Recent Developments on Internal Auditing Legislation in Public Institutions of Turkey:

A Hospital Case

Kiymet CALIYURT1, Cuneyt AGUN2, Ayse PAMUKCU3

Today, the fundamental aims of business enterprises are to become current throughout the world

and to expand in this competitive environment, and to increase the value and profit of shares. The

realization of the aims of business enterprises depends on making right decisions as well as an

efficent and effective work. Right decisions are only made by means of reliable, true, relevant,

well-timed information. The most effective element in the provision of these information in the

business enterprise is Internal Auditing Department working efficiently.

The function and department of internal control both in public and private institutions have

gradually gained importance. Sarbanes Oxley Law (SOX) , published in 2002 especially after the

fraud experienced and the Section 404 about internal auditing have proven that internal and

external control are the most effective factors in the prevention of fraud at business enterprises.

There are a number of different definitions of the term internal control. For the purposes of

Section 404, the great majority of companies and all the CPA firms use the definition in COSO

(Committee of Sponsoring Organizations of the Treadway Commission)’s Internal Control —

Integrated Framework. COSO’s definition relates to all aspects of internal control, not just that

over financial reporting. The following is from the report’s executive summary:

“Internal control is broadly defined as a process, effected by an entity’s board of directors,management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

• effectiveness and efficiency of operations • reliability of financial reporting • compliance with applicable laws and • regulations4

1 Corresponding Author, Associated Prof., Trakya University, Faculty of Business Administration and Economics, Edirne TURKIYE E-mail: kiymetunca_caliyurt@hotmail.com 2 Lecturer, Havsa Vocational College, Havsa Edirne TURKIYE 3 Ph.D., Marmara University, Faculty of Business Administration and Economics, Department of Accounting and Finance 4 The Institute of Internal Auditors, Sarbanes Oxley Section 404: A Guide for Management by Internal Controls Practitioners, Professional Guidance Setting the Standard, 2nd Edition, January 2008, p.11

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Internal control is an integral process that is effected by an entity’s management and personnel

and is designed to address risks and to provide reasonable assurance that in pursuit of the entity’s

mission, the following general objectives are being achieved:

• executing orderly, ethical, economical, efficient and effective operations;

• fulfilling accountability obligations;

• complying with applicable laws and regulations;

• safeguarding resources against loss, misuse and damage.5

The practice of internal control that is widely used at international scope has become an

inseperable part of public`s internal financial control systems. The accounting frauds that appear

lately at international markets have made the examination of internal control system and process

of auditing a current issue once again enabling the reliability of financial reports. Considering

these developments in Turkey, it has become inevitable to make the official regulations of

international standarts about internal control system , internal auditing and risk management.

Especially, in candidate countries of European Union , the necessity of forming an effective

internal auditing system to sustain financial transparency and accountability in the administrative

activities the government has appeared . As a result of this, internal auditing system has been

regulated in the frame of laws and secondary regulations in these countries.

Especially with the help of reforms recently implemented in the field of finance

administration in Turkey, it is aimed at making Turkish public system of Finance Management

suitable for international standarts. At this scope, with the 10.12.2003 dated and 5018 numbered

Public Finance Management and Control Law (Law 5018) coming into effect, not disregarding

the facts and needs of Turkey, and by means of developing principles and methods, aiming at

contributing to the works of public administrations and developing them to form internal

auditing mechanisms for enabling the use of public resources in an economic, effective and

efficient way are intended.

However, problems are being confronted as experienced in the practice of other laws.In

order to bring up the problems ,internal control and the practice of new law have been examined

through applications at a public university hospital – adherent to circulating capital – using the

internal control techniques. Among the serious problems defined in the natural risks of the public

5 Guidelines For Internal Control Standards For The Public Sector, Internal Control Standards Committee, www.intosai.org, p.6

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hospital, there are the important finanacial problem, the treatment costs` being determined by

the state , the delay in the money received from the patient, inability to follow the accounting

process and the Public Procurement Law. Among the problems due to the internal auditing are

that the internal auditors are not trained well enough , the risk-centered internal control is not

considered sufficiently, the internal auditors are not sufficient in number, and the application of

the law has not become prevalent yet.

KEYNOTE: internal audit, accounting, corporate governance, public institutions

ABBREVIATIONS:

CCSA: Certified Control Self Assesment

CGAP: Certified Government Auditing Pofessional

CIA: Certified Internal Auditor

CISA: Certified Information System Auditor

COSO: Committee of Sponsoring Organizations of the Treadway Commission

CPA: Certified Public Accountant

EU: European Union

IIA: Institution of Internal Auditors

Law 5018: Public Finance Management and Control Law

SEC: Security and Exchange Commission

SOX: Sarbanes Oxley Act

USA: United States of America

1. INTRODUCTION

Corporate governance refers to the method by which an organisation is governed, administrated,

directed or controlled, and the goals for which it is governed (Dellaportas and et.al., 2005: 118) .That has

become one of the most commonly used phrases in the current global business vocabulary. (Solomon,

