The Transformation of Romanian Internal Public Audit between 2006 and 2020.

• Author: Moldovan, Octavian

1. Introduction

   The current research (1) explores how Romanian internal public audit (IPA from here on) changed and provides a general overview regarding the evolution of internal public audit in all local and central institutions required by Romanian law to organize and conduct IPA. Internal audit is 'an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. [...] It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes' (Institute of Internal Auditors Research Foundation, 2009, p. 3). The internal audit consists of the investigation and evaluation of the adequacy and effectiveness of the internal system of control in an organization, while also assessing the work conducted by employees, in accordance with the duties and responsibilities assigned to them (Arens and Loebbecke, 2003, p. 904). Internal audit, as an independent and objective activity, provides assurance for an organization by controlling its operations and offering guidance in order to improve operations (Ravdan, 2020, p. 626).

   Internal audit is an important resource to achieve the objectives of public institutions as it can increase organizational performance and lead to a better allocation of resources (Bobes, 2012, p. 40). The role and significance of IPA should have increased during the Covid-19 pandemic, as auditors can conduct assurance and counseling activities for the benefit of the decision-makers and the organization as a whole, mitigate risks, and contribute to better usage of public resources (Moldovan, 2021). IPA should be used by decision-makers especially during uncertain contexts such as the Covid-19 pandemic, as it can reduce risks (especially regarding the usage of financial resources) and provide counseling.

   The main elements analyzed in this article refer to the degree to which internal public audit activities are organized at the central and local level in Romania, the professional and educational (training) specialization of civil servants working in internal public audit (the ability to cover the needs of public institutions) and the measure in which IPA can offer assistance to public sector leaders and provide actual support for reaching organizational goals (by referring to the main types of audit missions conducted). Besides the introduction and conclusions, the article consists of three main sections, as follows: (1) a brief review of the literature, (2) a methodological section, and (3) the main findings of the research and further discussions.

2. Internal public audit in Romania

   Public sector leaders should understand the importance of IPA as a support mechanism for decision-making, especially when considering the role of IPA, alongside leadership, in the creation and maintenance of a performant and ethical management system and resilient organizations (Dascalu, Marcu and Hurjui, 2016; Dumitrescu, 2012; Ticlau, Hintea and Trofin, 2021; Cetina and Ivan, 2021, p. 977; Toleikiene et al., 2022). Public sector organizations face multiple complex risks (Campbell, 2022), as well as external and internal threats, while focusing on the attraction of resources from the external environment, thus a risk management system is necessary to screen risks and prevent undesirable developments and threats (Dumitru and Burtescu, 2015). The absence of functional IPA or its superficial (formal) adoption, without actually providing the functional ability to accurately identify risks and reduce financial uncertainty could have been one of the elements that benefited/helped the previous economic crisis (Otetea, Tita and Ungureanu, 2013) and prolonged its effects. According to Ardeleanu (Trifu) (2020), when referring to local public administration, 'misunderstanding the role of internal audit is a major risk in the functioning of the decision-making system' (2020, p. 627); more often than not, decision-makers are reluctant to use IPA as they are unaware of its true objectives and role. Furthermore, Cetina and Ivan (2021, p. 977) argue that 'internal auditors and management structures must be seen as partners and not as adversaries, having the same objectives, to effectively achieve the act of management and corporate governance by achieving the assumed performance indicator'.

   Processes such as democratization, globalization and EU accession have led to greater exposure for public sector organizations (2), as they are legally required to be transparent and open to citizens, can be controlled (in different forms) by external stakeholders, and are expected to reach higher levels of accountability and responsibility for their actions; in essence, public institutions are expected to engage in a new paradigm of decision-making and community relations. In this relatively new environment, Romanian public sector leaders can use IPA as a support tool to manage risks and create improved and more effective control systems (Bobe[section], 2012, pp. 45-47) that can reduce the liability of an institution regarding negative unforeseen events. But, at the same time, auditors must also become aware that 'they cannot hold their current status if they continue to stay in their comfort zone and supply the auditing committee information and points of view based on the traditional approach of internal auditing' (Fulop and Szekely, 2017, p. 447).

   The dual paradigm transformation mentioned previously, faced by both public sector leaders (who need to reevaluate IPA) and internal auditors (who need to rethink their activity), was also emphasized in the literature, according to which IPA in Romania is:

   'undergoing an ample transformation process, which marks the transition from standardized management and control (generally, through normative acts), to an objective based management and a dual control, based on management self-control (managerial control), as well as on separate assessments made by independent bodies (external public audit and internal public audit). The new type of management entails, ex-ante, undertaking clear and feasible objectives on setting the direction to follow in order to fulfil the needs of a society or of a target group, the allocation of resources (financial, human, material) to fulfil these objectives, decision-making autonomy in resources use, as well as the implementation of a managerial accountability mechanism for the results obtained' (Dascalu, 2016, p. 643).

   In essence, the internal public audit can be seen as a dynamic process that transforms or evolves in a similar way to the society in which it exists, being closely connected with the development stage of a society (see Munteanu, Zuca and Tinta, 2010, p. 267) and community expectations regarding responsibility, accountability, and performance in the public sector.

   Besides internal public audit, Romanian public sector organizations from the local and national levels are also subject to external public audits exercised by the Romanian Courts of Accounts (3), whose activity is currently divided into three levels, referring to control, financial audit and performance audit (see Bostan and Dascalu, 2016, p. 391; Romanian Courts of Accounts, undated). The audit/control activity of the Romanian Courts of Accounts is concerned with the 'correct and effective formation and use of financial resources of the state and public sector, to evaluate the implementation of the approved budget, the strengthening of good financial management, proper execution of administrative activities and informing public authorities and the vast public through objective reports' (Bostan and Dascalu, 2016, p. 391). Furthermore, the Courts of Accounts communicates with the leaders of audited public institutions and presents its findings and potential remedies aimed at recovering damages (made due to the illegal use of public funds) (Bostan, 2011, pp. 38-39), and can provide recommendations and order measures following its auditing missions 'for the elimination of deviations from the law and of irregularities identified by public external auditors' (Bostan and Dascalu, 2016, p. 391).

   An analysis of the annual reports of the Romanian Courts of Accounts made by Terinte and Carausu (2017, p. 664) for the 2009-2017 period showed that the most common errors made by the public organizations audited referred to: (a) the process of drafting the budget and modifying/updating the initial budget during its execution phase (implementation); (b) the accuracy and the reality of the data reflected in financial statements; (c) organizing, implementing and maintaining internal/managerial control systems; (d) how to set, highlight and track the revenues of the consolidated general government budget; (e) the quality of economic and financial management (which actually became the most prevalent errors after 2010); (f) public procurement, and to a lesser extent (g) other violations.

   IPA has a rather short tradition in Romania and implementation in the modern form can be related to the European Union accession process and the specific requirements entailed by this process (Calota and Vanatoru, 2009; McKendrick, 2007; Cetina and Ivan, 2021, p. 977). Furthermore, the perception of Romanian public sector leaders regarding the role and importance of auditors is, more often than not, disconnected from international practices and standards; as an example, even if article 9 of Law no. 672/2002 provides an obligation to organize IPA and that leaders abstain from using auditors for other organizational activities, tasks and needs (except those connected with audit), public sector leaders often realize only formal compliance with the law and, in reality, use these experts for other assignments and activities, especially when considering their professional and education background, which is often economic or legal.

   During the analyzed...