LITHUANIA

LITHUANIA Official translation REPUBLIC OF LITHUANIA LAW ON INTERNAL CONTROL AND INTERNAL AUDIT 10 December 2002 No. IX-1253 Vilnius SECTION ONE GENERAL PROVISIONS Article

1. Purpose of the Law This Law establishes the basic legal framework, objectives and procedures of the functioning of internal control, including financial control, and internal audit in a public legal entity that manages, uses and disposes of state and municipal assets (hereinafter referred to as the public legal entity), as well as the competence of the head of a public legal entity in ensuring the functioning of internal control regulated by this Law. Article
2. Basic Concepts Used in this Law
3. "Centralised internal audit service" is a department, division or other independent structural unit of the public legal entity, set up with the aim of carrying out internal audit in a public legal entity and in all public legal entities subordinate to it and/or falling within its sphere of regulation.
4. "Financial control" is a constituent part of the internal control system of a public legal entity, which is used to ensure the legality of the economic activities of a public legal entity and compliance with the principles of sound financial management: economy, effectiveness, efficiency and transparency.
5. "Follow-up activity" (post-audit activity) is a process of monitoring performed by the internal audit service for the purpose of verifying that the decisions by the head of a public legal entity based on the internal auditor’s findings and recommendations presented in his audit report are being implemented.
6. "Internal audit" is the part of the internal control system of a public legal entity which provides an independent, objective assessment (examination, evaluation and consulting) by the internal auditors with a view to improving the performance of the public legal entity.
7. "Internal auditor" is a public servant or an employee of the internal audit service within the public legal entity who conducts internal audit following the procedure laid down in this Law and other legal acts.
8. "Internal audit service" is a department, division or other independent structural unit of a public legal entity, set up for the purpose of carrying out internal audit.
9. "Internal Control" is the entire set of controls established by the management of a public legal entity in order to provide reasonable assurance that the operations of the public legal entity are legal, economic, efficient, effective and transparent, that the strategic and other plans are implemented, that assets are safeguarded, that financial information and reporting are reliable and exhaustive, that contractual liabilities to third persons are satisfied and that all identified risks are managed. SECTION TWO INTERNAL CONTROL Article
10. Objectives and Functioning of Internal Control
11. The main objective of internal control is to ensure: 1) performance of activities of the public legal entity following the procedure established by laws and regulations on the basis of strategic and other action plans, programmes and procedures; 2) safeguarding of state or municipal assets and liabilities to third persons against fraud, waste, misappropriation, mismanagement or other irregularities; 3) observance by a public legal entity of the principles of sound financial management in the conduct of its activities; 4) provision of adequate and timely information about the financial and other activities of the public legal entity in the manner prescribed by law.
12. Internal control system in a public legal entity shall be set up and maintained having regard to the characteristics of its activities, legal acts and other documents regulating the activities of the public legal entity.
13. The head of a public legal entity shall establish internal control procedures taking into consideration the objective of internal control, existing activity risks, consistency and costs of internal controls, accounting and information system, the state of protection of assets and other criteria of internal control. Article
14. Objectives and Functioning of Financial Control
15. The objective of the financial control, as a part of the system of internal control, is to ensure that the management, use, disposal and protection of state and municipal assets and contractual liabilities of a public legal entity to the third persons comply with the principles of legality and sound financial management.
16. The head of a public legal entity shall be responsible for the establishment and maintenance of an adequate financial control system and for approving the rules for the functioning of the financial control in the public legal entity based on the minimum requirements for financial control approved by the Government or the institution authorised by it.
