“Society is making every effort to fund the ever-increasing costs of strengthening the state’s defence capabilities, but the audit shows that the Ministry of Defence, the Defence Forces and the Estonian Centre for Defence Investments have not made sufficient efforts to resolve the serious problems in the use of funds and the accounting of assets and inventories highlighted in the state’s consolidated annual report for the previous financial year,” said Auditor General Janar Holm. “The problems identified are not technical, but have real consequences, providing a simple opportunity for those who, through incompetence or malicious intent, enter the system to waste or misuse public funds and assets. The Ministry of Defence should take more radical steps to remedy the situation by temporarily moving the accounting of assets and inventories from the Defence Forces and the Estonian Centre for Defence Investments to the Ministry to get accounting in order as quickly as possible and to agree with the agencies on a clear chain of responsibility without gaps, down to the level of specific posts where necessary.”
Defence inventories are incorrectly recognised in the state’s consolidated annual report, because the stock accounting of the Defence Forces is still incomplete. The National Audit Office has qualified its opinion with respect to the €1.2 billion balance of inventories within the remit of the Ministry of Defence, as due to the significant shortcomings in the stock accounting of the Defence Forces, it is unclear which inventories, in what quantities and at what value are recognised in the balance sheet and which have been unjustifiably omitted. Except for this matter, the state’s 2025 financial statements present fairly, in all material respects, the state’s financial position, financial performance and cash flows for the year ended 31 December 2025.
“A comprehensive overview of the existence, availability, condition and value of assets and inventories should be a part of the preparedness of the Defence Forces, but there is serious confusion in the accounting of their assets and inventories. In a situation where assets and inventories are constantly increasing, but systemic flaws in the organisation of work lead to recurring disorder, it’s becoming increasingly difficult to maintain an overview of the assets and inventories acquired in previous years. It’s important to avoid an attitude where taxpayers’ money might be seen as something that is endlessly poured out of the budget with no questions asked, and as a result, the circulation of money and assets might be treated as a technical matter of no importance. Such an attitude would not help to solve the problems,” said Auditor General Janar Holm.
The Ministry of Defence has breached the General Rules of State Accountancy by arbitrarily establishing an exception for stock accounting and failing to recognise part of the inventories on the balance sheet. The General Rules of State Accountancy do not provide the option to not recognise part of the inventories on the balance sheet, but the Ministry of Defence has, through its internal accounting regulations, established a principle that differs from the General Rules of State Accountancy, according to which only part of the inventories is recognised on the balance sheet (certain types of materials held in specific warehouses).
The Defence Forces justified the introduction of the exemption on the grounds that, in previous periods, stock records had not been kept with the necessary level of detail, meaning that some of the data did not correspond to the actual situation. The state accountancy rules are established by a regulation of the Minister of Finance, and the Ministry may not amend them at its own discretion through internal regulations. In the audit, the National Audit Office sought to obtain an overview of the extent to which inventories had been unjustifiably omitted from the balance sheet, but the Defence Forces were unable to provide this information.
The Defence Forces have retrospectively amended the composition and value of their inventories, but are unable to explain the nature of this change, which amounts to nearly €100 million. After the Riigikogu approved the consolidated annual report for 2024, the Defence Forces have increased their stock balance retrospectively by €99.7 million – from €723.9 million to €823.6 million. According to the explanations given in the audit, the amendment was caused by a review of the types of materials and the inclusion of additional types in the accounts; however, the Defence Forces were unable to specify which types were included or in what quantities.
Pursuant to the Accounting Act, every accounting entry must be supported by a source document which makes it possible to understand independently what was adjusted and why, as well as on the basis of which data and how the amount was arrived at. The Defence Forces did not draw up any such document regarding the adjustment of inventories and therefore, it is not possible to assess whether the adjustment in the amount of €99.7 million was made at correct value and whether it was justified or not.
