The aim of this paper is to assess the capability of the internal audit function in the Serbian public sector to add value to the public sector entities by performing its work effectively, to support progress of and achieve the requirements of EU Chapter 32 – Financial control, opened in 2015. We reviewed the annual reports regularly published by the Ministry of finance as well as SAI’s annual activity reports for the period from 2016 to 2022. The results of our analysis show that the internal audit function in the Serbian public sector is still at the initial stage of its development. Our recommendation refers to the change of the model of organization of the internal audit function in the small entities and providing adequate resources for internal auditor’s continual professional education.

Introduction

The fundamental premise of the Three Lines Model or the public sector is that the governments and other public sector entities are essential for maintaining orderly and fair societies (INTOSAI and The Institute of Internal Auditors 2022). These entities operate on behalf of the public and use public resources, and consequently bear responsibility for the effective, efficient, ethical, equitable and sustainable management of the public sector resources. The decision making and operating processes of public sector entities must be transparent to all stakeholders. Establishing process of good governance, including internal audit function as a third line is essential for good governance. Budgeting and public financial management (PFM) are probably the most important instruments for proper implementation of public policies. PFM deals with the management of public resources, the allocation and use of resources collected from the economy.

Methodology

Ministry of finance - CHU monitors the work of internal audit in the public sector of the Republic of Serbia through the analysis of annual reports on the functioning of the internal controls system and internal audit submitted by public sector entities. The results of this analysis are presented in a consolidated annual report which have been regularly prepared since 2009. The consistency of the presentation of data varies over the years. Following the opening of EU accession Chapter 32 – Financial Control in 2015, the consistency of presentation significantly increased. The available data include the number of public entities that submitted their annual reports to the CHU, the status of internal audits in the reporting entities, the number of internal auditors, the number of audits, audit findings, and similar. The analysis of these data enables the assessment of the development of the function of internal auditing in the entire public sector. Since 2016, the content and format of the consolidated annual report have been improved in accordance with European Committee recommendations.

Serbian State audit institution (SAI) also reports on the development of the internal control system and internal auditing in the public sector for audited entities since 2007. SAI annual operating reports on the annual results of annual audit programs, thus, the greatest number of entities differs from year to year. Nevertheless, the considerable number of audited entities, on the other hand, represents a good base for an overall assessment of the status of internal auditing in the public sector, as all entities operate in the same environments and under the same regulation.

For this paper, we analyzed the date for the period commencing in 2016, with the aim of assessing the results of the efforts invested in improving the internal audit function in the public sector following the opening of EU Chapter 32 - Financial Control, in December 2015. Although the dates are not consistently presented in all these reports, the lack of their consistency does not impact the overall assessment results.

Results on the implementation process and discussion

The development of internal control system and internal audit in the Serbian public sector can be tracked by analyzing reported data in the Serbian Ministry of finance CHU reports. For example, we can track the progress of awareness of public entities’ management on the importance of the implementation of the proposed processes in the public management system by the number of entities which submitted their reports to the Ministry of finance CHU.

Table 1. The number of entities which submitted their mandatory annual reports to the Ministry of Finance's Central harmonization unit (CHU)

The data presented on the Table 1 reveals that the number of public entities which submit their reports on financial management and control (FUK) continualy increases, with the spike 2020. The difference between submitted reports and processed reports is another indicator of the quality of submitted reports. Namely, the differences relate to the emply reports. From 2020, all submitted reports were processed. Analysis of the structure of entities which submitted their reports, most difficulties occur at the municipality level, as the percentinge of municipalities which submitted their reports is the lowest. The overall assessment is positive, as the awareness of public entities management significantly raised. Part of this success relate to the intensive training of employees responsible for public management held in the latest period, as a greater number of public fund beneficiaries have undergone the training and submitted their first annual reports on financial management and control (Government of the Republic of Serbia 2021).

FUK is a system of policies, procedures, and activities which provides reasonable assurance that the objectives of the public entity will be realized in a proper, economical, efficient, and effective way. The FUK system includes five interrelated elements that are defined in accordance with COSO framework: control environment, risk management, control activities, information and communication and monitoring and evaluation of the system.

During the regular audit process, the State Audit Institution in Serbia (SAI) examines the FUK system. Based on performed reviews, SAI could not find assurance that the internal control system was established in a way to ensure operations in accordance with regulations, internal acts, and contracts in the majority of audited entities. It was also determined that the conditions for adequate functioning of the internal audit were not appropriate. The SAI’s analysis of irregularities in the functioning of financial controls reveals that the most of irregularities occur at the local level.