17. Financial control shall be effected in a public legal entity taking into consideration the rules of financial control approved by its head officer, the specific character of activities of the public legal entity, the accounting and information system and the state of protection of assets. 1) ex-ante financial control – control effected by verifying accuracy and legality of decisions related to the use of state and municipal assets and liabilities to the third persons before they are approved by the head of the public legal entity. The ex-ante control function must be carried out separately from the initiation and implementation of the decisions; 2) ongoing financial control – control which is carried out with the aim of ensuring a proper and timely implementation of decisions made by the public legal entity regarding the use of state and municipal assets and liabilities to the third persons. 3) ex-post financial control – control effected by checking the performed actions after the implementation of decisions of the public legal entity as regards the use of state and municipal assets and liabilities to the third persons. The purpose of this type of control is to check whether the funds and valuables have been used lawfully and purposefully, and whether of not there has been any contravention and abuse of laws or regulations or breaches instructions of the head officers. The ex-post-financial control provides the tools for the elimination of the detected deficiencies and may not be carried out by the public servant or the employee responsible for ex-ante financial control.
18. The public servants or employees assigned by the head of a public legal entity shall be responsible for ex-ante, ongoing and ex-post financial control. Where the accounting of a public legal entity is handled by a company providing accounting services, the head of the public legal entity shall assign a staff member to bear responsibility for the controls indicated in this Article, paragraph 6, as well as for performing the tasks indicated in this Article, paragraphs 7 and
20. The chief accountant (accountant) or the head of the accounting unit of a public legal entity shall be responsible for: 1) adequate control over the keeping of the organisation’s ledgers; 2) control over execution of payments; 3) making ex-ante compliance control of economic and financial transactions with the financial plan, and economic and financial operations for completeness and reliability.
21. The ex-ante financial control shall be effected by the chief accountant (accountant) or the head of the accounting unit of the public legal entity who signs or refuses to sign the relevant documents authorising performance of an economic transaction.
22. The chief accountant (accountant) or the head of the accounting unit of a public legal entity: 1) by signing the documents pertaining to an economic transaction, shall confirm that the economic transaction is legal, that the documents pertaining to the performance of the economic transaction have been drawn up in a proper manner and that the commitment proposals remain within the approved appropriations; 2) shall return the documents pertaining to an economic transaction to the public servant or the employee who prepared the documents, if he determines during the ex-ante financial control that the economic transaction is illegal, that the approved appropriations are not sufficient, or that the documents justifying the economic transaction have been drawn up improperly. Having established such facts, the chief accountant (accountant) shall refuse to sign the documents pertaining to the economic transaction and, stating the reasons for refusal, communicate a written notification thereof to the head of the public legal entity, who may refuse to approve the economic transaction in question or issue a written instruction to proceed. 3) performing ex-ante financial control, shall be entitled to obtain from the heads of administrative units of the public legal entity and from public servants or employees, without being given a separate instruction by the head of the public legal entity, written or verbal explanations about the drawing up of the documents pertaining to the economic transaction and the execution of the economic transaction as well as copies of documents.
23. Seeking to ensure reliable financial management and bookkeeping, cost calculation and financial reporting, all units of a public legal entity shall follow the rules of financial control approved by the public legal entity. SECTION THREE INTERNAL AUDIT Article
24. Objective and Basic Tasks of Internal Audit
25. The objective of internal audit is to contribute to achieving the objectives of a public legal entity, the public legal entities subordinate to it or those falling within its sphere of regulation, through a systematic and comprehensive assessment and evaluation of the risk management and control functionality.
26. The basic tasks of internal audit shall be: 1) to assess whether a public legal entity conducts its activities in compliance with applicable laws and regulations; 2) to advise the head of a public legal entity on the reduction of risk factors; 3) to provide recommendations to the head of a public legal entity on the improvement of the activities and internal control of the public legal entity; 4) to assess strategic and/or other action plans, the implementation of the programmes of a public legal entity as well as the economic, efficient and effective use of state and municipal assets; 5) to assess the administration and use by the public legal entity of funds received from the EU and foreign institutions or funds; 6) to assess the overall functioning of the internal control in a public legal entity at least once in three years.