Incomplete asset accounting continues in the Defence Forces and as a result, some assets have been unjustifiably not recognised in the accounts at the right time. Failure to recognise these assets gives a false impression of what was actually received for the funds allocated from the budget in the past year. Furthermore, the lack of accurate accounting increases the risk of misuse. There are over 60,000 units of such assets and their total value is approximately €300 million. In its audit, the National Audit Office identified defence inventories and fixed assets which, according to delivery notes, had arrived at the warehouse in 2025, but the cost of which had not been entered into the system and/or had been entered for the year 2026 by the end of the audit (as at 21 May 2026). As the process of adding the cost of goods takes an unreasonably long time in the Defence Forces (up to half a year in the cases identified during the audit), it is likely that the assets which arrived in the warehouses as early as 2025 have not been recognised in the accounts and should have been recognised as stock or fixed assets in the financial statements for 2025. This indicates an error in stock accounting in 2025 and it is not possible to determine the extent of the error due to incomplete source data.
In the case of the stock-takes carried out by the Defence Forces, it is impossible to determine the quantity of the total inventories that were counted during the reporting year, what the results of the stock-takes were, or what shortfalls or surpluses were identified. Due to the lack of a consolidated overview, the Defence Forces have no insight into the volume of inventories, their condition or whether the quantities match the accounting records. If it is not known which inventories were checked or counted, or to what extent, some inventories may be omitted from stock-takes over a long period. This increases the risk that stock shortfalls, poor condition or expiry will not be detected at the right time and will not be recognised in the accounts. There is also a high risk that the misuse of assets will go undetected.
The audit indicated that the Estonian Centre for Defence Investments and the Defence Forces still have serious problems in financial management, which are related to the accounting of expenses and receivables, the management of contracts signed, accounting for prepayments, and monitoring the arrival of the goods to be delivered and recognising them in the accounts. The fact that the principles and rules established by the minister are not being followed within the Ministry’s remit also remains a major problem. In 2025, the Ministry of Defence started improving its operational processes under the leadership of the minister and the deputy secretary general for the sector, but as streamlining these processes into a single, coherent whole is time-consuming, not all the necessary changes have yet been implemented.
There are errors in the documents concerning the delivery and receipt of goods and in other purchase documents, several contracts have not been signed, or the signatories lacked the necessary authorisation. Due to the errors in the documents, it is not always possible to ascertain under which contract the goods were received, or when – or whether at all – they arrived. The Estonian Centre for Defence Investments does not verify whether purchase transactions have been carried out or whether the goods have been received in accordance with the contract, nor does it verify whether all the necessary documentation exists (e.g. purchase order, record of delivery and receipt, letter of acceptance certifying entitlement to foreign aid).
The problem of assets not being recognised in time also remains unsolved. Fixed assets are often recognised in the Defence Forces’ accounting records several months after they have been received. There were also cases where free aid from a foreign country was recognised with a delay of more than a year. Recognising assets with significant delays or at incorrect amounts increases the risk that their existence and safeguarding are not ensured.
The National Audit Office has sent a memo to the Ministry of Defence, setting out detailed observations and recommendations regarding asset accounting, inventories taking and the organisation of other work processes within the Defence Forces and the Estonian Centre for Defence Investments.
Contrary to what was claimed last year, the Estonian Centre for Defence Investments assumed obligations and risks for the state that have not been taken into account in the state budget with contracts for intermediation of defence-related support. The National Audit Office was able to examine the contracts for the supply of defence equipment and supplies to target countries within the framework of defence cooperation, which the Ministry of Defence had failed to submit to the National Audit Office during the audit of the previous financial year, and found that the state has assumed obligations and risks that have not been taken into account in the state budget.
The 2024 and the 2025 State Budget Act give the Ministry of Defence permission to intermediate the funds necessary for the acquisition of defence equipment and supplies to the target countries of the EU defence cooperation, but the permission was given on the basis of the Ministry of Defence’s assurance to the Riigikogu that no risks will be assumed for the state budget in the intermediation of equipment and supplies, and the budget of the Ministry of Defence will not be used for the purposes of intermediation.
During 2025, the Ministry of Defence received prepayments of the grant for intermediation in the amount of €138.4 million (€531.9 million in 2024).