2007: 11) The development of a common understanding of corporate govenance is generally agreed to

have started with the Cadbury report. (Cadbury Committee, 1992), which identified the principles of good

governance integrity, openness and accountability. The report was the first of several on corporate

governance in the private sector, the most recent contributions being the Higgs report on non-executive

directors (Higgs Report, 2003) and the Smith report on audit committees (Audit Committees Combined

Code Guidance, 2003). In the public sector, the Nolan Report (Nolan and his Committee, 1995) was

particularly important in setting out the principles of public life (Audit Commission, 2003) which based

itself on the principle selflessness, integrity, objectivity, accountability, openness, honesty and

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leadership. (http://www.archive.official-documents.co.uk/document/parlment/nolan/nolan.htm)

The report made the following general recommendations (those which had general application

across the entire public service).

• Principles of public life: The general principles of conduct which underpin public life

need to be restated.

• Codes of Conduct: All public bodies should draw up Codes of Conduct incorporating these principles.

• Independent Scrutiny: Internal systems for maintaining standards should be supported by independent scrutiny.

• Education: More needs to be done to promote and reinforce standards of conduct in public bodies, in particular through guidance and training.

As in private sector, there appear problems in public sector in abiding by the rules.

Problems in public world have more specialites than private sector. Even in the corporate

governance public has following failues: closed culture, poor strategic risk management, poor

working relations, low levels of accountability, lack of clarity, poor leadership, poor information

for decision makers, lack of clarity.

The most important work to be done at public and private sectors is to form the Internal Auditing

Department and to enable its running in order to comply with the laws and internal control

procedures. This subject has become the firstcoming one in business world after the important

scandals are experienced in the 2000`s. According to this part under the heading of “Assessment

of Internal Control of Sarbanes Oxley 404 enacted in 2000” ,

“Under Section 404 of the Act , management is required to produce an “internal control

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report” as part of each annual Exchange Act report. The report must affirm “the responsibility of

management for establishing and maintaining an adequate internal control structure and

procedures for financial reporting.” (http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act#Sarbanes-

Oxley_Section_404: __Assessment_of_internal_control)

These developments experienced have affected the whole world closely and internal

control has gained the required importance in the world of accounting. Internal control is therefore

an obvious benefit in the overall function of corporate governance, the better the system of internal

control is, the fewer number of errors and frauds, and the greater the effectiveness of corporate

governance is. (Lee, 2006: 38)

The History and Definition of Internal Audit and its objectives

That internal audit roots back to very old dates, and is first encountered in the 13th century

in big Italian trade centers such as Milan ,Venice and Florence. Audit and internal audit were first

taken into account from the point of academical perspectives in Continental Europe in the 1900`s

(Kutlan, 2001). Great alterations are being observed in internal auditing in parallel with the

changes and developments in the fields of trade and industry (Ak, 2004: 354). Especially in the

development of Internal Auditing Profession and its starting to organize in 1942, International

Internal Audit Institute, the center of which is in the USA has played a great role.

In Turkey, Banking Regulation and Supervision Agency (BRSA), in order to observe the

risks confronted by banks and to control them and with the aim of defining the bases and

procedures related with risk management systems and internal audit systems to be founded by the

banks prepared “ Regulations about Internal Audit and Risk Management of Banks ” and it went

into effect being published in the Official Gazette numbered 24312 and dated 08.02.2001. With

this regulation, the executive committee is to assign one of its members to fulfill the function of

internal audit (Elitaş ve Özdemir, 2006: 146). With “the notification pertaining to the system to be

used in intermediary institutions” published on July 14 , 2003 by Capital Markets Board (CMB),

bases and procedures pertaining to internal audit systems were regulated which are to be founded

in order for the observation of risks confronted by the intermediary institiutions and controlling

them (www.alomaliye.com).

Increasing density of company actions , deteriorating economic conditions, increasing

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competition have led companies to more efficient management and working methods . Internal

Audit with the function of independent evaluation of activities such as financial formation,

production, marketing, management is more advantageous for the companies (Ak, 2004: 353).

Internal audit can be defined as an independent evaluation function formed in the structure of the

establishment with the aim of investigating and evaluating the actions of this

establishment(Özeren, 1999: 2). According to Yılancı (2006); “Internal audit is a kind of audit at

which the aim is to lead the company activities in a way to increase the effifciency and power of

competition; to manage the company`s wealth reasonably; to provide investment and management

consultancy ; to enable the prevention of faults and frauds. It is conducted by dependent auditors

who are dependent on the management , but independent in terms of their actions . According to

Pickett (2003) internal audit is defined as “ an independent and objective guaranty and consultancy

activity which aims at improving the activities of an institution and contributing to it.”. Duman

(2006) stated that internal audit helps the institution reach its targets by considering the

effectiveness of risk management , control and management procedures in a systematic and a

disciplined manner and improving these. In other words; “It is an independent evaluation function

formed in the organizational structure to work for it by investigating its activities and evaluating

them ” (Moeller ve Witt, 1999: 11). The overall objective of internal audit is to help the people

responsible with managing a business enterprise fulfill their duties in an effective way (Uzay,

2003: 79). In addition to these, internal audit is to investigate the accuracy and reliability of

accounting data and reports, to control the agreement between applications of the company and

managerial plans and policies, to find solutions after determining the faults and delays (Sözbilir,

2000: 99; Robertson, 1996: 10).

