The State Audit Office (VK) has once again closed its annual financial audit of the Consolidated Annual Report (CAR) with objections, the main reason being the annual tax report of the State Revenue Service (VID), which remains unverifiable, the VK told BNN.
Auditors report that unresolved issues remain in the VID Payment Administration Information System (MAIS), preventing them from obtaining sufficient evidence for the information included in the VID tax report.
Ilze Bādere, a member of the VK Council, stressed that since 2015 the VK has been monitoring the CAR and highlighting the importance of MAIS in producing an accurate VID tax report. The development of MAIS was a key stage in the project to implement the accrual principle. According to Bādere, this system was supposed to ensure the recording and accounting of tax revenues by registering VID-administered tax payments in the unified tax account and matching them to taxpayers’ obligations at the appropriate time and reporting period.
“Although the VID has made improvements to MAIS, the VID tax report is still not verifiable. In this audit, too, auditors found recurring errors already identified previously, as well as new accounting problems,” Bādere explained.
Since 2021,
VID-administered state budget payments have been accounted for in MAIS using the accrual principle.
However, the resulting annual VID tax report has never been verifiable since its first preparation in 2021 due to MAIS issues – analytical data by taxpayer could not be obtained, algorithm errors were found, and other deficiencies identified.
This year, in addition to checking the correctness of the report, the VK also assessed the progress of the MAIS project. A total of 613 problem reports and change requests were reviewed, including issues that have remained unresolved since 2023. However, the most serious criticism concerns not change management itself but rather how identified problems and errors are handled, the VK noted.
In the VK’s view, the VID is not working sufficiently on this issue, including not adequately addressing the root causes of problems or assessing their broader impact. For example, an error may be corrected at the level of an individual taxpayer without evaluating whether the error could reoccur for others. This year, too, auditors found data inconsistencies, manual corrections, and gaps in analytical accounting. As a result, the VID tax report is still subject to significant scope limitations – it cannot be determined whether adjustments are needed, or to what extent, the VK reported.
Bādere noted that
31 million euros has already been invested in MAIS, yet it still cannot produce a verifiable tax report.
“Therefore, we call for a serious assessment of MAIS development prospects, including consideration of related issues – for example, through the lens of tax policy development and bureaucracy reduction, examining options to optimize tax administration processes,” urged the VK Council member.
The audit also examined revenues from the Vehicle Operation Tax (VOT) and the Company Car Tax (CCT). The VOT is paid by all owners or holders of vehicles registered in Latvia for using them on public roads. In 2024, VOT revenues amounted to 102.3 million euros. The CCT is paid by companies for cars they own or use, regardless of their purpose. In 2024, CCT revenues were 28.5 million euros. Both taxes are currently accounted for on a cash basis, recognizing revenue when payments are received. Auditors found that the CAR balance sheet does not reflect receivables and liabilities for VOT and CCT because the accrual principle is not applied. This means that revenues and expenses are not recognized in the period they arise, regardless of payment, and the impact on budget execution cannot be determined.
Amendments to the VOT and CCT law came into effect in 2025. As a result, the accrual principle must be applied to VOT accounting starting next year, while necessary preconditions must be created for CCT to ensure the same approach. This would allow all tax revenues to be presented in one place using consistent accounting principles, the VK explained.
Turning to municipal structures and annual report preparation, the VK assessed whether its 2018 recommendation – to evaluate the continuation, usefulness, and efficiency of municipal structures – has been implemented. The audit found that
information in public registers about municipal structures remains inconsistent, outdated, and even contradictory.
For example, municipal institutions are registered under incorrect statuses in the list of public entities and institutions; discrepancies were found between this list and municipal bylaws; and the VID taxpayer register still included dissolved and reorganized institutions.
The VK stated that insufficient attention to these issues has also led to inconsistencies in annual report preparation. Some institutions, though independent taxpayers, fail to produce separate annual reports as required by law. Auditors therefore urge municipalities to continue streamlining their institutional structures and update information in public registers, also deciding whether institutions should be listed as independent taxpayers.
Regarding sustainability challenges in public finances, the VK pointed to Latvia’s Sustainable Development Strategy 2030, which emphasizes balancing social welfare, environmental, and economic interests without undermining future generations’ needs. The CAR audit report highlighted three pressing sustainability issues in financial management: public debt and credit rating, funding for strategic projects and priority areas, and obligations arising from demographic aging.
Public debt reached 19.1 billion euros at the end of 2024,
8% more than the previous year, and servicing costs will rise significantly in the coming years. To maintain investor confidence and the current credit rating, sound long-term planning is needed, the VK warned. But growing defense spending and major funding challenges in strategic projects such as Rail Baltica and state investment in airBaltic complicate matters. Rail Baltica’s cost in Latvia has nearly quadrupled compared to the initial plan, and a funding gap is expected in the coming years. In airBaltic’s case, auditors expressed concern over insufficient oversight of the state’s more than half-billion-euro investment and its recovery prospects.
The VK also sees risks from ineffective energy policy management. Achieving the National Energy and Climate Plan targets by 2030 will require over 13 billion euros in additional investment, yet less than 30% of that amount has been secured. Without extra funding, Latvia risks failing to meet its commitments, the VK warned.
Rapid population aging is already placing a heavy burden on the state budget. Pension expenditures amounted to 3.5 billion euros in 2024 and are rising every year. In addition to the general pension system, the service pension system is becoming increasingly costly and no longer fits today’s conditions, according to auditors. The VK calls for its review and for the creation of a reserve fund in the special social insurance budget to protect accumulated funds from short-term political use, thereby reducing the risk of further debt growth.
The audit provided three recommendations,
which, if implemented, would improve the information systems used in preparing the VID annual tax report, while also reviewing opportunities to optimize tax administration processes, the VK informed the Ministry of Finance (MoF). Implementation would also allow VOT and CCT revenues to be included in the annual tax report under the accrual principle, auditors said.
The CAR aims to provide a clear and fair picture of the state’s performance during the year and its financial position as of the 31st of December. It is prepared by the MoF and consolidates 73 reports – from 14 ministries, 12 central state institutions, Parliament, the VK, and 43 municipalities, as well as reports on state budget accounting and taxes, fees, and other payments administered by the SRS.
The audit of the CAR covers the financial report, budget execution information, and the MoF management report, and is conducted in accordance with international public sector auditing standards.
This is the last year the VK will prepare 27 separate financial audit reports and opinions for ministries, central state institutions, and the CAR. From May 2025, a new approach will be fully implemented – with only one audit report on the CAR’s correctness. This marks a new stage in financial auditing, the VK explained.
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