Auditing Public Debt Using Risk Management

Abstract

The Audit Office of the Republic of Cyprus conducted the first-ever audit of the country’s public debt, seeking answers to two key questions. Is government debt sustainable, and is debt financing efficient and effective in securing the lowest cost with acceptable risks? The audit’s findings were discussed by the parliament and can have significant ramifications for public finance. However, public debt management is quite complex, and the International Organization of Supreme Audit Institutions suggests that sufficient technical knowledge is essential in undertaking an audit, including an understanding of the uncertain macroeconomy, financing conditions, and government fiscal stance. We use a risk management model based on scenario trees in conducting the audit. The model determines optimal debt financing strategies to benchmark the performance of the country’s Public Debt Management Office and answer the audit questions. We also incorporate an integrated assessment model to examine the risks from climate change. The auditor general presented the findings to the Parliamentary Audit Committee in the presence of the Minister of Finance, and his recommendations are expected to have a significant impact on the debt operations of the country. History: This paper was refereed. Funding: This work was supported by the Auditor General Office of the Republic of Cyprus. A. Consiglio was partially funded by NRRP-GRINS [Grant PE00000018].