2. INTERNAL AUDIT STANDARTS IN THE PUBLIC, THEIR IMPORTANCE

AND DEVELOPMENTS IN TURKEY

2.1. General Problems in Public Audit System and Developments

In Turkey, there are a lot of audit associations differing in the organizational structure and

size and responsible for public audit . However, to say that this is done at present Turkish audit

structure in the desired and sufficient way is not that possible .Considered generally, we can state

the main institutional and functional problems as in the following (Yaman, 2008: 11-15);

• There are not audit standarts accepted by all audit associations ;

• Not enough attention is given to developments in contemporary audit in application;

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• The existence of unaudited areas and applications preventing the audit;

• Not carrying out the audit on a strategic basis;

• The vocational training of the audit members is not permanent and systematic;

• Not benefitting from information technology sufficiently in audit procedure;

• Audit activities are not transparent and open to audit;

• That some parts of inspection and audit units depend on the highest rank of

administration amd some other parts depend on the lowest rank of administration , and

the lack of coordination, result in repeated number of audits in application.

• Audits at many institutions in Turkey are not systematic, and permanent, also are

partial and at undetermined times.

• Audits focus not on the subjects determined based on risk analyses , but on

coincidental subjects mentioned through complaints.

• According to a common belief in public, audit has a punitive feature as it is

functionally focused on finding faults .

• Ongoing financial audits are not carried out independently and are based on

expertise.

• The status, definition of duty, field of activity and freedom of inspector, auditor, and

other audit staff are not clear enough in an undisputable manner.

• The presence of many autonomous institutions and committees;

• There not being an audit organization at the central superstructure at national level;

• There cannot be a sufficient pursuit of audit as it is necessary for audit reports.

For solving these problems, Turkey has promulgated a new regulation on public auditing

on 10/12/2003 named Public Financial Management And Control Law. The purpose of this law is

to regulate the structure and functioning of the public financial management, the preparation and

implementation of the public budgets, the accounting and reporting of all financial transactions,

and financial control in line with the politics and objectives covered in the development plans and

programs, in order to ensure accountability, transparency and the effective, economic and efficient

collection and utilization of public resources. (Law No 5018 Public Financial Management And

Control Law)

In the items between 63 and 67 of the Law numbered 5018 included the decision related

with internal audit. In the temporary Article 5 of the Law , some arrangements are made regarding

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the people to be assigned as internal auditors in the transition period set till 31.12.2007. In Article

63 of the mentioned Law, internal audit is mentioned as it follows. According to this item, internal

audit is “ an independent, objective guaranty provisison and counselling activity.” These activities

are realized at widely accepted standarts and with a systematic, constant and disciplined approach

to evaluate the effectiveness of the administrations` management and control structures and risk

management of their financial pocesses and to develop them . (Korkmaz, 2007: 10).

The subject about the qualifications of internal audits and their appointment is regulated in

Article 65. According to this , the ones to be assigned as internal audits should have the following

features;

• Having at least a four years` university degree in the fields decided by Internal

Audit Coordinating Committee considering the feature of public administration

concerned ,

• Having worked at least for five years as an audit member in public administrations

or having worked in the fields decided by Internal Audit Coordinating Committee

for at least eight years,

• Having the knowledge ,competence, and representative capability,

• Fulfilling other conditions required by Internal Audit Coordianting Committee.

(Arcagok and Arüz: 2006, 195-196)

In the Article 65 of the Law 5018, that people who will be assigned as internal auditors will

be given a training of internal auditing by the Ministry of Finance in coordination with the Internal

Audit Coordination Committee and that this training programme will be prepared in a sufficient

way to provide internal audits with the information about auditing, budget, financial control,

regulations regarding public procurement law, accounting, regulations regarding staff and other

subjects about profession. (Arcagok and Aruz, 2006: 199) In the mentioned regulations, place is

given to the arrangements to encourage the internal auditors to attend international internal

auditing certificate exams . According to this , the internal auditor who gets one of the certificates

of internationally accepted such as CIA (Certified Internal Auditor), CISA (Certified Information

System Auditor), CCSA (Certified Control Self Assesment) and CGAP (Certified Government

Auditing Professional) will be given a higher level of certificate. (Arcagok & Aruz, 2006: 200)

Public internal audit standarts are determined in accordance with the item “a” of first

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paragraph in Article 67 of the Law numbered 5018 by Internal Audit Coordinating Committee .In

accordance with first paragraph of Article 9 in Regulations regarding the Working Methods and

Bases of Internal Auditors, internal auditors are to conform with the standarts. In the determination

of Public Internal Audit Standarts, IIA “Vocational Application Standarts of International Internal

Audit” are taken as the basis, other international audit standarts are also benefitted. . Standarts

determine the features of internal audits and processes to be applied in internal audit activity.

