Technical Articles



International Journal of Government Auditing – January 2006

The Development of the National Audit Office of Mongolia: A Case Study in International Cooperation

As part of Mongolia’s transformation from a socialist dictatorship to a parliamentary democracy, the Law on State Control of March 1995 established the State Audit and Inspection Committee (SAIC) as the SAI as well as financial control organizations for the capital city of Ulaanbaatar and the 21 provinces (called Aimags). The following year, the SAIC became a member of INTOSAI and committed itself to the principles expressed in the Lima Declaration of Guidelines on Auditing Precepts: independence guaranteed under constitutional law, reporting to Parliament and the general public, comprehensive authority to carry out investigations, qualified auditors, and competent methods.

To establish modern financial control in accordance with the Lima principles, the Mongolian government and the SAIC sought the help of a consultant. On March 30, 1998, the governments of Mongolia and Germany signed an agreement of cooperation. The task of carrying out this consultancy project was assigned to the German Society for Technical Cooperation, and German state audit courts handled the implementation—the Hessian audit court from 1998 to 2001 and the Berlin audit court from 2001 to 2004.

Setting Up the Project

Work on the project began in April 1998 with a review of the status of financial control in Mongolia, a definition of the modules required for the consultancy work, and the organization of a project office.

Review of the Status of Mongolian Financial Control

The review of financial control in Mongolia revealed that the new audit authority was still characterized by many aspects of the old system. Deficiencies were noted in the following areas:

  • independence guaranteed under constitutional law;
  • a clearly defined division of tasks between external and internal auditing;
  • modern auditing methods;

  • the professional competence and number of employees;
  • a clearly defined operational and organizational structure, particularly the structural division of authority according to expertise and mandatory examination regulations; and
  • technical equipment, in particular information technology (IT).

In addition, the transformation of the basic structure of the Mongolian administrative system was incomplete, and additional changes were expected in both the administration and the SAI. At the end of 1997—and as a result of consultation with the Asian Development Bank—the draft Public Sector Management and Finance Act (PSMFA) was introduced into the parliamentary advisory process. This bill proposed a reorganization of the Mongolian administration based on the principles of new public management (such as accrual accounting and contract management) and changes to the activities of the SAIC. The bill proposed that a Mongolian audit office be responsible for the annual audit of the financial statements of government agencies. At the beginning of the project, Mongolian officials asked the German consultants to take into account the changes and new responsibilities for the SAIC that would result from the eventual passage of this bill (the law itself was not finally passed until June 2002).

Project Objectives

The project’s primary strategic objective was to improve the auditing of the national budget and property by the state audit and inspection organizations. To accomplish this objective, the following project tasks were to be completed:

  • the presentation of the content and methods of modern financial control in the areas of truth and fairness, cost-effectiveness, and certification;
  • consultation on creating a legal basis for unified and independent financial control;
  • consultation on establishing an effective operational and organizational structure; and
  • a survey of the IT needed for auditing and training (knowledge management).
Mongolia’s goal was to set up a financial control authority in accordance with
INTOSAI standards, but the SAIC was far from this stage at the beginning of the project.

The Project Office

A project office was set up to be a point of contact between the Mongolian and
German associates and to ensure coordination in the areas of content and culture. The office manager was a German Mongolia expert who had already provided invaluable assistance on other projects in country; the other employees were an SAIC official and a translator. The office proved to be of great value throughout the project, primarily because it effectively coordinated the ideas of the German consultants and their Mongolian associates and promoted trust and cooperation between the leadership of both parties.

First Project Phase: Knowledge Transfer

This phase of the project consisted mainly of imparting the basic knowledge, capabilities, and methods needed to carry out modern financial control. Training courses, each lasting 1 to 2 weeks, were offered in the following areas:

  • procurement
  • prevention of corruption
  • cost-effectiveness and the organizational efficiency of state actions
  • grants and subsidies to bodies outside the administration
  • audits of state companies
  • audits of revenue administration (customs, taxes, and fees).

The knowledge transfer also covered reporting and advisory activities related to Parliament and the government as well as reporting to the public. By the end of the first project phase, auditing regulations had been transformed and passed by the SAIC.

The Mongolian and German associates agreed that the project should encompass financial control activities of the new public management system described in the proposed PSMFA legislation. It was therefore necessary to consider the basic principles of the new system and their effect on financial control activities. In addition, SAIC employees needed to be trained to carry out the attestations required in the bill.

Therefore, in 1999 and 2000, seminars were held on double-entry bookkeeping and reporting according to International Accounting Standards (IAS). Since Germany did not have IAS experience in a state context, the accounting firm KPMG was commissioned to hold two seminars on reporting.

To learn more about reforming the legal basis of Mongolian financial control and setting up the Mongolian financial control organization, delegations visited the German cities of Bonn in 1999 and Berlin in 2001. The delegations primarily included executives from the Mongolian audit offices and members of the Mongolian Parliament (called the State Great Hural). During the course of these visits, various discussions were held with members of German state and federal parliaments.

