Article 9.2. and 9.3.
Management of Public Finances

Article provisions:
9.2. Each State Party shall, in accordance with the fundamental principles of its legal system, take appropriate measures to promote transparency and accountability in the management of public finances. Such measures shall encompass, inter alia:
(a) Procedures for the adoption of the national budget;
(b) Timely reporting on revenue and expenditure;
(c) A system of accounting and auditing standards and related oversight;
(d) Effective and efficient systems of risk management and internal control; and
(e) Where appropriate, corrective action in the case of failure to comply with the requirements established in this paragraph.
9.3. Each State Party shall take such civil and administrative measures as may be necessary, in accordance with the fundamental principles of its domestic law, to preserve the integrity of accounting books, records, financial statements or other documents related to public expenditure and revenue and to prevent the falsification of such documents.

State evaluation
Public evaluation
National legislation of Ukraine is consistent with parts two and three of Article 9 of the UNCAC. The established mechanism for adopting the state budget is clear and transparent, with the ability to monitor its execution. At the same time, the possibility of changing between the first and second reading and making changes during the budget period negatively affects the stability of the budget system in Ukraine.
The public can participate in the process of forming the budget and control its execution. Authorized state bodies, in their turn, also quite qualitatively control the execution of the budget, but it is necessary to strengthen their functionality, and they need to focus on the effectiveness of the use of budget funds. Protection of budget information is carried out at a high level.

In short:

State of implementation

Legal framework
1.1. Legal framework for the adoption of the National Budget in Ukraine
Budget relations in the country are regulated by the Budget Code of Ukraine (hereinafter referred to as the BCU), which has been in force since 2011. In particular, the BCU establishes regulations on the budget system of Ukraine, national and local budgets, their implementation, as well as inter-budget transfers and liability for violations of budget legislation.
The formation of the budget for the next year begins in March of the current year. The Ministry of Finance of Ukraine (hereinafter referred to as the Ministry of Finance) is responsible for developing the draft law on the national budget of Ukraine. The draft law must be approved by the Cabinet of Ministers of Ukraine before it is considered in the Parliament. It should be based on the provisions of the Budget Declaration. According to the BCU, this is a document of medium-term (for 3 years) budget planning, which defines the principles of budget policy and indicators of the national budget for the medium-term period and is the basis for drawing up the draft national budget of Ukraine and forecasts of local budgets.
The draft budget, in particular, is based on budget requests from the main managers of budget funds. These requests, in addition to offers (amount of funds), must contain a justification for the need to receive these funds to perform the functions of these managers.
The adoption of the national budget is conducted by the Parliament according to a special procedure established in the Rules of Procedure of the Verkhovna Rada.
In particular, the following is attached to draft national budget:
1) an explanatory note containing justification for the provisions of the submitted draft law;
2) forecast indicators of the consolidated budget of Ukraine (including the assessment of the national budget of Ukraine and local budgets) in accordance with the budget classification;
3) a list of tax and fee benefits with the calculation of budget revenue losses from their provision.
The budget also contains secret expenditures that are included in the draft national budget without detailing. Reports on secret expenditures are considered at a closed meeting of the Verkhovna Rada. Only the total cost figure is available to the public, and any requests for its detailing are rejected with reference to state secrets, and therefore it is impossible for the public to control these funds.
After the adoption of the national budget, the main managers of budget funds must adopt passports of budget programs for the current period. This is a document that defines the directions of using funds, responsible performers, performance indicators, etc. Main managers must publish budget programs within three days from the date of their approval.
According to the BCU, for their non-disclosure, as well as for other violations of budget legislation, appropriate measures of influence are applied to participants of the budget process (Articles 116 and 117).
1.2. Reporting and accounting of transactions with the National Budget
According to the BCU, reporting on the implementation of the National Budget (estimates of budgetary institutions) includes financial and budget reporting. Reporting is divided into operational, monthly, quarterly, and annual.
As for accounting, in Ukraine, the legal basis for regulating, organizing, maintaining and preparing financial statements is defined by the Law of Ukraine “On Accounting and Financial Reporting in Ukraine.” Among other things, there are requirements for primary and consolidated accounting documents. Accounting of all operations related to the implementation of the national budget is conducted by bodies of the State Treasury Service of Ukraine (hereinafter referred to as the STSU). The powers of the STSU include, in particular, ensuring the functioning of the multi-level information and computing and internal payment systems of the STSU and taking measures to protect information.
1.3. Internal and external control of the national budget
In Ukraine, there is internal and external control of the national budget. Budget managers independently conduct internal control and audit in accordance with approved bylaws. A separate division is created in the state authority to perform internal audit.
External control of the national budget is conducted by:
1. the Accounting Chamber, which conducts financial and performance audits.
2. the State Audit Service, which controls the targeted, efficient use and preservation of national financial resources, non-current and other assets.
Implementation in practice