27. The internal audit service shall draft the audit report to be discussed with the heads of the units of the audited public legal entity, or legal entities subordinate to it or those falling within its sphere of regulation, after which the final internal audit report shall be submitted to the heads of the public legal entity, public legal entities subordinate to it or those falling within its sphere of regulation. Article
28. Establishment of Internal Audit Service
29. Internal audit services shall be set up in the Office of the President of the Republic, Office of the Seimas of the Republic of Lithuania, Office of the Government of the Republic of Lithuania, all ministries, administrations of county governors and municipalities.
30. Internal audit services shall be set up in the public legal entities other than those specified in this Article, paragraph 1, if they have at least 200 approved positions (jobs), including the approved positions (jobs) in the public legal entities subordinate to them or falling within their sphere of regulation.
31. A centralised internal audit service may be set up upon the decision of the head or a collegial management body of a public legal entity, if the founding documents or legal acts regulating the activities of public legal entities stipulate such competence to be exercised by the management of public legal entities. In this case, the internal audit service shall not be set up in the subordinate public legal entities or those falling within the sphere of regulation, despite the number of the positions (jobs) approved in them.
32. In the case where less than 200 positions (jobs) have been approved in the public legal entities specified in this Article, paragraph 2, the internal audit service may be set up in the aforementioned entities upon the decision of the founder (founders) or the Government, or the internal audit shall be carried out by the internal audit service of the founder of the public legal entity. Where the founder (founders) of a public legal entity is not a public legal entity, which has transferred state and municipal assets for its management, use and disposal, the internal audit shall be carried out by the internal audit service of the public legal entity which has transferred the state or municipal assets. Where a public legal entity has been set up by several founders, the internal audit in the public legal entity shall be carried out by the internal audit service appointed by a joint decision of the founders. Article
33. Functional Independence of Internal Audit Service
34. The internal audit service shall be subordinate and accountable directly to the head of the public legal entity who shall ensure functional and organisational independence of the internal auditors. The aforementioned management function may not be delegated to other public servants or employees of the public legal entity.
35. The internal audit service shall be independent in planning and conducting the internal audit and reporting on the internal audit results.
36. After co-ordination with the head of a public legal entity, ad hoc audits may be carried out on the decision of the head of the internal audit service.
37. The activities of the internal audit service shall be governed by the internal audit regulations approved by the head of the public legal entity. The regulations shall be drawn up following standard internal audit service regulations approved by the Government.
38. The head of the public legal entity, dismissing the head of the internal audit service from office or terminating his employment contract, shall inform the Ministry of Finance about the dismissal indicating the reasons in all cases, except when the head of the internal audit service resigns of his own volition or the employment contract is terminated upon his request.
39. The head of the internal audit service or internal auditors may not be involved in the performance of any managerial function in the public legal entity, or the entity subordinate to it or falling within its sphere of regulation. Article
40. Head of the Internal Audit Service
41. A person employed as the head of the internal audit service shall: 1) have a university education in economics, management or law; 2) have no less than 2 years of auditing or internal auditing experience.
42. A representative of the Ministry of Finance shall be invited as a member of the competition commission for the recruitment of applicants to the position of the head in the internal audit service of a public legal entity, or the entities subordinate to it or falling within its sphere of regulation.
43. The main functions of the head of the internal audit service shall be: 1) to be responsible for the activities of the internal audit service and independently organise its work in accordance with the regulations of the internal audit service approved by the head of the public legal entity; 2) to develop the internal audit methodology taking into account the specifics of activities engaged in by the public legal entity and submit it to the head of the public legal entity for approval. The methodology shall be developed following the Standard Internal Audit Methodology approved by the Minister of Finance; 3) to plan the activities of the internal audit service, draw up strategic and annual action plans on the basis of objective risk analysis of the public legal entity, co-ordinate the plans in writing with the head of the public legal entity; 4) to represent the public legal entity in other institutions, agencies, organisations and enterprises in the framework of the service's competence in internal audit matters; 5) to advise the head of a public legal entity, heads of public legal entities subordinate to it or falling within its sphere of regulation on internal control issues; 6) in order to avoid work duplication, to co-ordinate the activities of the internal audit service and exchange information with other persons conducting the external audit and internal audit of the public legal entity; 7) to ensure the monitoring of follow-up audit recommendations; 8) to prepare and submit for approval to the head of the public legal entity a separate job description for each internal auditor of the internal audit service; 9) to provide conditions for the internal auditors of the internal audit service for the development of their professional skills.
