Final assessment of the local accounts certification experiment
The Final assessment in a nutshell
Directive 2011/85/EU of the Council dated November 8, 2011 on the requirements for budgetary frameworks of European Union member states subjects public accounting systems to internal control and independent auditing. As per a law passed by the Partement, the French financial jurisdictions conducted an experimentation to assess the feasibility and desirability of imposing a legal obligation on local territorial authorities and public local entities to undergo external audit of their accounts.
Twenty-five voluntary local public administrations participated in testing the certification of accounts or other mechanisms aimed at ensuring the regularity, accuracy, and fidelity of their financial statements from 2016 to 2023. Various stakeholders were involved in this experimentation: the experimental entities, administrations, auditors, certified accountants, magistrates, and financial jurisdiction inspectors.
The certification and other reliability methods entrusted to accounting professionals by the experimental entities confirmed "the importance of the path to be taken for financial statements to be certified with or without reservations," along with the value of the certification process.
This exercise had to address the challenges identified in overall entry diagnostics conducted at the start of the experimentation and during targeted audits performed by dedicated teams from regional and territorial audit courts. These challenges included the scope of financial statements, insufficiency of internal control systems, and uncertainty about the assets of the entities. It confirmed the need for progress to ensure the reliability of all accounting cycles, particularly regarding fixed assets, provisions, and off-balance sheet commitments.
However, the work carried out by accounting professionals during the certification campaigns for the years 2020 and 2021 affirmed "the momentum for change within the experimental entities to revise their financial organization and instill a risk management culture throughout their services."
The methods of certification appeared to significantly enhance the reliability of local accounts, regardless of the sometimes mixed results obtained by each experimental entity. The same applied to the alternative methods tested, despite providing a more limited degree of assurance.
The experimentation revealed that the reliability of accounts for local communities and public local entities still needed improvement to provide "a faithful representation of their management results, assets, and financial situation."
Ensuring account reliability through external auditing, whether through certification or other reliability methods, requires fulfilling several prerequisites, including methodological ones, to make the intervention valuable for the entity. The legislative and regulatory adaptations necessary for this purpose would be of limited scale, and the centralization of financial information of local public administrations in applications maintained by the State would facilitate the required IT developments.
To be fully effective, certification requires several accounting and management changes:
At the end of the experimentation of certifying local public accounts, the financial jurisdictions believe that:
In conclusion, the experimentation has demonstrated that, within an almost unchanged legal and regulatory framework, the experimental entities have successfully shifted from primarily budgetary financial management to a more asset-based approach. They have identified risks associated with accounting management, evaluated them, and implemented internal control systems that, even if incomplete, have secured numerous management processes. This marks a significant advancement that financial jurisdictions had long emphasized the need for. There are no substantial obstacles, either in terms of substance or procedure, preventing these benefits highlighted by the experimentation from being extended to the entire local public sector.
The Final assessment summary
Experimentation of Certification of Local Public Accounts in France
Directive 2011/85/EU of the Council dated November 8, 2011 on the Requirements Applicable to Budgetary Frameworks of Member States of the European Union subjects public accounting systems to internal control and independent auditing. Under a law passed by the Partement, the French financial jurisdictions conducted an experiment aimed at assessing the feasibility and desirability of subjecting territorial authorities and local public entities to a legal obligation of external control of their accounts.
Twenty-five voluntary local public administrations thus tested the certification of accounts or, more generally, mechanisms intended to ensure the regularity, accuracy, and fidelity of their financial statements from 2016 to 2023. Various stakeholders were involved in this experiment: experimental entities, administrations, auditors, certified accountants, magistrates, and inspectors from financial jurisdictions.
The certification or other reliability methods entrusted to accounting professionals by the experimental entities confirmed "the importance of the path to be taken for financial statements to be certified with or without reservations," while also demonstrating the value of the certification process.
This exercise had to address the challenges identified in the scope of entry diagnostics conducted at the beginning of the experiment and during targeted audits carried out by dedicated teams from regional and territorial audit chambers, whether it concerned the scope of financial statements, insufficient internal control systems, or uncertainty about the assets of the entities. It confirmed that progress would need to be made to ensure the reliability of all accounting cycles, particularly in terms of fixed assets, provisions, and off-balance sheet commitments.
However, the work of accounting professionals during their certification campaigns for the 2020 and 2021 fiscal years reinforced "the momentum for change within the experimental entities to review their financial organization and instill a risk management culture across all services."