Table 2. Irregularities in the functioning of financial controls in 2018

Table 3. Development of the internal audit function in the public sector

The scope of the audit is primarily analyzed according to the scope of the internal auditing of the budget by categories of given entities. The results presented in Table 5 show most of the budget expenditures occur in entities with functional internal auditing.

Table 4. The scope of re budget of public entities audited by internal auditors

Although the data on the assessment of the quality of internal auditing work is not available, an average number of internal auditors by public entities raises skepticism about its quality (Table 6).

Table 5. The number of internal audit functions and internal auditors in the Serbian public sector

The data in the table above reveal that the average number of internal auditors by a public entity is between 1,5 and 2,1, with the continually decreasing trend. The average number of internal auditors at the central level, presented in Table 7, is above average for the entire public sector. Thus, the decreasing trend may be explained by the increase in the number of entities that establish internal audit functions with one or two internal auditors in the internal audit function.

Table 6. Established internl audit functions and proposed and actual number of internal auditors in public entities at the central level in 2021

During its regular audit process, State audit instituion in Serbia (SAI) examines internal audit function. Auditees are the direct and indirect beneficiaries of the budget funds, beneficiaries of funds of organizations of mandatory social insurance, the public enterprises, units of territorial autonomy and local self-government, the National Bank of Serbia in the part relevant to use of public funds, and all other users of public funds (State Audit Institution 2019).

Table 7. The status of internal audit function in audited entities

Professional competencies of internal auditors

To comply with the International standards for the professional practice of internal auditing, internal auditors must obtain appropriate professional designation and possess or obtain the knowledge, skills and abilities to perform their responsibilities successfully (The Institute of internal auditors 2017). Funding for training and professional development should be included in the internal audit budget, i.e. provided by the organizations. Training opportunities may include enrolling in courses, working with a mentor, or being assigned new tasks under supervision during an engagement. Membership in a professional organization is also beneficial for maintaining internal audit knowledge on a day-to-day basis.

According to the regulation of internal auditing applied in the public sector of the Republic of Serbia, the duty of internal auditors is to improve their knowledge, skills, and other abilities through continuous professional development. The Rulebook on professional training of certified internal auditors in the Serbian public sector prescribes the areas and forms of professional training of authorized internal auditors in the public sector and criteria for recognizing professional training (Republika Srbija, Ministar finansija 2019). The Ministry of Finance CHU publishes the Record of professional training of certified internal auditors in the Serbian public sector. The records show that only fifty percent of public sector internal auditors obtain continual professional education, and subsequently maintain their professional designation. The summary of these records is presented in Table 9 (Republika Srbija Ministarstvo finansija 2021).

The number of public sector internal auditors who are the members of the most influential professional organization is presented in the annual reports of the IIA Serbia (Udruženje internih revizora Srbije n.d.). These figures show that only ten percent of public sector internal auditors are members of this professional organization.

Table 8. Professional competencies of internal auditors in the public sector

Conclusion and recommentations

The aim of the study is to examine the development of the internal audit function and its capabilities to effectively carry out its role in the public sector of the Republic of Serbia following the opening of EU Chapter 32 - Financial Control, in December 2015.

Despite the advanced normative regulation, operating capabilities of the internal audit function in the public sector are in the initial phase. This conclusion is based on two results. The first is that the average number of auditors in public entities continually decreases, from 2.1 in 2016 to 1.5 in 2021. The number of public entities that have established internal audit functions continually increases, but the actual number of auditors in these entities varies between 1 and 2. It is hard to believe that such a small number of internal auditors can comply with international internal audit standards. Analysis of the qualifications of public sector internal auditors reveals that about half of them do not have access to continual professional education, which is of the utmost importance for qualified professionals. Moreover, just ten percent of public sector internal auditors are members of authoritative professional organization IIA Serbia and majority of them have no access to the cheapest source for continual professional education.

The research finds an increase in awareness of the value of internal auditing since the opening of the EU Chapter 32. The analysis of irregularities in the functioning of internal control systems reveals that the greatest average number of irregularities occur at the local level, in entities with the least developed internal audit function. The least irregularities occur at the central level and public entities owned by the central government, with the functional internal audit function. We conclude that a key public sector challenge is to ensure appropriate internal audit at the local level.

The overall conclusion is that internal audit function, regardless of its well-done normative regulation, has not significantly improved its capabilities to effectively carry out its role in the Serbian public sector since the opening of the EU Chapter 32 – Financial control.

Based on the findings enumerated above, the following are some recommendations that will improve the capability of internal audit functions in performing their roles and responsibilities: The first one refers to the promotion of compound internal audit function with more auditors, whereas internal audit staff is concentrated at one point and performs internal auditing for more entities. The second one refers to providing adequate resources and incentives for public sector internal auditors for their intensive continual professional education.