Standarts arrange the matters of planning , application and reporting of internal audit and the

working of an internal auditor in a perfect , honest, an independent way.(http://www.tkgm.gov.tr).

2.2. Disputable Issues about Public Financial Management and Control Law Numbered

5018.

Besides covering vast distances in several years`time in the field of internal audit , that

Turkey is not at the point which it should be is known. Before all, the institutionalization of

internal audit units is not realized fully, effective and comprehensive carrying out of internal audit

activities are not started yet despite the fact that internal auditors are assigned in many

administrations. In this context, disputable issues such as deficiencies and problems in the

organization, management and budget; mission and function conflicts between internal audit units ,

inspection committees and other audit units ; whether internal aud,itors will conduct their

investigation mission or not are considered. (Agun, Cuneyt, 2008: 89)

2.2.1 Organization, Management and Budget Problem of Internal Audit Units :

Arrangements required by the Law numbered 5018 and related regulations about management

and budget and the interpretation of this regulation by different authorities and managers do not

let the reform in the field of audit reach its goals and the audit function be carried out sufficiently

(Midyat, 2007). .It will be meaningless to expect internal auditors, internal audit units to carry

out an audit mission as envisaged in the regulations and standarts if the organization of internal

audit units is formed in this way, and the approach which entails assigning one of the internal

audits as coordinator is adopted , and these units are not supplied with sources to plan their

activities and apply them. That is, a seperate budget is not given in the administrative budget

(www.kidder.org.tr).

It is difficult or even impossible to perform miracles for internal audit units .The reasons are

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that their place/position is left unknown( due to being founded without a place in organizational

schemas and regulations of administrations and without an approval ), the management is carried

out by an internal auditor who is assigned as a coordinator and whose authority and

responsibility are not defined. Because of these, what need to be done are to eliminate the

indefiniteness in the fields of inspection and audit, to internalize a way of organization that will

enable the internal audit activities to be conducted in an effective and a sufficient way and to

make the necessary regulations . Additionally, this structure needs to be supprted in terms of

management , staff and budget and the internal audit needs to be reached at a level to fulfill their

mission entailed by regulations .

2.2.2. Internal Auditors and Their Investigation Mission : The mission, authority and

responsibility are arranged in a clear and detailed way in Law 5018 and related regulations .

This appears as a subject which strengthens independence and professional assurance. However,

there are debatable and hesistantly considered issues in the context of roles and responsibilities

of internal auditors. At this point, the subject whether internal auditors can conduct their mission

realetd with investigation becomes a current issue. However, before investigating whether

internal auditors can conduct their investigation mission, it will be beneficial to touch on internal

auditors` position regarding administrative operations and control activities . To be clearly stated,

an internal auditor is not only a financial auditor and controller but is the person who is in

authority and in charge of conducting all duties entailed by the broad scope of internal audit

activity. Defining internal audit only as inspection of expenses` legal conformity is clearly

against standarts of law and audit. There is no value in arguing such an approach seriously which

narrows the extent and true nature of internal audit is in contradiction with international

standarts and applications and national regulations related with this subject. As legal and

administrative arrangements determine the extent, boundary, application fields of internal audit

explicitly, internal audit includes all of the financial and non fianacial activities, processes and

procedures.

On the other hand, internal audit is an auditing profession and it should not be included in

administrative decision-making processes. At this point, not disregarding the differences resulting

from the aim, true nature and methodology are required . Otherwise, independence and impartiality

of auditing profession is damaged and audit function canot be conducted in a convenient way for

standarts and regulations and in the required way. Furthermore, the result that the necessary

durites are taken by controller (financial control / financial pre-control) and at which are special

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applications of control activites are designed and applied in the scope of management instead of

audit are reached. It should be emphasized once again that consultancy service be provided,

internal audit not be considered as an executive control activity and executed in this way. Duty,

authority and responsibility are spread out in a broad area. At this point, the issue whether

investigation duty (disciplinary investigations, pre-inspections , private inspections) will be

conducted by internal auditors or not gains importance . There are two different approaches on

this subject. (Midyat, 2007: 4):

• According to the first approach, as it is in the inspection and audit applications before the

Law 5018, internal auditors are to conduct their investigation duties. In the even that

inspection duties are not conducted by internal auditors, their position in the

administration and their strength before public staff to be audited weaken. As a result of

this effectiveness of this audit will be damaged.. Internal auditors left without strength due

to being given the investigation authority will not fulfill auditing duty properly.

• According to the second approach, the internal auditors`s conducting their investigation

duty contradicts both regulations and audit standarts. Furthermore, audits to be done

using the investigation authority will eliminate the benefits of modern audit approach , will

prevent the staff to be audited from supporting the audit, will not produce the xpected

results as a result of such a communication dominated by fear and doubt .

