Audit warns defence accounting gaps raise asset misuse risk

Estonia’s State Audit Office has identified serious problems in the Defence Ministry’s area of government that increase the risk of state money and property being misused, ERR reported.

“Society is making an effort to fund the growing enhancement of the country’s defence capability, but the audit shows that the Defence Ministry, the Defence Forces and the State Defence Investment Centre have not made sufficient efforts to resolve serious problems in the use of funds and the accounting of assets and inventories,” State Auditor General Janar Holm said.

Holm said the problems were not merely technical. In his view, they could allow incompetence or malicious intent within the system to waste or misuse state money and property.

The State Audit Office qualified its opinion on the accuracy of the Defence Ministry’s inventory balance, which amounted to 1.2 billion euros. Because of significant shortcomings in the Defence Forces’ inventory records, it was unclear which inventories were included in the balance sheet, in what quantities and at what value, as well as which had been left out without justification.

Excluding that qualification, the audit found that Estonia’s 2025 consolidated annual accounts fairly represented the state’s financial position, financial results and cash flows in all material respects.

The State Audit Office also said the Defence Ministry had breached the state’s general accounting rules by unilaterally creating an exception for inventory accounting and leaving some inventories off the balance sheet.

The Defence Forces justified the exception by saying that warehouse records had not been maintained in sufficient detail during earlier periods, meaning some data did not correspond to the actual situation.

The Defence Forces later changed the composition and value of its inventories but could not explain the content of the nearly 100 million euro adjustment. After Parliament approved the 2024 consolidated annual accounts, the Defence Forces retrospectively increased the inventory balance by 99.7 million euros, from 723.9 million euros to 823.6 million euros.

According to explanations provided during the audit, the change resulted from a review of material types and the inclusion of additional types in the records. However, the Defence Forces could not specify which types had been added or in what quantities.

Under Estonia’s Accounting Act, every accounting entry must have an underlying document that independently shows why and what was adjusted, which data was used and how the amount was calculated.

The Defence Forces did not prepare such a document for the inventory adjustment. As a result, it was impossible to assess whether the 99.7 million euro adjustment reflected fair value or whether it was justified.

The audit also found that the Defence Forces’ inventories could not be reconciled with the results of annual stocktaking. It was impossible to determine what share of all inventories had been counted, what the results were, or what shortages and surpluses had been identified.

Because there was no consolidated overview, the Defence Forces lacked a full picture of the volume and condition of its inventories or their quantitative correspondence with accounting records.

The State Audit Office said some inventories could therefore remain outside stocktaking for extended periods. This increases the risk that shortages, poor condition or expired items will not be detected and recorded in time, as well as the risk that misuse of property will go unnoticed.