This is part 1 of how to read and interpret the reports by the auditor general. The focus is on the different terms and opinions that the Auditor General employs in the audit reports. The terms apply, with the necessary changes, to both the national and the county governments.
This guide should enable any person to understand and analyse the audit reports from the Auditor General for any arm of the National or the County Government and their respective agencies or bodies. (For example, the Executive, Parliament, Judiciary, County Executive, County Assembly, Independent Commissions and Offices, Political Parties, etc.)
The definition of terms and opinions are courtesy of IBP Kenya. Unless indicated otherwise, the photo examples are from the Nairobi County Government audit report for the FY 2014/15.
DEFINITION OF TERMS
A government ministry (or county department) reports an expenditure. However, it does not provide enough documentation to show for sure that-
- the spending was authorized (by the legislature), or
- it received goods and services for the expenditure.
This is called “unsupported expenditure”. The key information here is the absence of supporting documentation.
The government ministry (or county department) overspends its budget without authorization (of parliament or county assembly).
A ministry (or county department) has a “vote” of spending, that is when Parliament (or County Assembly) tells them how much they can spend. If the government ministry or department exceeds the vote without proper authorization, then it becomes an “excess expenditure” or “excess vote”.
The key information here is spending more than the allocated money without authorization. Here is an example of excess expenditure.
They arise when a government ministry (or county department) commits to pay for goods and services, and receives those goods and services, but does not settle the bill within that financial year.
Pending bills are a problem because the (national or county) government works on a single-year budget and a ministry (or county department) must have cash and book expenditure when it happens. All money that is not spent is returned to the Treasury (or to the County Revenue Fund in case of a County Government) to be budgeted afresh the next year. There is no basis for carrying forward commitments.
NB: In (some) counties, pending bills are considered as (part of the) county’s debt since the pending bills consist of money owed to suppliers.
These are cash advances when the (national or county) government officers travel or attend meetings that they must return or account for with proper records. They are often not returned or accounted for. Sometimes, officers who have failed to account for them are allowed to obtain new imprests, which is against government policy.
What opinion does the Auditor General have on financial statements (or audit reports)?
Unqualified certificate (Unqualified Opinion)
This means that no problems exist with the documentation that the auditor general reviews and the government ministry (or county government department) has managed funds properly.
Unqualified opinion is a clean opinion, meaning that the financial transactions, by and large, were recorded properly and are in agreement with underlying accounting records.
A qualified opinion occurs when the auditor has found some problems but they are not pervasive (widespread or persistent). The auditor received all the information required for audit, but the audit reveals some gaps in adherence to procedures and budgets.
A qualified opinion means that financial transactions are recorded and deemed to be in agreement with the underlying records, but there are cases where the Auditor-General is unsatisfied with the accuracy of certain expenditure.
An adverse opinion occurs when the auditor general is able to review the ministry’s documentation, but the problems found are pervasive and will require considerable changes to rectify. This kind of finding should be of concern to oversight bodies.
An adverse opinion means that although the financial transactions are recorded, the Auditor-General may be unsatisfied with the accuracy of significant amounts of expenditure. Consequently, the Auditor-General cannot give a clean (unqualified) opinion, and gives an adverse opinion.
A disclaimer is when the auditor is unable to review fully the ministry’s documentation because there is a substantial amount of information that the ministry has not made available.
In such a case, the auditor feels unable to determine whether the situation is qualified or adverse because the paperwork is not adequate. This is a serious lapse in compliance and should be of concern to oversight bodies.
For a disclaimer, the record keeping is so bad the auditor cannot give an opinion.
A disclaimer opinion is serious and means that there was no basis upon which the Auditor-General can undertake an audit because the accounting records are unreliable. There are no verifiable supporting documentation and explanations for transactions.
Summary of the audit opinions
Below is a summary of the unqualified, qualified, and the adverse opinion on the FY 2013/14 national government audit report.
(Some of the terms used here like ‘ministry’ are for explanatory purposes. You can apply this guide to any audit report from the Auditor General under Article 229 of the Kenyan Constitution).