Auditing Public Debt using Risk Management

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