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Trust or Verify: Shifting Emphasis in Control and Oversight

May 26, 18:18 UTC+3
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The Government is looking for ways to reduce the burden on the business, on the one hand, and to identify unscrupulous players more accurately, on the other. Introduction of a risk management-based model is expected to make this supervision more effective.

The existing supervision framework is ineffective, in particular, due to the following:

  • Excess audits increase the administrative and financial expenses of businesses and lead to inefficient spending of government resources. The number of supervised entities is also higher than the potential capability of supervisory bodies.
  • There is a focus on total audits at predefined intervals, and since the same entity is subject to various types of supervision (fire safety, sanitation/epidemic, tax, etc.) and audits are made by more than 30 various agencies, the pressure on the business turns out to be rather high.
  • The evaluation of supervisory bodies' effectiveness and efficiency is flawed since it is based on the number of breaches identified and amount of penalties imposed. Hence, the auditors seek to identify and punish wrongdoers by all means rather than to prevent damage.

In April 2016, the Government approved a supervision improvement roadmap. Currently, the Ministry of Economic Development is drafting a law on the fundamentals of government and municipal control (supervision) in the Russian Federation which will serve as a legal base for a reform. The reform provides for a shift of emphasis from the punishment for breaches to the management of risks and potential damage prevention.

Switching to the risk-based approach is the key point of the reform:

  • Supervision will be refocused onto higher risk facilities and entities that commit material breaches of law. The least hazardous facilities can be exempted from regular audits.
  • This approach will reduce the number of audits, lower the workload on officials, and enable more efficient spending of resources by decreasing the number of supervised entities and audit frequency.
  • It is planned to introduce a new framework to measure efficiency and effectiveness of supervisory bodies, based on the size of damage prevented.
  • Priority is given to preventive control of business entities (through consultative assistance, among other things).
  • The new approach will result in reduced corruption, better developed human capacity of supervisory bodies, and higher penetration of IT in supervisory activities.

An important supervision principle with the new framework is transparent government operations and their transparent results. Supervised entities will have access to up-to-date information, and the Government will be able to come up with a quick response to any infringements of business rights by supervisors.

The reform has already shown some early results:

  • The approach is being pilot-tested in seven types of supervision (fire safety, sanitation/epidemic, tax, etc.).
  • A methodology for control evaluation framework has been defined.
  • A pilot project is launched to develop and implement an efficiency and effectiveness evaluation framework based on international best practices.
  • Supervision holidays are introduced, i.e. small businesses are exempted from regular audits. According to the Ministry of Economic Development, the total number of scheduled audits in 2016 was cut by 39% or 350,000+ audits.

It was actually before the supervision reform that the risk-based approach showed some good results in several supervisory bodies:

  • The Federal Tax Service began implementing the model as far back as 2007. As a result, their performance per field audit increased from RUB 2.7 million to RUB 9.7 million in 2015. The number of audits has actually decreased seven-fold.
  • The Federal Service for Supervision of Consumer Rights Protection and Human Welfare has reported that while they made 19,000+ regular audits in the retail sector in 2013, 2017 will see just 1,069 of them. In the catering sector, the number of audits over the five-year period has decreased more than ten-fold, in food production – five-fold, in agriculture – four-fold, and in the industrial sector – two-fold.
  • Given the pilot results of the risk-based approach, EMERCOM has reduced their regular audits three-fold over the last three years, with 700,000+ lower risk facilities relieved from the government supervision, and the number of extraordinary supervisory activities reduced by a factor of 2.5.
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