In addition, many consultations and two primarily political events were held regarding the principles of the Lima Declaration. The first took place in September 1998 at the beginning of the consultation process with the former president of the German Federal Court of Audit, and was directed mainly to executives of Mongolian authorities and parliamentarians. The Management Academy of Mongolia organized a second event in 1999, chiefly to inform its own professors on the tasks of financial control in a democratic system. Since the Academy has an important function in training executive staff of the Mongolian administration, it was an important cooperation partner.

The first phase ended with a project progress check, which confirmed that although the project was proceeding well, considerable deficits remained. To consolidate achievements and successfully conclude the project, a second phase was recommended.

Second Project Phase: Consolidation of Gains

The second project phase began in autumn 2002 and ended in autumn 2004. This phase was designed to consolidate gains, build on the knowledge already transferred, and work on the further implementation of the project objectives.
The focus of the knowledge transfer changed from transferring basic knowledge to strengthening its practical application. During work placements of several weeks duration in Germany, Mongolian auditors participated in selected audits in the following areas: audits of public companies, checking on cost-effectiveness, auditing organizations, IT tests, procurement, and prevention of corruption. The German-Mongolian auditing teams communicated with each other over a long period of time and developed a relationship of trust, which was a good basis for knowledge transfer.

In this way, the gap between transferring theoretical knowledge and its practical implementation began to narrow. In January 2003, the Law of Mongolia on State Audit (LMSA) was enacted. It provided the legal basis for the Mongolian National Audit Office (MNAO) as well as the audit offices of the Aimags and the capital city. Essentially, this law regularized the external government auditing authority’s responsibility for auditing state revenue, expenditures, and corporate activities;

  • the institutional independence of the MNAO according to the Westminster model
  • the specifications of the audit mandate (to include certification and cost-effectiveness)
  • reporting to Parliament and the general public
  • the recruitment and continuing professional education of auditors

The LMSA thus adopted the principles of the Lima Declaration and was an important step forward. However, to date, the existence and main tasks of government auditing have not yet been incorporated into Mongolia’s Constitution. An additional deficiency in Mongolia’s current financial control structure is the considerable overlapping of authority with the old mandatory financial control that is now incorporated into the State Professional Control Agency in the executive branch of the Mongolian government.

At the beginning of 2002, changes were made in the organizational structure of the former SAIC. After the MNAO was established in 2003, it was divided into four departments: two concerned with content, one with basic principles, and another primarily responsible for administration. Thus, the MNAO has effectively divided work according to auditing activities as well as the specialization and qualifications of staff.

During the second project phase, the number of central office employees rose by 50 percent. This increase in human resources was necessary after the Public Sector Management and Finance Law, enacted in June 2002, transferred certification audits to the MNAO. Due to the large number of agencies involved in these audits, the MNAO can also commission accounting firms to carry them out.

Finally, the second project phase included the introduction of more IT equipment and an intranet and the establishment of a systematic training program to use these technical capabilities. The increase in IT resources was based on an inventory and needs analysis as well as the requirements of the audit office. The establishment of a central database and intranet made it possible to provide up-to-date work materials, exchange information on current audits, and organize an IT-supported work flow among the employees involved in the audits. Use of the intranet has remained limited mainly to the MNAO, since the necessary technical facilities are not yet available at the Aimag audit offices.

Project Evaluation and Final Comments

Much was achieved during the 7 years of the consultancy project. The Mongolian financial control authorities, both the MNAO and the regional and capital city audit offices, have changed. External financial control has undergone a remarkable transformation—from financial inspections responsible primarily for tests of truth and fairness to tests of efficiency, effectiveness, and economy according to international standards based on the Lima Declaration.

At the end of the second project phase in October 2004, an evaluation compared the original project objectives with the actual results. Many tasks that the Mongolian and German associates had undertaken had been implemented, although much was still incomplete. The MNAO is dealing with these issues during a 2-year post-processing phase to bring the project to a successful conclusion.

The success of such a consulting project within a relatively short period should not be taken for granted. Considering the frequent lack of willingness to learn new systems and the cultural dissonances that often occur in international cooperation projects, the original ambitious objectives might well have been curtailed considerably.

However, this did not occur. The commitment of many employees of the Mongolian and German auditing organizations, the cooperation between the executives on both sides, and the mediation of the exchange processes by the project office were keys the project’s success. If the first phase was defined by a general knowledge transfer, second phase served above all to consolidate and practically apply the knowledge implement structural and legislative measures.
While the process had not been planned this way initially, it later became obvious that it could scarcely have been organized more sensibly. The project was based on the cooperation of two financial control authorities in countries at differing stages of economic development. The goal was not to introduce German financial control in Mongolia. Rather, it was to offer Mongolian associates opportunity to learn from German governance experiences. The Mongolian associates were tasked with constructing a system for financial control that suited their needs: both meet international standards and account for requirements specific to Mongolia. This was the case, and the result was optimal.

For additional information, contact the authors:
E-mail: batbayarb@mnao.pmis.gov.mn and JHarms@rhvb.verwalt-berlin.de
See also the April and October 2003 issues of the Journal for more information about the recent developments in the Mongolian National Audit Office.