Auditing Public Debt using Risk Management
INFORMS Journal of Applied Analytics (in print)
35 Pages Posted: 7 Jun 2022 Last revised: 11 Jan 2023
Date Written: October 1, 2022
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: Suggested Citation