Whether internal auditors will conduct their investigation duty or not , whether

conducting of their investigation is suitable for the regulations related with the subject or not and

results , drawbacks and profits gained need to be argued seiously. The reason is that some issues

resulting from the nature of investigation duty seem probable to give important harms to internal

audit and this profession As well as being a sensitive issue , it bears the potential to reduce

internal audit to traditional inspection and investigation duties and to reduce the profession of

internal auditing to the profession of inspecting and investigating. Additionally, internal auditing

activitiy does not include analysis and evaluation of fraud and irregularities peculiar to person and

event , and activites that are disciplinary and crime in nature. Such kinds of activities should be

evaluated in the scope of other staff`s ( inspector, controller, audits, and other public staff assigned

for investigation and pre-examination) and manager`s duty and responsibility at administrations

(Agun: 2008, 89-93) .

2.2.3.Conflicts of Duty and Function between Inspection Committees and Other Audit

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Units:

Another important issuse is conflicts of duty and function between internal auditors and

inspection and other audit units of administrations and duty conflicts , clashes and disagreements

to appear as a result of this. In fact, the scope of internal audit activity, duty and responsibility of

internal auditors are clearly arranged in Law numbered 5018 and related regulations There is no

argument on this subject. The debatable issues are the duties and responsibilities that inspection

and other audit units conduct and the duties and functions that will be conducted or not in the

scope of internal audit. (Güler, 2007):

According to first approach, audit activity is regulated in Law numbered 5018. In this

law, there are two types of audit function / activity as internal and external audit . Additionally,

limited to exceptional situations, inspection activities that can be conducted financially are given

to the audit staff of Ministries of Finance and Internal Affairs. Any kinds of audit, investigation,

research, evaluation and examination activities can only be conducted by internal auditors,

because Law numbered numbered 5018 abolished previous law decisions indirectly. Besides this,

other duties that are not considered to be among internal auditors`(i.e. investigation, pre-

inspection, tax inspection conducted according to private laws, inspection / analysis of work and

procedures of people outside association or tax payers/private associations in terms of their

suitability for regulations or other investigation/inspection duties conducted by other inspection

and audit units of administrations) can be conducted by other inspection and audit units of

administrations.

According to the second approcah , Law numbered 5018, only regulated internal audit

activities of associations. However, in organizational laws and other private laws in the Law

numbered 3046 about Organization and Duties of Ministries, no necessary change is made in the

organizational laws that regulate the mission and organization neither is in the private laws .

Therefore, as the second approach requires, the mission and function of inspection and audit units

of administrations continue and should continue. Adopting and supporting the second approach

from the point of law technique is difficult. Legislator has given his audit function and duty –

defined in Law 5018 and the legal borders of which are determined – to internal auditors and

internal audit unit. It won`t be possible that this duty and functions are taken on or conducted by

someone else or units based on the regulations put into application before the Law 5018. In the

event of such a thing, it will be in act, but not legal..

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Besides these, these most appropriate things are rearrangement of inspection and audit

units which are outside internal audit units in parallel with the Law 5018 and clarification of the

mission and function distinction between internal audit units and other inspection and audit units

through a legal agreement. In fact, law decisions against Law 5018 and put into application before

this law are clearly stated to be abolished indirectly as required by Article 81 of this law. However,

taking the arguments and hesitations into account in application, it is seen that clarification of this

subject through a legal arrangement will be beneficial for all of the inspection/ audit units and

staff. (Agun: 2008, 89-93)

3. PUBLIC HOSPITALS , NEW LAW of CONTROL, INTERNAL AUDIT, AND

PROBLEMS CONFRONTED

In Turkey, public university hospitals are run as circulating capital business enterprises.

Circulating capital business enterprises are public organizations which are founded based on

Article 49 of Financial Public Law numbered 1050 , and with certain aims such as to use inactive

capacity, to provide the government with income , to meet the needs in the economy and to

provide social benefit and are also active. Circulating capital belonging to universities are founded

based on Article 58 of Higher Education Law numbered 2547. Hospitals are one of the social

institutions and even the firstcoming ones that provide public with various health services. These

institutions bear the feature of being the most important ones of health system and play the most

important role in providing public with health services. Hospitals with an important role in

providing public with efficient health services and as an important part of health system can be

defined in several ways:

According to Gümüş (2006) hospitals are " institutions where patients and the injured ,

people suspicious about illness or who wants to get checked are put under medical observation

either through outpatient or inpatient treatment, are examined , diagnosed, treated, rehabilitated ,

and also where the children are born ”. For Sevin (1999), hospitals are “complex organizations

where any kinds of health services are produced in an economic and continuous way and where

eduaction, research and public health services are conducted. They are also non-profit

organizations which transfrom various input into beneficial outputs.” Today, presentation of

health services attracted the attention of private sector. Therefore, as in all over the world, in

Turkey numerous private hospitals with the aim of profit began to be opened. Consequently, in

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the definition “usually nonprofit” given below, public hospitals or hospitals under the control of

government and some institutions founded to help humanity should be understood.

