The focus of the steering of local government finances should be shifted to anticipation

In a recently published audit report, the NAOF recommended that the coordination of the microeconomic and macroeconomic steering systems for local government finances should be enhanced. However, softer means than normative steering can also be used to influence the finances of individual municipalities. One such method is to collate comparable data and actively disseminate best practices between municipalities.

The steering of the finances of individual municipalities has already been improved by adjusting the financial steering criteria laid down in the Local Government Act that establish, for example, when a municipality or joint municipal authority should be placed into the assessment procedure led by the Ministry of Finance. Whenever there is a need for the assessment procedure, something has already clearly gone wrong. In addition to the development of the assessment procedure process, softer means could be used more in the steering of local government finances in order to prevent financial difficulties from emerging in the first place.

Many municipalities often lack sufficient economic competence that could support their decision making. For example, investment project lifecycle costs are often inadequately evaluated. Boards of municipal subsidiaries have also been shown to have weaknesses, for example, in their industry expertise. Recruitment of competent staff, particularly in net migration regions, is challenging and the level of economic know-how seems to vary greatly between municipalities.

Could enhanced external auditing support the steering of local government finances?

Enhanced external auditing could provide another approach to support local government finances. Presently, under the Local Government Act local authority audit committees are responsible for the external audit of local government activities. The task of local authority audit committees is to assess the extent to which the operating and financial targets set by the local council have been achieved in the municipality and the local authority corporation and whether or not the activities are arranged in a cost-effective and appropriate manner. The assessment should be carried out in an objective and reliable manner and it should support decision-making and development of operations. The assessment should be targeted at key objectives and activities in terms of cost-efficiency.

However, the same resourcing issue as in the municipal decision-making process also affects the present audit system: is the level of economic competence in local authority audit committees sufficient? In addition, the system also involves an issue of objectivity as most audit committee members are also local councillors and thus participate in the decision-making regarding the targeting of audits.  Hence, the question is are these members capable of setting aside the issues they are pursuing while performing their external audit duties.

It would be important to develop the external auditing of the local government sector towards function-specific audits so that the audits could consider a broader perspective than that of an individual municipality. In several EU Member States the responsibility for the external audit of municipalities is entrusted to the supreme national audit authority. In such systems, audits are typically targeted at certain key functions the organisation of which has been assigned to municipalities. The cost-efficiency of such functions can then be examined among a sufficient number of municipalities. Municipal category-specific examinations would also enable the efficient dissemination of best practices and utilisation of productivity potential.

Independent external auditing supports decision-making

The need for independent external auditing provided as a service has also been recognised previously. Attempts have been made to cater for this need in different sectors by taking into account their different needs and perspectives. However, the level of independence of private assessment service providers and their rights of access to information are not fully comparable to those of audit authorities and generally their audit activities do not cover all local government functions.

In recent years, the work of audit authorities has gradually shifted towards supporting the improvement of public administration in order to generate relevant and timely information for decision-making. This is one reason why the audit of the appropriateness of finances of the upcoming regions has been assigned in Finland to the National Audit Office.

The system of strong local self-government limits the possibilities of central government to influence local government finances. Consequently, the achievement of the macro-level targets set by the Government requires that municipalities are also strongly committed to them. Enhanced external auditing of local government activities could provide concrete support to municipal decision makers to achieve the targets. It would be beneficial to achieve a level of collaboration between municipal decision makers and independent external experts that took account of not only the local needs but also the wider perspective of the overall public finances.