The methods of certifiers appeared to significantly enhance the reliability of local accounts, regardless of the sometimes contrasting results obtained by each experimental entity. The same applied to the alternative methods tested, despite providing a more limited degree of assurance.
The experimentation showed that the reliability of accounts for local communities and public local entities still needed improvement to provide "a faithful representation of their management results, assets, and financial situation."
Ensuring account reliability through an external auditor, whether through certification or another reliability method, requires fulfilling several prerequisites, including methodological ones, to ensure that their intervention is a valuable investment for the concerned entity. The legislative and regulatory adaptations necessary for this purpose will be of limited scope, and the centralization of financial information of local public administrations in applications maintained by the State will facilitate the required IT developments.
To be fully effective, certification requires several accounting and management changes:
Having a single, reliable, and comprehensible financial account at the entity level
French local public entities do not have accounts established at the level of the legal entity, unlike other public sector organizations, but rather on each of the budgetary segments they institute. The significance of annex budgets – which notably track industrial and commercial activities – and the reciprocal flows between these budgets and the main budget – which track administrative activities – often lead to presenting an incomplete or even misleading financial situation in many entities. Having a single financial account that presents comprehensive and aggregated asset and budgetary information appears essential. In a second step, the legislator may consider consolidating the accounts of each local public entity with those of the entities it controls.
Furthermore, the different components of the accounts lack transparency due to the absence of explanations for variations from one fiscal year to another and the superimposition of numerous annexes. It is necessary to review the statements that make up the accounts as a whole. The requirement to present a management report would contribute to improving transparency.
Evolving the accounting framework and giving it regulatory value
A budgetary and accounting instruction known as "M57" constituted the accounting framework selected for the experiment, in the absence of a set of standards tailored to the specificities of the local public sector, which has been completed and approved by regulatory means.
Out of a planned total of 22 standards, 18 have been published by the Public Accounts Standardization Board (CNoCP), a committee responsible for the "accounting standardization of all public and private entities engaged in non-market activities." These standards represent significant advancements in translating generally applied accounting principles while considering the specificities of the local public sector. However, the first version of the standard has not yet been subject to a ministerial order by those responsible for public accounts and local communities, making it applicable from January 1, 2024. This would end the situation where the administration plays a role as a standard-setter while also being responsible for maintaining the accounts of local communities.
Eliminating or easing derogations
Significant derogations have been granted by law or by the administration to certain French municipalities, based on their nature or size. These derogations compromise the comparability of local entities with each other and the faithful representation of their accounts. They need to be removed or limited, especially concerning the assets of these municipalities.
Making the implementation of internal control mandatory
It would be relevant for French local public administrations to have an obligation to implement an internal control system, as provided for other public entities by Decree No. 2012-1246 of November 7, 2012, relating to public budgetary and accounting management. The deployment of such a system should be based on a national framework that considers the varying sizes of municipalities and local public entities.
Furthermore, the experimentation showed the importance of political impetus to drive change and ensure transparency towards deliberative assemblies. The effective implementation of certification will require full involvement of elected officials.
Improving the performance of Hélios
Hélios has been the unique national information system used by the Directorate General of Public Finances (DGFiP) since 2004 to maintain the accounts of all local public entities in France. The experimentation provided an opportunity to assess the necessary progress for Hélios to contribute more effectively to the reliability of accounts.
The controls integrated into this application contribute to automated anomaly detection. The implementation of a standardized exchange protocol (PES) centralizing the transmission of data related to fixed assets at once would improve the recording of assets for inventory operations.
Furthermore, despite long-standing regulatory obligations imposed on DGFiP, numerous adjustments are necessary to identify the accounting entries of a local entity in the form of a general ledger, with no assurance of their completeness. The development of an accounting entry file would reduce these adjustments and allow entities to fulfill the obligation of producing such a file in case of the tax administration's audit of their industrial and commercial activities.
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Facilitating Access to Information by Local Authorities and Auditors
Information necessary for the reliability of local authorities' accounts is held by third parties. This information pertains, in particular, to assets put under concession or made available, investment subsidies paid, tax revenues, intervention charges, and European funds managed by regions.
It is necessary to establish appropriate information exchange rules to facilitate the work of external auditors and to prevent the audit opinion report from containing "external" reservations, justified by the absence of information from third parties to confirm certain amounts recorded in the accounts.
Certification Should be Made Mandatory for the Largest Local Public Administrations, Under Certain Conditions
The experimentation has shown the significant value an external auditor's intervention could have for the quality of accounts and, beyond that, for effective management.