2.1. Preparation and adoption of the National Budget in Ukraine
1) Preparation of the national budget for consideration in the Parliament.
As noted above, the Ministry of Finance is preparing a draft law on the national budget for consideration by the Cabinet of Ministers of Ukraine. In the future, the budget is presented directly to the Parliament by the Minister of Finance.
Nonetheless, one of the key parts of the budget is budget requests. The Ministry of Finance is responsible for the final version of all budget requests, but managers play an important role because they understand their needs. Experts point out that the higher the level of state authorities, the better they approach the preparation of budget requests. To ensure the stability and predictability of budget expenditures, requests should be based on the provisions of the Budget Declaration.
On May 31, 2021, the Budget Declaration for 2022-2024 was approved for the first time, which should ensure transparency of fiscal policy and predictability of financing for various sectors in compliance with the planned budget deficit indicators in the medium term.
This is one of the first steps to ensure stability and predictability of budgets at all levels. The presence of three-year planning will allow establishing permanent financing for individual projects that last more than one year. According to experts, this tool should be developed to ensure the applied nature of its operation and application. Among the risks, experts call the lack of protective mechanisms against introducing changes to such a declaration, and as a result, non-compliance with the indicators laid down in it.
2) Consideration and adoption of the national budget in the Parliament
The budget process is public and allows the public to participate at the stage of consideration of the draft law in the Parliament. In particular, the practice of participation of specialized experts and associations in meetings of the Budget Committee is quite common. They submit their proposals and comments to the draft budget through MPs or the Cabinet of Ministers of Ukraine. Taking public positions into consideration is a fairly common practice.
All accompanying documents to the draft national budget are also open and published on the Parliament's website. In addition, they are submitted for consideration by MPs together with the draft law on the national budget. According to experts, the accompanying documents to the draft national budget are drawn up at the proper level. They contain all detailed information about the submitted draft law, in particular macroeconomic indicators, forecast analysis of budget revenues and expenditures, inter-budget transfers, etc.
The national budget must be adopted by November 20. In this context, it is worth noting that quite often the mentioned deadline is violated. For example, the budget for 2021 was adopted on December 15, 2020; for 2020 — on November 14, 2019; for 2019 — on November 23, 2018; for 2018 — on December 21, 2017; and for 2017 — on December 21, 2016. One of the reasons for the violation of deadlines is the political discussions between parliamentary factions. To find the necessary votes, the budget may change between 1 and 2 readings, and new expenses or even corruption schemes may arise in it, which in the future lead to budget losses. So, in 2017, simultaneously with the budget for 2018, changes were adopted that legalized the scheme of “intermediary” platforms for property valuation, which caused serious losses to the budget and citizens of Ukraine (tens of millions of euros annually).
Another problem is the chaotic and excessive introduction of changes and amendments to the national budget during its consideration in the Parliament. For example, 2,176 amendments and proposals were submitted to the budget for 2020. Their analysis showed that MPs mostly propose an increase in estimated expenditures, without specifying the income at the expense of which they will be realized. In fact, many changes are submitted by MPs, for whom budget relations are not a key area of their activity.
It is also noteworthy that the top 10 MPs in terms of the number of amendments (each submitted at least 200) are not members of the Budget Committee of the Parliament. The most popular proposal is to increase spending on regional development, social benefits, or raising social standards. Such proposals, without proper justification, make the budget process more sensitive to corruption risks. For example, when adopting the budget for 2021, between the 1st and 2nd readings, a subvention for socio-economic development was returned, which amounted to EUR 187.5 million. This subvention is intended for the development of individual regions, and MPs representing them in the Parliament are interested in receiving as much money as possible for the region. According to journalists, the subvention is an indirect attempt to bribe MPs in order to get the necessary votes in the Parliament in the future because the further distribution of these subventions after the regions receive them is opaque.
To reduce the number of unjustified amendments to the budget, a special procedure for submitting them was previously adopted. In particular, it was proposed to provide mandatory justification for all proposed expenses. However, according to experts, this safeguard did not work in practice.
