European Central Bank: The Audit of the HNB’s Work Must Be Apolitical, Independent, and Professional

The European Central Bank (ECB) believes that the audit of the Croatian National Bank (HNB) should be conducted on an apolitical, independent, and fully professional basis, as stated in the ECB’s Opinion on the proposed amendments to the Law on the HNB, which was published by the HNB on its website on Wednesday.

The ECB received a request from the Croatian Ministry of Finance on October 4 for an opinion on the Proposal for the Law on Amendments to the Law on the Croatian National Bank. The ECB assesses that the proposed law is more precise than the previous legislative initiative and aims to respond to certain issues raised in the earlier ECB opinion.

The amendments to the Law on the Croatian National Bank were discussed today in the Croatian Parliament. It is proposed that the State Audit Office oversee the operations of the central bank and that the regular report of the HNB be voted on in Parliament, instead of merely being acknowledged as has been the case so far.

Respecting the Independence of the HNB

The ECB emphasizes that the exercise of powers and the performance of tasks and duties assigned to central banks must not be subject to external instructions or influence from the executive authority, and if the operations of the national central bank (NCB) are subject to control by the state audit office or a similar body responsible for overseeing the use of public finances, the scope of control should be clearly defined by legal framework.

Furthermore, the ECB believes that this control should not affect the examination of all business records and accounts of the NCB by an independent external auditor and should be in accordance with the principle of institutional independence.

– The state audit must be conducted on an apolitical, independent, and fully professional basis, as stated in the ECB’s opinion. It adds that by establishing rules for the scope of the HNB audit, the proposed law aims to take into account the principle of central bank independence and related safeguards, but in this regard, the proposed law is unclear, contradictory, and does not meet the conditions and safeguards concerning a number of important aspects.

Firstly, as explained, the scope of the HNB’s operations control by the State Audit Office is not clearly defined by legal framework. The proposed law particularly excludes activities related to achieving the goals and performing the tasks of the HNB from the scope of the audit, but other provisions expand the scope of the audit to include the assessment of whether the programs, projects, and activities of the HNB are being carried out effectively and whether the activities, financial transactions, and information are in essential aspects in accordance with the regulations governing the operations of the HNB.

– The exclusion from the scope of the audit of the HNB’s activities related to fulfilling the goals and performing the tasks established by the Law on the HNB seems to, if read literally, lead to the exclusion of all activities of the HNB, based on the Law on the HNB, from the scope of the audit by the State Audit Office, the ECB assesses.

They also note that since this does not seem consistent with the apparent intention of the proposed law and, more importantly, with a number of proposed provisions, the coexistence of these provisions which on one hand exclude some activities, while seemingly including those activities on the other hand, leads to legal uncertainty about the clear scope of the audit by the State Audit Office.

For Financial Statements, an Independent Auditor

The ECB notes that the task of assessing financial statements belongs to independent external auditors and that the proposed law should be adjusted so that the State Audit Office must not verify the financial statements of the HNB nor provide opinions on the financial statements of the HNB, as this could affect the work of the independent external auditors of the HNB, who are due to their independence and expertise more suitable for conducting the audit of the financial statements of the national central bank than a state body.

In addition, the accumulation of opinions regarding the financial statements of the HNB could negatively affect the credibility of the HNB’s business accounts, the ECB believes.

The jurisdiction of the Croatian Parliament to vote and adopt the annual report of the HNB on its operations and the semi-annual information on the financial condition of the HNB, the degree of achievement of price stability, and the implementation of monetary policy would affect the institutional independence of the HNB, as it exceeds the obligation of transparency and accountability of the central bank to the national parliament, the ECB believes.

– The decision of the Croatian Parliament on whether to adopt the annual report of the HNB and the semi-annual information on the financial condition of the HNB, the degree of achievement of price stability, and the implementation of monetary policy seems to imply that the Croatian Parliament could give direct or indirect instructions to the HNB and its decision-making bodies and its members, for example, regarding the amendment of the annual report of the HNB or regarding disputing the HNB’s assessment of price stability and the implementation of monetary policy, it is stated in the Opinion.

The ECB welcomes the introduction of a provision that explicitly guarantees that regardless of the fact that members of the HNB Council may serve a maximum of two terms in the future, current members of the HNB Council who were appointed under the existing provisions of the Law on the HNB will continue to be members of the HNB Council until the expiration of their terms.

The ECB notes that in the justification accompanying the Proposal for the Law, published on the website of the Croatian Parliament, it is stated that these provisions of the proposed law will not be applied retroactively and that current members of the HNB Council, as well as individuals who were previously members, will be able to be members in the future.