Auditing Public Debt using Risk Management

INFORMS Journal of Applied Analytics (in print)

35 Pages Posted: 7 Jun 2022 Last revised: 11 Jan 2023

See all articles by Andrea Consiglio

Andrea Consiglio

University of Palermo - d/SEAS

Akis Kikas

Government of the Republic of Cyprus

Odysseas Michaelides

Audit Office of the Republic of Cyprus

Stavros A. Zenios

University of Cyprus; Bruegel; University of Pennsylvania - Wharton Financial Institutions Center; Cyprus Academy of Sciences, Letters, and Arts

Date Written: October 1, 2022

Abstract

The Audit Office of the Republic of Cyprus conducts the first ever audit of the country’s public debt, seeking answers to two key questions: (i) Is government debt sustainable, and (ii) is debt financing efficient and effective in securing the lowest cost with acceptable risks? The findings are discussed by the Parliament and could have significant ramifications for public finance. However, public debt management is a complex issue, with the International Organisation of Supreme Audit Institutions suggesting 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 provides 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 our recommendations are expected to have a significant impact on the debt operations of the country.

Keywords: Debt sustainability analysis; sovereign debt; performance audit; risk management; debt financing; climate risk

JEL Classification: C44, C61, E43, H63, H68, M42

Suggested Citation

Consiglio, Andrea and Kikas, Akis and Michaelides, Odysseas and Zenios, Stavros A., Auditing Public Debt using Risk Management (October 1, 2022). INFORMS Journal of Applied Analytics (in print), Available at SSRN: https://ssrn.com/abstract=4126959 or http://dx.doi.org/10.2139/ssrn.4126959

Andrea Consiglio

University of Palermo - d/SEAS ( email )

Viale delle Scienze, edificio 13
Palermo, 90124
Italy

HOME PAGE: http://portale.unipa.it/persone/docenti/c/andrea.consiglio

Akis Kikas

Government of the Republic of Cyprus ( email )

Odysseas Michaelides

Audit Office of the Republic of Cyprus ( email )

Stavros A. Zenios (Contact Author)

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893605 (Phone)

HOME PAGE: http://https://www.researchgate.net/profile/Stavros_Zenios

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3733 Spruce Street
Philadelphia, PA 19104-6374
United States

HOME PAGE: http://zenios.wordpress.com

Cyprus Academy of Sciences, Letters, and Arts ( email )

Nicosia
Cyprus

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