44. Following the procedure prescribed by the Minister of Finance, the head of the internal audit service shall prepare information on the activities of the internal audit service and on the internal audit of projects or programmes financed from the EU and foreign institutions or funds. The head of the public legal entity shall submit the aforementioned information to the Ministry of Finance.
45. Each year, by February 1, the head of the internal audit service shall prepare and submit the annual report on the activities of the unit to the Ministry of Finance, the head of the public legal entity and the founder (founders) or the collegial management body upon its request, if such a body is envisaged in the founding documents of the public legal entity. The report shall also contain information about the functioning of the internal control system of the public legal entity.
46. In case the irregularities determined during the internal audit fall within the jurisdiction of the appropriate law enforcement institutions, the head of the internal audit service shall transfer the audit documents to the law enforcement institutions according to their competence. Article
47. Competence of Internal Auditors
48. The internal auditor, fulfilling the functions assigned to him, shall follow the regulations of the internal audit service approved by the head of the public legal entity, the Methodology of Internal Audit, the laws and regulations of the Republic of Lithuania regulating internal audit, the job description, instructions given by the head of the internal audit service.
49. The internal auditor, carrying out the internal audit in the public legal entity or the public legal entity subordinate to it or in the entity falling within its sphere of regulation shall have the right to: 1) have access to all information stored in the public legal entity; 2) obtain from the public legal entity or the public legal entity subordinate to it or the public legal entity falling within its sphere of regulation copies of all documents necessary for conducting internal audit; all accounting documents; information on investment and IT projects under preparation, copies of computer software documents and data and copies of the programmes and information systems; 3) make random visits to all units of the public legal entity and to public legal entities subordinate to it or falling within its sphere of regulation without giving an advance notice; 4) within 5 working days from the date of receipt of the written request by the public legal entity, get written and oral explanations as well as copies of documents from the heads and public servants or employees of the audited units of a public legal entity and the public legal entities subordinate to it or falling within its sphere of regulation; 5) request that the heads of the audited units of the public legal entity and the public legal entities subordinate to it or falling within its sphere of regulation should provide conditions for carrying out internal audit, for the auditor's independent work and for preparation of objective conclusions.
50. Acting in compliance with the Code of Conduct approved by the Government or the institution authorised by it, the internal auditor shall: 1) be objective and impartial, restrain from premature public judgement; 2) ensure security of copies of financial statements, accounting documents, registers, computer software documents data and copies of information systems that are being audited; 3) discuss the draft internal audit report with heads of audited units of the public legal entity and the public legal entities subordinate to it or falling within its sphere of regulation as well as public servants or employees responsible for specific areas; 4) refuse to carry out the internal audit and notify the head of the internal audit service and the head of the public legal entity in the cases where performing the internal audit in the public legal entity or the public legal entity subordinate to it or falling within its sphere of regulation may give rise to a conflict of public and private interests; 5) after carrying out the internal audit, report to the head of the internal audit service; 6) continuously upgrade his knowledge, skills and other professional qualities and abilities.
