Czech state accounts neither ‘uniform’ nor totally reliable, NKÚ warns

As of this year, the financial statements of state bodies and institutions are to be used by the Ministry of Finance, the Czech Statistical Office (ČSÚ) or the Czech National Bank (ČNB), for instance, as a basis for estimating the debt or deficit of public finances. It concerns highly sensitive information about the state the country’s in, providing the financial markets with a guide as to whether it will be able to meet its commitments. But not all the numbers listed in the key financial statements are wholly reliable, notes the Supreme Audit Office (NKÚ).

The problem is that the laws lack clear definitions of basic accounting concepts, such as assets, liabilities, costs, or income. This can lead to different offices interpreting these categories differently, thus obtaining incomparable data. How far this could go can be seen by the example of Greece, which has been teetering on the edge of bankruptcy ever since the financial markets lost their trust in the country’s statistical data.

Fantasy versus reality

In 2007, Mirek Topolánek’s (Civic Democrats, ODS) government adopted a resolution to introduce “uniform” state accounting as of 2010. The Ministry of Finance stated that “it represents the creation of a modern system that ensures effective state management.” Apparently, this is an essential condition to increase the trustworthiness of financial statements for the Czech Republic. But the promises and ideas differ substantially from reality.

This transpires from the findings of the Supreme Audit Office (NKÚ), which audited the financial statement of the budget for the Ministry of Education, Youth and Sports for 2010. The audit was to verify the reliability of the Ministry’s accounts up to Dec. 31, 2010. We won’t go into the professional accounting analyses in the report, nor the reservations the auditors had with the Ministry. Instead, we’ll get straight to the NKÚ’s conclusions, which are generally applicable.

What are liabilities? What are assets?

The information contained in the financial statements must be free of any debate, reliable, comparable and understandable. But, as the NKÚ auditors found out, that is the fundamental problem. “One of the preconditions for meeting the legally set requirements is a condition that the rules for accounting and reporting must be clear, unambiguous and complete. Czech accounting, however, lacks coherently formulated bases upon which the construction of financial reporting could rest, i.e. a conceptual framework,” the NKÚ report says. ‘The law on accounting does not have a clear and specific definition of the basic concepts: assets, other assets, liabilities, other liabilities, costs and revenues.’

The document then goes on to the next warning: “The law on accounting does not have a clear and specific definition of the basic concepts: assets, other assets, liabilities, other liabilities, costs and revenues.”

For the NKÚ, this situation represents an obstacle to giving a clear statement as to whether the data given in the financial statements is reliable or not. “In 2010, some of the provisions of the laws in force, especially in the field of decommissioning fixed assets of the estimated receivables for transfers, evaluating the differences for assets intended for sale, small fixed assets and corrections to this asset and pre-financing expenditures co-financed by European Union funds, were not clearly applied by some organizational units of the State,” the NKÚ says.

A specific consequence? In the case of the audit on the MEYS final statement for 2010, the NKÚ auditors did not make a statement on items that came to over Kč 24.7 billion in all. Due to the ambiguous and unclear provisions, it was not possible to determine whether the items had been correctly accounted. Just for comparison: at the end of 2010 the Ministry’s assets and liabilities came to over 123 billion crowns, thus it was about a fifth of the total amount. And it's not just the MEYS, equally imperfect accounting rules apply to all the state’s organizational components.

They do it their way

“The regulations and rules are set up so that in some cases accounting entities can interpret them in different ways and apply them accordingly. Understandably, this results in incomparable data,” says Jaromíra Steidlová, an NKÚ board member, who led the MEYS audit.

The amendment to the act on accounting formally fulfils the government resolution from 2007, but so far none of the implementing regulations have been passed. Responsibility lies with the Ministry of Finance under Miroslav Kalousek (TOP 09). The NKÚ is trying to map out if there is any improvement in the state of regulating accounting rules. “The truth is, that there has been a shift here and there, but it is not always in the desired direction or specified to a sufficient extent,” Steidlová told Czech Position. Transfers are one of the most difficult areas.

The Ministry is responsible for the regulation; it’s the accounting entities that apply it. The NKÚ checks financial statements giving a verdict that assures their users of the data's reliability. “In some areas the basic assumptions for this have not been met for us to make a verdict,” Steidlová said.

The government discussed the result of the NKÚ audit of the MEYS at the end of March. It took into consideration the audit report and the MEYS statement. At the same time, it imposed remedial measures on the minister of education, ones proposed by his office. The paradox is that, even with the best intentions, the minister of education — if they can find someone willing to take on the abandoned resort — cannot ensure all of the rectifications. If the Ministry of Finance does not change its approach, there will be no fundamental changes in the reliability of financial statements in the problem areas.