According to the French Court of Audit, the certification of local public accounts should be made mandatory for regions and departments, as well as other local authorities, based on thresholds that consider the high concentration of financial stakes within a small number of entities. Less than 2000 local public administrations (1,757 entities, which is 2.5% of the 66,454 local authorities and public entities) represent 80% of the total operating expenses of the local public sector. This includes all departments and regions.
For other entities, due to the diversity of situations in the territorial framework, the Court recommends providing the possibility of using alternative modes to certification, ranging from a limited annual review to a synthesis developed by the DGFiP network.
Facilitating External Auditor's Intervention and Adjusting Nomination Rules
The process of appointing an external auditor must ensure their independence and professionalism.
The application of rigorous rules in terms of ethics, training, and auditor appointments is essential to meet the demands of local democracy.
The French legislator could usefully consider existing practices in the audit of local public accounts in certain foreign countries, especially within the European Union, to define the most suitable solutions.
Facilitating the Role of Professionals in the Accounts Closing and Approval Process
The legal and regulatory timeline for closing accounts posed a challenge during the three years of experimental certification, particularly concerning the adherence to deadlines that arise at various stages of certification work. This observation suggests that this timeline should be relaxed, particularly to account for the impact of election deadlines.
The law allows the deliberative body, holding budgetary power, to adopt the final budget amendment of the previous year by no later than January 21 of the following year. In these circumstances, adjustments proposed by an external auditor to achieve a faithful image of the accounts are difficult to make after this date, as any necessary budget credits could not have been rectified beforehand.
To avoid limiting the scope of account review work, which should allow for corrections before closure, several legislative solutions are conceivable, including granting the deliberative body the authority to the authorizer to account for necessary adjustments after the supplementary day.
Having an Audit Framework Specific to the Local Public Sector
The experimentation has also led the Court to question the relevance of the current audit framework, which is mainly based on conditions in the private sector. Applying the provisions of the commercial code to local authorities is at odds with the public nature of deliberative assembly meetings and the obligation to make most documents relating to decisions made by these assemblies available to the public.
An adaptation of audit standards to the specificities of local authorities is necessary to ensure coherence in the work of external auditors and the clarity of their opinions for interested parties, including elected officials and citizens. Additionally, this framework should define the concepts of regularity, accuracy, and faithful representation, which external auditors base their judgments on.
This adaptation should be entrusted to entities responsible for the reliability of the accounts of the local public sector, without having the responsibility to develop audit standards.
The Necessity of Preparation Time and Gradual Implementation
The experimentation has shown that only one of the entities involved managed to complete the deployment of an internal control system sufficient to ensure risk management for all accounting cycles, after seven years of effort and annual monitoring by financial courts, followed by accounting professionals.
The reliability enhancement process heavily relies on the maturity and effectiveness of internal control. A comprehensive diagnosis resulting in an action plan is necessary to guide accounting and financial management based on risks. It will also allow external auditors to prepare on-site and tailor their interventions in view of widespread reliability mechanisms.
This generalization could follow the pattern chosen for the certification of healthcare public establishments' accounts, through successive waves defined by the concerned administrations and not exceeding five years after the law's enactment.
The Potential Role of French Financial Courts
The task of certifying or ensuring the reliability of local public accounts cannot, due to the number of audits to be conducted and the required resources, be solely carried out by financial courts. However, the experience gained during the experimentation could enable them to support the certification process by:
More broadly, financial courts will continue to exercise their responsibility for controlling the accounts and management of local authorities as entrusted by law – a mission broader than certification and distinct from it. Within this framework, they will review the work carried out by external auditors and take it into account, where necessary, for the exercise of their own mission.
Conclusion
At the conclusion of the local public accounts certification experimentation, financial courts believe that:
In conclusion, it would be unfortunate if the experimentation did not lead to significant improvements in the reliability of local accounts, regardless of the methods chosen and the size of the local authorities and public establishments. Thus, the experimentation has demonstrated that from a nearly unchanged legislative and regulatory framework, the experimental entities have transitioned from a primarily budgetary financial management to a patrimonial approach. They have identified the risks associated with accounting management, evaluated them, and established internal control mechanisms which, though incomplete, have secured numerous management processes. This is a very significant step forward, a necessity that financial courts have emphasized for a long time. There are no substantive or procedural obstacles preventing the benefits highlighted by the experimentation from being extended to the entire local public sector.
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