51. In order to ensure objectivity, the internal auditor shall not be involved in the establishment and implementation of the internal control procedures, including financial control, of the public legal entity or public legal entities subordinate to it or falling within its sphere of regulation and may not participate in the inspection and appraisal of the activities, which he was responsible for less than one year before assuming office of the internal auditor. SECTION FOUR COMPETENCE OF THE HEAD OF A PUBLIC LEGAL ENTITY Article
52. Duties and Competence of the Head of a Public Legal Entity The head of a public legal entity shall: 1) be responsible for the establishment, functioning and development of the effective internal control, including financial control; 2) while establishing the internal control, including financial control, take into account the objectives specified in this Law, Article 3, paragraph 1 and Article 4, paragraph 1; 3) ensure that the internal control in the public legal entity is established ensuring compliance with laws and regulations, strategic plans, procedures, work regulations (internal work arrangements) of the public legal entity, implementation of agreements, reliability of its activities and financial information, efficiency and effectiveness of activities, protection of assets; 4) appoint public servants or employees responsible for effecting the financial control; 5) annually submit, following the procedure established by the Government, reports on the quality and status of the financial control in the public legal entity, including the public legal entities subordinate to it or falling within its sphere of regulation; 6) ensure that deficiencies of internal control, including financial control, and factors conditioning their existence, detected by responsible persons indicated in this Article, paragraph 4, and by the internal auditors, are eliminated; 7) be responsible for the establishment of the internal audit service and its functioning in the public legal entity; 8) determining the number of positions (jobs) in the internal audit service, take into consideration the internal audit need assessment analysis presented by the head of the internal audit service which shall be carried out following the procedure prescribed by the Minister of Finance; 9) ensure that the heads of the audited administrative units of a public legal entity and of the public legal entities subordinate to it or falling within its sphere of regulation within 5 working days familiarise themselves with the draft internal audit report submitted by the internal audit service and give their comments on it; 10) ensure that the heads of the audited units of a public legal entity and of the public legal entities subordinate to it or falling within its sphere of regulation make a decision on the implementation of the internal audit recommendations within 15 calendar days after the receipt of the internal audit report. In case they disagree with the recommendations presented in the internal audit report, they shall give the heads of the public legal entity and the internal audit service a written explanation of the reasons for their disagreement within 10 calendar days from the receipt of the report. The final decision on the implementation of the recommendations shall be taken by the head of the public legal entity; 11) ensure that the adopted decision on the recommendations presented in the internal audit report is implemented within the time limits set in the decision for the implementation of the recommendations. SECTION FIVE FINAL PROVISIONS Article
53. Final Provisions
54. The Ministry of Finance shall: 1) give methodical guidance in financial control and internal audit matters, assess and, as necessary, check whether the activities of the internal audit services comply with the requirements established in this Law and other legal acts, analyse the functioning of internal audit services in public legal entities; 2) prepare and each year by March 1 submit to the Government and the Seimas Committee on the Budget and Finance the annual report on the functioning of the internal audit system in the public legal entities; 3) co-ordinate training, improvement of professional qualifications and performance evaluation of internal auditors of the public legal entities.
55. Public legal entities indicated in this Law, Article 6, paragraph 1, shall submit to the State Control annual internal audit plans within 10 calendar days after their co-ordination with the head of the public legal entity and the annual reports of the internal audit service activities - by February
57. Entry into force and application of the Law: 1) the Law shall enter into force on 1 January 2003, except Article 8, paragraph 1, subparagraph 2, Article 10, subparagraph 8, and Article 11, paragraph 4; 2) Article 8, paragraph 1, subparagraph 2, and Article 10, subparagraph 8, shall enter into force on 1 January 2004; 3) the provisions of Article 6, paragraphs 1, 2 and 4, on the establishment of the internal audit service in municipality administrations, public legal entities subordinate to them or falling within their sphere of regulation, and the provision of Article 10, subparagraph 7, regarding the responsibility of the head of the municipality administration for the establishment of the internal audit service in a public legal entity and for its functioning shall be applicable as of 1 January 2004; 4) the Law shall apply without derogations to all public legal entities, except the Bank of Lithuanian.
58. To recommend to the Government to prepare and submit to the Seimas by 1 July 2003 draft amendments to the laws, which are necessary for the implementation of the provisions referred to in Article 11, paragraph 3, subparagraph 3, and to prepare the implementing legislation. I promulgate this Law passed by the Seimas of the Republic of Lithuania. PRESIDENT OF THE REPUBLIC VALDAS ADAMKUS