to public audit, supervision of local or national elected bodies, or any kind of internal audit. It must be emphasized that such a situation provides fertile soil for the growth of all kinds of organizational, staffing, budgetary, and financial irregularities by allowing such activities to take place far from the public eye and free of significant audit. The State Comptroller's report on local government grants to various institutions (1991) provides a good example of what happens when local governments feel free to implement their political, economic, and administrative whims.

The dimensions of public and internal audit in local government in Israel are not just theoretical issues. Vast political, economic, and administrative power is concentrated in this sector which claims significant chunks of the national budgetary pie. Local government affords an arena for interest groups and political and economic forces to greatly influence the daily life and future of large numbers of people. The decline in professional audit of this sector impairs public oversight by elected officials and the public by distracting their interest from important processes taking place. It appears that the right of the public to know what's going on in local government has changed - following the decline of audit - from a significant democratic procedure to an empty phrase.

This article, points out that for the last three decades public and internal audit in local government in Israel has continued to be impotent. They do not currently fulfil their function. The price of that failure is high. Worse, negative norms are still prevailing and taking root in public and internal audit in this immense sector. On this background it should be mentioned that in 1993 a special active audit department was established in the Ministry of Interior, for auditing of local authorities. It could mark a change in the attitude of the Ministry towards significant operational and financial audit activities in this important sector. Until 1998 the department published two comprehensive reports (of three prepared) covering the period 1994 - 1996. The reports related to across-the-board important issues of the local authorities sector, as well as to specific local authorities too. Time will tell if we are facing a temporary approach of the Ministry or a new start towards institutionalizing long lasting basic audit concepts in one of the most important sectors of Israel's public administration system.

Notes

1. For a comprehensive analysis of public and internal audit in the local government sector in Israel during the 70's and the beginning of the 80's see: Friedberg, 1988, pp.2747.
2. At the end of the Eighties and the beginning of the Nineties, a number of scholars discussed public accountability, both in general and in various areas of the public sector (Caiden, 1989, pp.1 7-38; Friedberg, Geist, Mizrahi, and Sharkansky, 1991; Friedberg, Geist, Mizrahi and Sharkansky, 1995). It should be emphasized that the contribution of public audit to the improvement of accountability had also been examined in the mid-Sixties (Normanton, 1966, p.1-12) as well as at the beginning of the Eighties (Geist, 1981).
3. The State Comptroller's Annual Report 37 (1987, p.xix) reports that "...concurrent with the submission of this report to the Knesset, the State Comptroller's Office is carrying out across-the-board studies of central issues in local government, such as the collection of property taxes and the grant of tax relief, the establishment of municipal companies and their relations with municipal authorities, the treatment of sewage, the financing of local road and sidewalk paving, and the care of old people". The State Comptroller promises that "...findings in these and other areas of local government will be collected together and published separately" (ibid). It appeared that the State Comptroller had adopted across-the-board audit in local government. A year later, in Annual Report 38 (1988, p.xix), the State Comptroller reiterated that "...concurrent with the submission of this report to the Knesset, the State Comptroller's Office is carrying out across-the-board studies of central issues in local government, such as the collection of property taxes and the grant of tax relief, the establishment of municipal c6mpanies and their relations with municipal authorities, the treatment of sewage, the financing of local road and sidewalk paving, and the care of old people". He added that "...a number of subjects are likewise being audited in the Municipality of Tel Aviv- Jaffa. At this time they and the other issues are being finalized towards their inclusion in Report No.2 on local government. The audit of the municipalities of Beer-Sheva and Haifa is drawing to a close; audit reports on these municipalities will be published separately".

In Annual Report 39 (1989, p.xxii) the new State Comptroller repeated that "...the audit of a number of central issues in local government has been concluded. These and findings relating to specific local governments will be included in Report No.2 on local government which will be published in 1989".

In Annual Report 40 the State Comptroller again repeated that "concurrent with the submission of this report to the Knesset, Collected Reports No.2 on local government is being finalized It includes comprehensive state audit findings on a number of central issues connected to the activities of local government and to their supervision by the Ministry of Interior, as well as findings on specific local governments".

4. It has been implied that the timing of annual and other State Comptroller reports has influenced voters. See the author's article on the influence of state audit on political processes (Friedberg, 1991, pp.110-31). The attempt by Members of Knesset from the ruling coalition to change the publication date of the annual report of the State Comptroller (42, 1992) which was scheduled to appear just before the last Knesset elections also says something.
5. Following is a comparison of the subjects appearing in the two State Comptroller reports on local government:

*    Based on examination of the following:

• Payment of wages in violation of law-15 local governments and 14 special purpose districts;
• Property taxes - Billing, discounts, and exemptions -41 local governments;
• Grant of subsidies to sports associations - 15 local governments;
• Safety in educational institutions - 8 local governments.

6. The second State Comptroller's report on local government shows that in the context of its traditionally oriented report on payments to elected officials in violation of the law, the State Comptroller' Office examined 14 special purpose districts (Report on the Audit of Local Government, 1992, p.445).
7. Section 20(b) of the State Comptroller Law states: "The State Comptroller shall forward each report on the inspection of an inspected body within the meaning of section 9(4) [all local governments] to the head of the local authority inspected with copies for all the members [councilors] of such local authority; a copy of the report shall be forwarded by the Comptroller to the State Audit Affairs Committee of the Knesset, the Minister of Economy and Interdepartmental Coordination and the Ministry of Interior" (the Ministry of Economy was closed in 1995 and its functions were transferred to the Prime Minister's Office).
8. See Kaicheim & Rozevitch, 1990, pp.67-77 regarding budget deviations, especially in election years.

Bibliography

English

Caiden, Gerald E., "The Problem of Ensuring the Public Accountability of Public Officials", in: Jabbara, Joseph 3. and Dwivedi, O.P., eds., Public Service Accountability, Kumarian Press, West Hartford, Conn., 1989, pp. 17-38.

Edds, John A., "Internal and External Audit", in: Geist, B., ed., State Audit, Developments In Public Accountability, MacMilllan, London, 1981.

Elaaar, Daniel, and Kaicheim, Chaim, Local Government in Israel, Latham University Press of America and the Jerusalem Center of Public Affairs, 1988.

Friedberg, A., Geist, B., Mizrahi, N., and Sharkansky, I., eds., State Audit and Accountability, State Comptroller's Office, Jerusalem, 1991.

Friedberg, Asher, "State Audit, Politics, and the Media", in: State Audit and Accountability, 1991, pp. 110-31.

Friedberg, A., Geist, B., Mizrahi, N,. and Sharkansky, L, eds., Studies in State Audit, State Comptroller's Office, Jerusalem, 1991.

Kaicheim, Chaim, and Rozevitch, Shimon, "Deficits in Local Government Budgets In Israel: A Reflection of Political Cycles and an Expression of Local Autonomy", Public Budgeting and Finance, 1990, 10(1):67-77.

Lutrin, Carl E., and Settle, Allen K~, American Public Administration, West Publishing Co., St. Paul, Minn., 1992.

Mohr, Jorg en, "The Danish Auditor General and the Media" in: State Audit and Accountability, 1991, pp.132-S.

Normanton,E.L., The Accountability and Audit of Governments: A Comparative St-, Manchester University Press and F.A.Praeger, New York, 1966.

Wheat, Edward M., "The Activist Auditor, A New Player in State and Local Politics", Public Administration Review, Sept/Oct 1991, 51(s):385-92.