"Society is making an effort to fund the country's growing defense capabilities, but the audit shows that the Ministry of Defense, the Estonian Defense Forces and the Estonian Center for Defense Investments have not made sufficient efforts in return to resolve the serious problems with the use of funds and the accounting of assets and inventories highlighted in the state's consolidated annual report for the previous fiscal year," Auditor General Janar Holm said.

According to Holm, these are not merely technical problems but have real-world consequences, giving incompetence or malicious actors within the system an easy opportunity to waste or misuse state funds and assets.

According to the audit, defense-related inventories have been incorrectly reported in the state's consolidated annual report.

The National Audit Office issued a qualification regarding the accuracy of €1.2 billion in inventories held by institutions under the Ministry of Defense's administration. Due to significant deficiencies in the Defense Forces' inventory accounting, it is unclear which inventories, in what quantities and at what value have been recorded on the balance sheet and which have been unjustifiably omitted.

Apart from this qualification, however, the state's 2025 financial statements fairly present, in all material respects, the state's financial position as well as its financial performance and cash flows for the reporting period.

In addition, according to the National Audit Office, the Ministry of Defense violated the state's general accounting rules by unilaterally establishing an exemption for inventory accounting and failing to recognize some inventories on the balance sheet.

The Defense Forces justified creating this exemption for itself by saying that inventory records had not been maintained in sufficient detail in previous periods, meaning some of the data did not reflect the actual situation.

The Defense Forces retroactively changed the composition and value of its inventories but is unable to explain the substance of the nearly €100 million adjustment.

After the Riigikogu approved the state's consolidated annual report for 2024, the Defense Forces retroactively increased its inventory balance by €99.7 million, from €723.9 million to €823.6 million.

According to explanations provided during the audit, the change resulted from a review of categories of materiel and the recognition of additional categories. However, the Defense Forces was unable to explain which categories were added or in what quantities.

Under the Accounting Act, every accounting entry must be supported by a source document that makes it possible to independently determine why and what was adjusted, what data the adjustment was based on and how the amount was calculated.

The Defense Forces did not prepare such a document for the inventory adjustment. As a result, it is impossible to assess whether the €99.7 million adjustment was made at fair value or whether it was justified.

In the case of Defense Forces inventories, it is impossible to determine what proportion of all inventories was physically counted during the reporting year, what the results of the inventory counts were or what shortages or surpluses were identified. Because there is no consolidated overview, the Defense Forces does not have a complete picture of the volume or condition of its inventories or whether physical quantities correspond to accounting records.

According to the National Audit Office, this means some inventories could remain outside physical inventory counts for extended periods.

"This increases the risk that inventory shortages, poor condition or expiration will not be detected in a timely manner or reflected in the accounts. There is also a significant risk that misuse of assets will go undetected."

The audit found that the Estonian Center for Defense Investments (RKIK) and the Defense Forces continue to have serious financial management problems involving the accounting of expenses and receivables, the management of signed contracts, the accounting of advance payments and the tracking and recognition of delivered goods.

"Another major ongoing problem is that institutions within the ministry's area of administration are not following the principles and rules established by the minister," the audit found.

Contrary to what RKIK claimed last year, the audit found that agreements to facilitate defense-related assistance have resulted in obligations and risks for the state that were not accounted for in the state budget.

The National Audit Office was able to examine agreements for facilitating the provision of defense equipment and inventories to partner countries in defense cooperation that the Ministry of Defense had failed to provide to the National Audit Office during the previous audit of the state's annual accounts. It found that the agreements had resulted in obligations and risks for the state that were not accounted for in the state budget.

As a result of the audit, the National Audit Office issued recommendations to both the defense minister and the finance minister.

The defense minister was advised to take measures to improve financial management and ensure that financial transactions are recorded in accordance with the Estonian financial reporting standard.

"In cooperation with the director general of RKIK and the commander of the Defense Forces, the defense minister must resolve the problems identified in asset accounting, physical inventory procedures and other work processes."

Permanent secretary: We admit there's more to do

Ministry of Defense Permanent Secretary Kaimo Kuusk said the National Audit Office's observations are relevant and provide further detail on shortcomings identified in previous audits.

"We have taken steps to address them, but we acknowledge that what we have done so far has not been sufficient or that resolving the shortcomings is taking longer than expected," Kuusk said.

According to Kuusk, inventory procedures have been changed, 10 dedicated inventory positions have been created within the Estonian Defense Forces, controls over advance payments and the movement of assets have been strengthened and institutions under the ministry's administration are transitioning to digital warehouse management.

"We can confirm that the defense budget entrusted to us by taxpayers has been used for its intended purpose of strengthening Estonia's defense capabilities," the secretary added.

The state's consolidated annual report, including the report on the implementation of the state budget, provides the Riigikogu and the public with information about financial transactions that have already taken place. The state's consolidated annual report is prepared in accordance with the State Budget Act and the Estonian financial reporting standard.

The article was updated to add comments from Kaimo Kuusk.

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