Extension of the National Audit Office’s Powers to Audit of Local Governments: Limitation or Constitutional Protection of Local Democracy?

• Author: Mihkel Oviir
• Position: Auditor General National Audit Office of Estonia
• Pages: 116-124

Mihkel Oviir

Auditor General National Audit Office of Estonia

Extension of the National Audit Office's Powers to Audit of Local Governments: Limitation or Constitutional Protection of Local Democracy?

On 1 January 2006 , an amendment to the National Audit Office Act ¹ entered into force in Estonia , which extended the powers of the National Audit Office to include auditing of the activities of local governments. The National Audit Office thus became the external inspection body for local governments.

The purpose of this article is to highlight the problems pointed out during the discussions that preceded the extension of the National Audit Office's powers, as well as the positions of the participants in the discussion in favour of and against the extension, and to briefly summarise the first results of the National Audit Office's activity as the external inspection body for local governments.

The dilemma referred to in the title mainly lies in the need to weigh the balance between two constitutional principles. On the one hand there is local government autonomy - a local government's right to independently and finally resolve and manage local issues. On the other hand there is the principle of democracy, which pertains to the public nature of power and the legal liability of those who exercise power, and of democratic control, including the nation's right to know how public resources are being used.

1. Local government following the principle of autonomy

The Constitution of the Republic of Estonia ² clearly recognises the principle of local government autonomy, implying local governments' right to independently and finally resolve and manage local issues (in § 154 of the Constitution). This is thus a guarantee given to local governments by th e Constitution. According to the Constitution, a local government is free to manage its procedures while being a part of the state as a whole³. The European Charter of Local Self-Government (hereinafter also referred to as the Charter), which Estonia ratified on 28 September 1994 ⁴ , recognises the right of local incorporated territories to local governments, while leaving it up to each state to decide on their organisation.

The preamble of the Charter contains important principles for setting up local governments, including the principle of local government autonomy, whose implementation entails the existence of local authorities endowed with democratically constituted decision-making bodies and possessing broad autonomy with regard to their responsibilities, the ways and means by which those responsibilities are exercised, and the resources required for their fulfilment⁵. The principle of local government autonomy serves the purpose of decentralising public authority and limiting and balancing the authority of the state⁶.

According to § 154 (1) of the Constitution of the Republic of Estonia, local governments resolve and manage local issues independently, while the bases for their activity are provided by law. The Constitution recognises local governments - bodies of persons constituted on a territorial basis - as legal subjects separate from the state and not being part of the authority of the state in the narrower sense. This is why the activities of local governments must comply with constitutional principles.

Section 14 of the Constitution specifies the guarantors of fundamental rights (i.e., the addressees of personal rights and freedoms)⁷. The provision mentions local governments in addition to the authority of the state. Local governments' duty to guarantee the fundamental rights of persons arises from the fact that this is a duty of the state authority in its entirety⁸. On the basis of the opinion of the Constitutional Review Chamber of the Supreme Court, local governments exercise the authority of the state both when complying with their state duties and when acting within their guaranteed autonomy; i.e., the relationship of local governments to fundamental rights applies to both their public-law and private-law activities⁹.

The legal delimitation of a local government organisation should take into account the long historical development of local governments and the developments and trends of the political system. Any indirect interference by the state must also be justified by overriding public interest and follow the principle of proportionality¹⁰.

For example, the European Charter of Local Self-government also provides that, as far as possible, grants to local authorities shall not be earmarked for the financing of specific projects; neither does the provision of grants remove the basic freedom of local authorities to exercise policy discretion within their own jurisdiction (Article 9). The Charter thus places great emphasis on the appropriateness of the local government's funds for its duties. For example, although local governments may borrow money under certain conditions, there are cases where the excessive loan burden of local governments has caused problems and even led to the insolvency of local governments. It should be stressed that bankruptcy proceedings with respect to local governments are precluded by constitutional law principles: the local government's constitutional guarantee and the principle of the rule of law.

2. The National Audit Office as a state body exercising economic control

Pursuant to § 132 of the Constitution, the National Audit Office shall be, in its activities, an independent state body responsible for economic control. The main function of the National Audit Office as set out in the Constitution - the content and scope of economic control - is specified in the National Audit Office Act¹¹. According to § 137 of the Constitution, the organisation of the National Audit Office shall be specified in the law. The law thus referred to in the Constitution is the National Audit Office Act, which specifies the organisation and the bases for the activities of the National Audit Office, including the control powers (addressed in § 1 of the National Audit Office Act).

In the course of performing its main function, the National Audit Office may assess the audited entities' internal control, financial management, financial accounting, and financial statements, as well as the legality of their economic activities, including economic transactions; performance with regard to the audited entities' management, organisation, and activities; and the reliability of their information technology systems (§§ 16 (2) and (3) of the National Audit Office Act). Section 7 of the National Audit Office Act also specifies the audited entities: in addition to the institutions and persons listed by law, the National Audit Office audits local governments. The law determines the content and scope of the economic control exercised by the National Audit Office (control powers) and the bases for audit activities (procedure). The control powers of the National Audit Office are extended not to the entire scope of local government activities but to a limited set of them¹². Until 1 January 2006 , the economic control exercised by the National Audit Office over local governments covered allocations for specific purposes and subsidies granted from the state budget for the immovable and movable property of the state transferred into local governments' possession, and funds allocated for the performance of state functions.

3. The necessity of control of local governments

The insufficiency of local governments' control system has been pointed out in many international reports concerning Estonia . An example can be found in the 2001 report of GRECO (Group of States Against Corruption, Council of Europe)¹³. Amongst other things, it recommended that Estonia review the National Audit Office's activities and strengthen control over local governments. Other methods of strengthening control over local governments were considered in order to solve these problems and attain the goals. These methods include, for example, improving the efficiency of audits commissioned from private auditors, establishing a special auditing institution for external audit of local governments, and strengthening auditing conducted by the audit committee. Thorough analysis led to the conclusion that extension of the National Audit Office's powers was the best solution¹⁴.

The Supreme Court's position concerning control over local governments is based on Article 8 of the European Charter of Local Self-government, under which administrative supervision of local authorities may be exercised only according to such procedures and in such cases as are provided for by the constitution or by statute. Any administrative supervision of the activities of the local authorities shall normally aim only at ensuring compliance with the law and with constitutional principles. Administrative supervision shall be exercised in such a way as to ensure that the intervention of the controlling authority remains in proportion to the importance of the interests it is intended to protect¹⁵.

4. The objectives of extending the control powers of the National Audit Office

Extension of the control powers of the National Audit Office to local governments served two main objectives:

- to help strengthen external control over the lawful use of public-sector resources; and

- to help reduce corruption risks...