University circulating capital business enterprises transform properties and services that

have economic value and come out as a result of educational and instructional activites at

universities and they enable the use of this money in meeting educational and instructional

needs. In fulfilling these functions, a road is taken. Administrative office does not take part

actively in this working system. Actual production of property and service is realized by the

related education –insruction units. Treatment service at hospitals are conducted by health staff.

The duty of administrative office starts after the realization of this production. Selling these

products, transformation into money and spending the collected money on the needs of related

units are duties of administrative office. Besides these, administrative office supports related

units to enable the exact and on time collection of properties and services paid in advance are

delivered by administrative office. Expenses that come out in this education and applications in

modern government approach should be tolerated by the government. However, getting the

circulating capital system run , government receives income at a certain amount under the name

of treasury share and meets the needs of rank and file who are in need of treatment.Starting at

this point, basic aims of circulating capital system business enterprises of universities can be

defined as in the following (Gümüş, 2006: 41):

• To state scientific opinion on the subjects demanded by real and corporate bodies

and organizations outside higher education institutions , to carry out projects , do

research and adopt similar procedures,

• To produce work and service in the limits of activity field to open sales centers, to

market and sell the products got by courtesy of the rector,

• To provide consultancy, to do model experiments, to organize data processing , to

evaluate work ,to analyse, to examine , to conduct technical and quality control, to

ascertain the suitability for standarts, to carry out technical maintenance , to provide

expertise, to make measurement adjustments and report on these services,

• To provide services of research , study and application on other scientific issues

about culture, art, agriculture and health, for encouraging these researches and

applications, to organize seminars courses, conferences, environment camps and

examinations , and to apply the scientific results to be gained.,

• To fulfill any kinds of printing and publication services,

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• To conduct chemical, biological, and similar analyses and studies and any kinds of

examination , treatment and surgery and to conduct researches and applications related

to these,

• To purchase the required properties and services to realize these activities .

University circulating capital business enterprises don`t operate like a state economic

enterprise. Main goals are not to increase profit rate to the highest where they are. To meet the

needs of this unit in a balanced way is the fundamental goal of circulating capital business

enterprises. Hospitals with circulating capital business enterprise which try to realize these aims

encounter the problems mentioned below.

3.1. Low prices of service: If we clarify that university hospitals are top level institutions

providing health service, it is seen that patients who could not get well in community health

centers and public hospitals consult to university hospitals. When taken into from this

perspective,the services provided at university hospitals are higher in quality.In parallel with

this, service charges are expected to be high. Despite this situation, service charges are found to

be insufficient and this caused problems between incomes and expenditures.

3.2. Problems about payment of legal obligations : These are elements such as treasury

share , surcharges for scientific research , tax deductions from people deserving which are paid

legally out of incomes received from circulating capital of uiversity hospital .These payments are

made by the Circulating Capital Accounting Office in the name of hospital. There is no right of

both university hospital and exploitation management to use the initiative. The payment rates`

being high brings with the financial trouble. University hospitals, as required by the letters of

budget act, transfer certain amount of their circulating capital incomes (15% for 2006) through

circulating capital accountancy every year. This share, in a way, is in return for the sources

allocated by central administration of university hospital. Buildings put up, equipment bought

and salaries paid to the staff that are financed by central budget are some of them. On the other

hand, due to the share paid by circulating capital business enterprise, according to our tax law,

they are left outside the scope of paying taxes collected through incomes such as corporation tax

,income tax.Treasury share is calculated considering the exact revenue of every monthand paid

till 20th night of the following month. Despite 15% revenue rate mentioned seems low, as income

– expenditure is calculated not out of the amount left but out of the “exact revenue amount”, its

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share in the total circulating capital incomes reaches at extremely high rates.

3.3. Problems confronted in purchasing methods: As required by the law, there are some

limitations which circulating capital business enterprises will confrorm to in auctions for getting

property and service. Especially, at direct assurance, property and service . Especially, in direct

supplies, property and service costs are 8.626 YTL for 2006 ( 9. 624 YTL for 2007, 10.195 YTL

for 2008).Direct supply is possible for purchases below this cost, however, auction among

certain eagers should be held for costs above this (http://rega.basbakanlik.gov.tr,

http://www.maliye.gov.tr) About purchasing, it is stated that up to 10% of the one-year amount

capital raised in the budget of the organization can be used in property and service prurchases

made via direct supply method – property and service purchases seperately – and in purchases

stated in related articles (21/f and 22/d) of Circulating Capital Law. Hospital of circulating

capital busiess enterprises should abide by this.

