Edwards Deming was the first foreigner to receive the ‘Order of the Sacred Treasure’ of Japan. He is said to have laid the foundation for Japanese quality. He taught that in order to improve the resulting quality of any activity, four things must be done in a row. This is called the Deming cycle and it goes as follows:
- Plan
- Do
- Check
- Act.
The main reason for the crisis in the Mongolian government and non-governmental organizations is that one of the above-mentioned four steps has disappeared. The checking system for state-owned companies and NGOs, to which special laws, apply has been deliberately dismantled and minimized to a mere symbolic status by the Mongolian government, and these organizations are now used as an instrument for a group of individuals to steal public wealth and enrich themselves. As a result, the activities of these organizations have deviated from their goals and failed to fulfill their core functions, resulting in the shrinking of free competition and stunted economic development, and now even a change of leaders wouldn’t improve anything.
In order to achieve its goals, any given institution must operate within its own rules, regulations and applicable laws. Internal monitoring within the executive management structure is responsible for ensuring that performance is on track and effective. Meanwhile, the internal audit within the administration that is responsible for overseeing the executive management, performs reviewing and evaluation within a specified period of time. Internal audit of administration oversees the internal monitoring, making sure that independence, risk prevention, financial discipline and compliance with certain laws and regulations are in place. Additionally, external audits and external monitoring institutions do auditing and monitoring as well.
The Government’s Risk
In 2011, the ‘Budget Law’ was re-enacted, and the ‘Government Resolution No. 327’ of 2014 on the implementation of this law was issued by N.Altankhuyag’s government, transferring the financial control within the structure of the State Inspection Agency to the Ministry of Finance. This transferral violated the provisions of the ‘Law on State Inspection’, which states that “all state control shall be unified” and that “financial control shall be independent and impartial”. The government no longer possessed the ability to control the finances of ministries, special funds and SOEs (state owned enterprises). It was no longer possible to control the state and local budget expenditures. This is made evident by many cases: the purchase of 49 percent of Erdenet for personal possession using the state funds; the conspiracy between the Parliament members and the Minister in charge of the Small Medium Enterprise Support Fund that resulted in theft of the funds by parliament members; and the transfer and loss of social insurance assets in the Capital Bank. These are just the detected cases.
According to the ‘Law on State Inspection’, the Specialized Inspection Agency is obliged to assess the implementation of the legislation in all areas and submit proposals for its sophistication to the Government once a year. Recently, Prime Minister U.Khurelsukh raised this issue during a meeting with officials of the Specialized Inspection Agency and instructed the Deputy Prime Minister to “transfer financial control and inspection back to the Unified Specialized Inspection System”. The government’s internal audit should be the responsibility of the Cabinet Secretariat, not the Ministry of Finance, and the Ministry of Finance should exercise their internal monitoring.
The Accounting Sector’s Risk
Money is an expression of material value. The world cannot function properly without accurately recording every movement of this value. In addition to proper registration, it needs to be monitored and verified by a third party, as well as being regularly reviewed for compliance with internationally recognized practices, in addition to the laws and regulations of the country, and having its shortcomings corrected.
Mongolia is a democracy with a market economy. Today, state and private enterprises operate in the economy. The government is responsible for ensuring that businesses operate in a manner that is environmentally friendly and law-abiding. Citizens and organizations come together to form alliances to protect their interests. These are called non-governmental organizations (NGOs). In our country, the involvement of government officials, members of parliament, and ministers in the leadership of NGOs has led to a major conflict of interest. A study indicates that the members of the previous parliament were selected by various foundations, local councils, wrestling federations, and professional associations, and led a total of 300 NGOs, thus being directly or indirectly involved in receiving donations and money laundering crimes.
There is a non-governmental organization called The Mongolian Institute of Certified Public Accountants. This body, which is supposed to be independent of the state, was ordered to carry out additional government work according to the amendments to the ‘Accounting Law’ earlier this year. Also, licenses now required to provide professional accounting consulting services. Those licenses are to be granted and revoked only by this institution. This type of license does not exist in the ‘License Law’. In 2015, through revision of the law, the institute was tasked with licensing, revoking and training certified public accountants, approving the ‘Code of Conduct for Auditors’, overseeing implementation, translating international standards and amendments to accounting and auditing, developing national standards, and providing handbooks and recommendations. This special treatment given to one NGO provided the basis for considering it as a restriction on equal opportunities and free competition in the sector. Some government responsibilities can be released and transferred to NGOs, in which case the organization will be subject to higher ethical standards. The board of directors and the executive management of a contracted organization that performs government duties may not include a senior government official, but the monitoring board, in particular an internal audit could. In addition, NGOs with specific government responsibilities must comply with the ‘Transparent Finances Law’. However, the institute does not meet these two requirements. The vice president and board members of the institute are usually heads and officials of departments and divisions of the Ministry of Finance. And the list goes on to even include some leading auditors of the National Audit Office. The organization’s financial statements are not available on the website.
In addition to the Mongolian Institute of Certified Public Accountants, other similar institutions authorized by special laws in the fields of accounting, auditing, taxation, and asset valuation, such as the Professional Valuation Agency and the Association of Certified Tax Advisors, are obliged to meet these requirements, to have operational transparency and to keep their finances transparent.
Risks of Internal Audit and Monitoring
All government and non-government organizations, all public companies, and well-governed businesses have a clear structure of internal monitoring. Although the internal audit and the internal auditor are legal entities, they have the responsibility of reporting to the board. Monitoring environment is not created due to the lack of support and cooperation from the executive management and the fact that the goals and responsibilities of the internal audit activity are not understood by its employees. There are many risks and no prevention is possible in cases where the internal monitoring environment is weak. Internal audit should be the eyes and ears of shareholders.
Mongolia needs to radically reform internal audit and monitoring of state-owned companies. The fact that the heads of departments and divisions of ministries now sit in their boards and receive special salaries and benefits has attracted the attention of ordinary government officials and citizens. It is time to make the majority of all state-owned companies publicly owned and improve property monitoring. In addition, the internal crisis would not have necessarily escalated to a change in the leadership of the MNCCI (Mongolian National Chamber of Commerce and Industry) and the MNB (Mongolian National Broadcaster), which are governed by special laws, if they had improved their internal oversight and properly performed that. Mongolia needs to follow the recommendations of the The International Organization of Supreme Audit Institutions (INTOSAI) that it joined as a member in 1996, on how to implement internal monitoring.
2020.11.18
Trans. by Riya.T and Munkh-Erdene.D