State-Owned Enterprises Reform Activity in Ukraine, Task Order 1

The analysis revealed several strengths, but also identified 16 key observations of areas where the GOU's IA function and systems can be improved. The majority of these 16 key observations can be attributed to four primary root causes. These include the absence of well-defined legislative guidelines, regulations, and standards; the absence of a standardized approach to IA; constraints on professional resources encompassing personnel, tools, and training; and constricted budgetary support. Considering these critical factors, SOERA provides a summary below of the findings and the underlying common causes. The absence of legislative guidelines and standards within the GOU's IA sector was a significant finding. Notably, SOERA observed an absence of legislative mandate that requires internal audit units to properly execute follow-up procedures for overseeing the remediation efforts associated with findings and recommendations originating from prior audits. The absence of regulatory requirements mandating proper follow-up procedures poses multiple challenges, including non-implementation of recommendations, persistent weaknesses and deficiencies in controls, and an increased burden on the capacity of public institutions to identify and mitigate risk effectively. The analysis also identified several key areas for enhancement in the GOU IA sector, primarily stemming from the absence of a standardized approach for implementing the IA function throughout the government. For example, SOERA observed an absence of a standardized system for managing efficiency and effectiveness in their internal audit activities. The absence of a standardized system can lead to several disadvantages, including inconsistency in practices, an absence of clearly defined reporting requirements, ambiguity surrounding roles and responsibilities in the audit process, and more. Furthermore, the analysis indicated that there are a limited number of skilled professionals with proper internal audit expertise essential for the integration of modern audit tools and resources to undertake continuous improvement within the GOU's IA audit sector. Notably, there is a deficiency in skilled Information Technology (IT) audit specialists proficient in IT audit methodologies. The absence of IT audits and the accompanying IT audit skillset within the GOU IA sector gives rise to several challenges, including the limited budgetary support discussed next. The analysis underscores the prevailing issues of inadequate financial support for IA institutions. The insufficient funding allocation to IA functions poses significant challenges for the GOU to perform IA efforts. This financial constraint often results in lower levels of maturity within IA institutions, a heightened rate of staff attrition, and restricted IA coverage across GOU programs and expenditures. These limitations substantially elevate the risk of encountering fraudulent activities, wasteful practices, abuse, and corruption in the management and allocation of public resources. To address these limitations, SOERA will continue to build on this work in Year 4, including conducting an additional workshop to collaborate with relevant stakeholders for generating feedback on research findings, along with drafting a methodology with suggested approaches to support the areas for improvement identified in this report. With both GOU and Central Harmonization Units (CHU) feedback, SOERA will produce additional in-depth recommendations for USAID regarding how GOU can enhance its IA laws, policies, and procedures, coupled with a roadmap of actionable steps for each recommendation. These recommendations and actionable steps will ultimately assist the GOU in strengthening its IA capacity, ensuring long-term oversight and accountability of public funds. The report highlights observations from a comprehensive analysis on the current state of IA capacity in the following GOU ministries and institutions: Ministry of Finance (MoF), Ministry of Education and Science (MoES), National Health Service of Ukraine (NHSU), Ministry of Social Policy (MoSP), State Treasury Service of Ukraine (STU), and Pension Fund of Ukraine (PFU). The analysis aims to support the GOU in enhancing its capacity to implement processes and controls in several areas of transparency and accountability, including strengthened IA capacity, improved ability of executive leadership to confirm the status of the Internal Control environment, and establishment of proper processes and procedures to assess the extent of improper payments for pilot budget programs.