3.4. Contradiction of Circulating Capital System with generality and unity principles of

National Budget System:

By generality principle, display of government`s all of the incomes and expenditures in the

budget should be displayed as they are and gross (without entering an item into account), and not

allotment of certain expenditures are mentioned(Özgen, 1999: 251).The unity principle is

gathering of all the government`s incomes and expenditures in a single budget. The aim is to see

all of the government`s income and expenditures as a whole and to do the budget audit in the

best way(Karabaş, 2005: 29) . Circulating capital system has appeared as a deviation in terms of

generality and unity principles in government`s budget system. In the application study from this

perspective, circulating capital system contradicts with these principles and the reason for this is

that incomes at this scope are not received from sources such as taxes and expenses that interest

the whole budget of the government. Incomes received at circulating capital system are formed

by people paying money in return for the private services they benefitted and are transformed

into expenditure for the needs of the units which assisted in the formation of income. These

incomes are collected in a huge pool of income and are transformed into expenditure by expense

centers disregarding their support . As required by these principles , to form small pools alloted

to some expenditures is not correct .

3.5.Problems stemming from patients treated at hospitals:

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That treatment services provided at university hospitals are at high levels increased the interest of

people in university hospitals. As a result of this, people`s expectations to get well at university

hospitals are higher than others. These expectations bring with some problems. That people

consulting to university hospitals for an illness that can be cured at lower levels of health

institutions and that person addressee cannot be found in the payment of expenses of some

patients consulting in times of emergency, and the difficulties in paymet of treatment costs of

patients sent to university hospitals with a need to have long term treatment at hospital are some

of these difficulties. Many patients paying costs do not feel inclined to pay the treatment costs at

the time of discharge despite having undertaken to pay the costs later on. Although executive

proceeding is conducted for these undertakings, a result cannot be reached. As a result of

pressure from public opinion and having the aim of increasing capital incomes, they are not

selective in the admission of patients. University hospitals which were governed by centralized

management for long years are led to meet their needs through circulating capital incomes and

instead of being selective in admitting the patients with other public and private hospitals. This

takes university hospitals from working in the directory of their real objectives.

4. INTERNAL AUDIT APPLICATION AT A PUBLIC UNIVERSITY HOSPITAL AND

SUGGESTIONS

A research was conducted at the departments of management and accounting of a hospital

in terms analysing applications of the Law numbered 5018 and internal audit. The results of

research that can be generalizable for all of university hospitals are below.

4.1.Evaluation in terms of law: University hospitals provide service under the name of

“research and application center”. The firstcoming mission of such kind of hospitals are to provide

medical education and to train experts. However, due to the needs of qualified health staff and

country`s health service, they provide public service , by taking on the very important two duties

with the same staff, building and equipment. There appear problems stemming from regulations

and applications in paying the costs to employ staff , to buy equipment for the provision of both

eduaction and health services and the costs about infrastructure and superstructure works.

Regulations in the legal system can only be made based on a law and include an expanatory

sentence. There is not a law that regulates the direct establishment of research of hospitals for the

regulations to be meaningful in terms of law. Neither university managements nor Ministry of

Heath is aware of this information. As the system from the past to present has been regularly

17

conducted , this legal infrastructure insufficiency has not been considered as a problem and no

legal arrangements are made. That there are not any problems in the system`s operation does not

mean problems will not be encountered and this situation contradicts with the mamagerial structure

of our country ,which is a state of law. Despite the fact that hospitals belonging to universities act

like hospitals ,in fact, that there is not a law regulating the establishment and working diminishes

the effectiveness and efficiency of these hospitals. Legal insufficiency in the infrastructure of the

university hospitals should be eliminated urgently and they should be defined in Higher Education

Law .The place of hospital in the health system and university operation and its duties ,

responsibilities should be clearly defined. All of the subjects related with hospitals such as their

establishment, management, budget, structure of the staff, doctor-patient relations should be based

on a legal ground.

4.2. Evaluation of finacial problems: One of the most important problems of university

hospitals is the difficulties that they encounter in fulfilling the financial needs.Especially, that

budget they get is low forms the most important part of this problem. The demands of university

managements about hospitals and the hospitals` needs of building, medical equipment and

inventory stocks are met at the construction phase. In the following years, it will not be possible to

meet the new needs that can arise through the central budget. Additionally, while the needs relating

to consumption of other units at universities are met by central management, payment such as

kinds of expenditures of hospitals are led to be met by circulating capital incomes. In their present

financial structures, hospitals have become unable to keep their present state. Although in

circulating capital system spending as much as producing is the principle, nearly not getting any

share from the central budget in recent years has led these hospitals to circulating capital incomes

for their expenditures and the circulating capital business enterprises that hospitals are dependent

and to display tendency in postponing their debts to later years . University hospitals have been in

an effort to get away from this situation by increasing their present circulating capital incomes and

by getting these incomes exactly and on time. However, they encountered important problems on

the other hand. These are :

• Late publication of budget application directions determining the rules till the phases of

these incomes` generation, verification, and collection,

• There not being a great difference between the costs of services at university hospitals

and at other health organizations providing the same services,

18

• There being variations in the criteria of the institutions paying despite the fact that criteria

for paying the treatment service costs are written in the budget application instructions,

• Even though these criteria are fulfilled, the prices are not paid in the time determined (45

days) in the budget application instructions, but are paid at a later time than this,

• High rates of reductions are made on the prices by the organization paying.