Consequently, the procedure for considering the national budget in the Parliament negatively affects the budget policy of the country, reducing the predictability and the planned nature of the budget process. However, recently, in the conditions of the majority of one faction in the Parliament, the influence of the Verkhovna Rada has not been so great (the text of the draft changes less during consideration). In the absence of a permanent coalition, the negative impact was greater.
3) Making changes to the budget; passports of budget programs.
Every year, the Parliament changes the national budget after its adoption. For example, in 2019 it was changed 4 times, and in 2020 — already 17 times. This practice may indicate the adoption of a document that needs to be finalized in the future.
In addition, the Cabinet of Ministers of Ukraine can also distribute funds within existing programs. Such a mechanism is necessary for rapid response to spontaneous economic changes. However, it can also be used for unjustified distribution of funds. For example, during the global COVID-19 pandemic, the Cabinet of Ministers of Ukraine redistributed UAH 2.7 billion from the Anti-COVID-19 Fund to the needs of the Ministry of Internal Affairs in 2021.
Let us remind you that after the adoption of the budget, specific budget programs are approved, which contain the distribution of funds for the needs of each individual body. According to the Ministry of Finance, as of August 2021, out of 538 passports of budget programs that require approval, 26 passports of budget programs have not been submitted to the Ministry of Finance. As of September 2021, the STSU did not receive 29 passports of budget programs.
This practice negatively affects the use of funds in the current year in areas where budget programs have not been approved. The problem is that funds cannot be allocated at all without the approval of budget programs. This leads to incomplete implementation of the objectives declared in the budget.
2.2. Reporting of budget managers and information protection by the STSU
As noted above, budget managers submit reports on the use of funds in the current period. The total number of managers and recipients of budget funds at the end of 2020 amounted to 71,400 institutions and organizations, including 12,300 institutions and organizations of the national budget, and 59,100 institutions and organizations of local budgets. Reports are submitted in electronic form through the E-Reporting system specially created by the STSU. This tool is available exclusively for institutions submitting budget reports and supervisory bodies.
The submission and storage of budget reporting requires appropriate security measures. The STSU created a comprehensive information security system (hereinafter referred to as the CISS). The STSU believes that with the help of CISS, the maximum effectiveness of protection is achieved due to the simultaneous targeted use of all the necessary resources, methods, and tools that exclude unauthorized access to information. In addition, the STSU uses antivirus software tools that have passed national expertise and received a positive expert opinion from the State Service of Special Communications and Information Protection of Ukraine.
2.3. Internal control and audit
Internal control and audit must be conducted in each body. What activities will be conducted as part of the audit, and what the activity of the audit divisions will be aimed at, is determined by each body independently. For example, the Ministry of Finance, the Ministry of Economic Development, Trade and Agriculture, and the Accounting Chamber post information about internal audits on their website.
The results of internal audits are seldom published and are not known to the public. The Ministry of Finance has information on the effectiveness of their implementation. Responding to our request, the Ministry of Finance indicated that it conducted an analysis of the state of functioning of internal control and internal audit in government agencies in 2020. Based on the results of this analysis, the Ministry of Finance indicated that the internal control system is mainly built around compliance with regulatory legal acts. Thus, control measures are focused not on the effectiveness of the implementation of key processes, but on the use of budget funds, management of state-owned objects, and other resources.
In 2020, internal audit divisions completed almost 1,700 audits. The total number of shortcomings and problems identified by them was 48,200. Based on the results of audit studies, 14,100 recommendations were provided, of which 9,100 recommendations were fully or partially implemented.
In addition, the Ministry of Finance points out the following most common shortcomings in the implementation of internal audit activity in individual government agencies:
  • failure to ensure organizational and/or functional independence of internal audit structural divisions, assigning them functions that are not related to the implementation of internal audit;
  • high number of vacancies in internal audit divisions and/or cases of reduction in the number of full-time employees of such divisions;
  • insufficient level of application of a risk-oriented approach in planning internal audit activity;
  • the focus of audit studies is mainly on compliance and financial and economic aspects of the activity;
  • insufficient implementation in practice of measures to ensure and improve the quality of internal audit (conducting internal quality assessments).
2.4. External control (including public control)