The most important of all these problems is that there is not a stable and continuous

structure in the process of university hospitals` getting their circulating capital incomes. The

transfer to general health insurance application is a giant leap in the elimination of these

problems. At this scope,

• Budget application instructions that regulate the applications regarding the treatment

support should be published before the start of every fiscal year and university hospitals

should also take their precautions as all of the health organizations getting treatment

prices at the extent of these instructions do.

• In setting the service prices, service prices of university hospitals should be set at a higher

rate considering that they are third level health institutions and provide a more

technologically equipped and advanced health service presentation.

• Problems such as variations among payment criteria of paying institutions and their

reductions at high rates in hospital invoices will be decreased to the minimum as a result

of the paying organizations` being transformed into a single organization which is Social

Security Institution. In this reconstruction , when determining the conditions of treatment

costs` payments, penal sanctions that Social Security Institution has to endure as the

payinf institution should be stated clearly.

One of the important financial problems of university hospitals are reductions of treasury

share and scientific research funds that they have to pay out of net revenues of capital incomes of

university hospitals. The rates of treasury share reductions are stated in the law of budget every

year (15% for 2006) and when these rates are not applied on the remaining amount by calculating

the incomes and expenditures but on the “net revenue”, they present a fairly high progress.As

required by Higher Education Committee Law, the legal responsibilty payments, “not being less

than 5%” of net revenues and adding the scientific research fund reduction reach 40% out of gross

revenues. This situation causes hospitals serious problems in conducting their usual activities.

Central management should give up the idea of seeing the activities at this scope as a serious

19

source of income and abolish these shares taking into responsibility of being government and and

“the responsibility entailed by government in the presentation of health service”. Or these shares

should be diminished to symbolic rates such as 1% and 2% . The most important problem of

university hospitals in finding the properties and services is a monopolistic market existent

especially in medical equipment purchases. This formation forces the university hospitals to buy a

new medical equipment from certain firms by paying a lot more than it costs. Additionally, these

firms take on the care of the medical equipments they sold out by “contract of maintenance” .

Consequently, they continue increasing their profits having made contracts at a high cost .Central

management should take measurements to prepare a more competitive environment.

4.3. Evaluation in terms of patients treated at hospitals: University hospitals are chosen

for providing service at high quality by many patients. Unnecessary use of these choices is the

most important problem of this subject. University hospitals are left in a competition with other

health organizations to catch patients. University hospitals have to take part in this competition to

meet financial needs. As required by health regulations, university hospitals cannot admit the

patients directly except for emergency, the admission can only be possible via consignment from

other low level health organizations. Being in such a competition affects their studies in the

direction of their goals adversely. In order to prevent this, they should admit patients that will

serve for their goals and if circulating capital incomes gained from the patient admitted are

insufficient, required financial support should be provided from the budget.

4.4. Evaluation regarding other problems and suggestions for solutions: Notes

receivable for the amounts are seen to be taken as a result of the services provided by person and

institutions at the end of the treatment services. However, it is found out that these notes are not

collected and we are in the opinion that these notes not collected should be taken to the court. On

this subject, what are required by article(s) of Law numbered 6183 should be applied. Credits that

are not collected again are determined to take place under the account of “NOTES

RECEIVABLE” in accounting records. However, these credits should be taken into the account of

“ DOUBTFUL TRADE RECEIVABLES ” in the accounting records. The result we have reached

is that internal audit activities should be conducted in a risk-centered way. By means of measuring

and evaluating such kinds of risks/faults that public institutions may encounter, preparing a risk

based internal audit plan and schedule, internal audit can be conducted according to them .As a

result of risk evaluations to be done , by determining the areas at high risk, preparing risk-centered

20

internal audit plan and schedule is enabled. For example, for credits with not much time for

collection , by means of enabling that computer program signals warning in the last 10-15 days,

pursuit and collection can become a lot more possible.

Before the auction to be held for the properties and services to be bought , eagers should

submit their auction proposal dossiers considering the time period given by organization`s

mangement. For this reason, we are in the opinion that the process of auction should be realized in

the frame of a control mechanism in all of its phases from the start to the end. At this point, with

the help of computer programmes developped , by including the pursuit of auction dossiers to the

automation system, admission of auction dossier later than the time determined can be made

impossible.

As a result, it is possible to say that internal auditing departmants and internal auditors in

public sector established by Law 5018 have not enough opportunity to be succesfull in achieving

aimed results in the comparision of private sector because of legislation, authorization and

independence problems.

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Law No 6183 Amme Alacakları Tahsil Usulü Hakkında Kanun

1050 sayılı Muhasebe Umumiye Kanunu

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