External control over the national budget is conducted by the Accounting Chamber and the State Audit Service.
The Accounting Chamber forms conclusions on the results of an analysis of how the Law on the National Budget for the current year for different periods is implemented (from a quarter to a year). It should be noted that the conclusions of the Accounting Chamber are quite informative. They contain a large amount of statistical data, reflect problems in the implementation of the national budget, cases of inefficient use of estimates, and so on. For example, the conclusion on the implementation of the budget for 2020 indicates an opaque distribution and improper use of funds of the Anti-COVID-19 Fund in the amount of EUR 2.5 billion euros and non-fulfillment of the plan by a total of 15.2%.
Moreover, the Accounting Chamber conducts an audit of individual budget programs according to its Plan. Scheduled audits cover many areas of national activity. In 2020, the volume of funds checked during control measures amounted to UAH 1.185 trillion, 285 objects were checked, and 48 reports were approved.
According to the results of the state external financial control's (audit’s) measures, 63.9% of the recommendations provided by the Accounting Chamber in 2019 and 2020 were fully or partially implemented by the end of 2020. At the same time, we note the need to improve the ability of the Accounting Chamber to conduct audits, through a clear procedure for selecting the objects of inspections, approving the methodology for conducting audits, and ensuring liability based on the results of inspections. All this is possible by increasing the institutional capacity of the Accounting Chamber as an independent auditor.
Experts also point out the importance of the Accounting Chamber in monitoring the national budget, emphasizing the need to improve the mechanisms for communicating the results of its activity. As many interested parties as possible should know about the consequences of misuse of funds for the country.
The State Audit Service performs a state financial audit of the use of budget funds. In its report for 2020, the service pointed to the results of state financial control, in particular:
207 state financial audits were conducted;
violations were identified that led to losses of financial and material resources worth about EUR 5 billion.
The direct economic effect of the service's activity is UAH 3.74 billion.
According to the experts we interviewed, the Audit Service's activity should be improved by focusing not only on performance (or formal) indicators of budget implementation, but also on indicators that will show the effectiveness of using the funds received in the current budget period. In general, the capacity of the State Audit Service to conduct state financial control should be significantly strengthened.
The public also monitors the use of budget funds. Access to information about budget funds is provided by the unified web portal for using public funds (spending.gov.ua). It allows getting all the necessary information about the use of public funds by all budget managers. The portal provides transactions, reports, information about contracts and their implementation, etc.
Data on the portal is updated quite often, according to experts, this allows to quickly monitor the use of budget funds. At the same time, in their opinion, there are certain shortcomings. In particular, the portal’s interface is inconvenient, which makes it difficult to work with data, so it needs technical improvements. Another problem is the format of data posted by the main managers of budget funds. According to experts, the data format “PDF,” “JPEG” does not allow to quickly process the information received. There is a need to publish data in a machine-readable format.
Another control mechanism is the creation of the budget for citizens in 2018, at the initiative of the Ministry of Finance of Ukraine, — this is an official state portal with open data on public finances. The portal provides a glossary of budget terms, information about the budget process and its participants, and the necessary indicators. The web portal allows uploading public data in the machine-readable JSON format, which makes their use easy.

Practices

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Commencement of the budget declaration for budget planning.
Openness of the process of submitting amendments and proposals to the budget.
Information on budget accounting and external control of the state budget is public.
Web portal for the spending of public funds is in place.
Electronic reporting system is in place, and the appropriate level of protection of budget information is ensured.
Between the first and second parliamentary readings, MPs are submitting a great deal of amendments to the draft budget, without giving proper reasoning; and there is possibility for significant changes in budget indicators to happen in the Verkhovna Rada.
Some information about the budget is filed in a format that does not allow its prompt processing.
Lack of focus of internal and external oversight bodies on the efficiency of budget funds spending.
Actual research and materials
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State evaluation will be published soon

2In short:

2State of implementation

Legal framework

Legal framework after State evaluation
Implementation in practice

Implementation in practice after State evaluation

2Practices

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