The risks associated with intermediation are already materialising as financial obligations that may have to be covered by the state budget, and there is a risk that costs in the region of €70 million will have to be met from the Estonian state budget at the expense of other planned expenditure. An audit of the stock-take of the prepayments made in connection with the intermediation of support revealed that, of the total amount of prepayments made to suppliers in the amount of €72.1 million, there are issues with €71.6 million, as there are disputes with the suppliers regarding goods that have not been received. Prepayments totalling €59.8 million have been made to the supplier that has become the biggest problem. As the supplier has so far failed to deliver the goods ordered, the management of the Estonian Centre for Defence Investments (RKIK) has, according to its management, taken the matter to court. The National Audit Office asked to examine the contracts concluded with the problematic supplier in order to clarify the circumstances surrounding the transaction and the prepayment, but the RKIK did not provide the contracts requested. It is not clear to the National Audit Office whether the required contracts have not been concluded or whether there was a reluctance to submit them to the National Audit Office. The National Audit Office will continue to request materials from the RKIK and, where necessary, will also inform the Riigikogu of the circumstances surrounding the transaction.
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The Ministry of Defence and its area of government are only a part of the audit of the consolidated annual report of the state. However, the problems identified in relation to the state budget are not serious enough to affect the National Audit Office’s assessment of the regularity of the state’s financial transactions. The financial transactions of the state have in all material respects been carried out in compliance with the State Budget Act, the 2025 State Budget Act, the 2025 Supplementary Budget Act and the 2025 Second Supplementary Budget Act. In the opinion of the National Audit Office, the 2025 state budget implementation report provides reliable information on the state's revenues collected, expenditures incurred, investments and financing transactions.
In the other sections of the audit, the National Audit Office noted that, amongst other things, it is unclear how much of the state budget for future years is already committed under long-term contracts and other financial obligations, and that previous irregularities were repeated in the carry-over of budget surpluses.
The Ministry of Finance and other ministries do not know how much of the state budget for future years is already tied up in long-term contracts and other financial commitments. The situation regarding Estonia’s state budget is tense. Actual revenue in 2025 amounted to €18.3 billion whilst total expenditure and investments amounted to €19.1 billion. According to the data published by Statistics Estonia on 22 April 2026, the general government budget deficit for 2025 amounted to 2% of GDP. An even bigger budget deficit is planned for the coming years. In a situation like this, it is not enough simply to monitor revenue, expenditure and the deficit for the current financial year.
Unfortunately, the Ministry of Finance does not know whether the areas of responsibility of ministries are complying with the limit on entering into financial commitments laid down in the State Budget Act, as the Ministry of Finance does not monitor the assumption of long-term liabilities. Things are not in order in ministries either when it comes to monitoring obligations. According to the ministries, compliance with the threshold is monitored in approximately half of the areas of government. However, none of these ministries was able to share the results of their threshold calculations with the National Audit Office. The other half of the ministries confirmed that they do not monitor compliance with the threshold.
Monitoring compliance with the threshold is important, so that the obligations assumed in the past do not unreasonably restrict the budgetary choices of the current and future governments, nor reduce the Riigikogu’s substantive scope for decision-making regarding the state budget. Furthermore, the Ministry of Finance does not have a standard methodology for determining which types of liabilities, to what extent and from which source of funding should be taken into account when calculating the threshold. During the audit of the National Audit Office, the Ministry of Finance began drawing up guidelines on entering into liabilities for several years.
The budgets for the areas of government to be approved by ministers are not regarded as documents that serve as the basis for expenditure in agencies. Ministers adjust the budget to reflect the actual expenditure incurred by the agencies within their remit several months after the end of the financial year. The state budget expires once the financial year has ended. As the state budget has an expiry date, it is not possible to make budgetary funding decisions in the new calendar year to cover expenditure incurred in the previous calendar year. However, ministers in two-thirds of the areas of government continued to make retrospective budgetary decisions – the final allocation of the budgetary expenditure of the area of government for 2025 was approved several months after the end of the financial year. This means that the authorities have unlawfully incurred expenditure before a decision had been made to allocate funds for that purpose. Pursuant to the State Budget Act, agencies in a ministry’s area of government are entitled to use state budget funds for specific purposes and only if the relevant funds have been allocated in the budget.
The ministries have not complied with the requirements set out in the State Budget Act and the regulations on the carry-over of budget surpluses when carrying over and using budget surpluses. In its previous audit reports, the National Audit Office has repeatedly drawn attention to problems concerning the carry-over of budget surpluses and ensuring the comparability of the state budget across financial years, its consistency and transparency, and to the fact that budgetary decisions are also made after the end of the financial year. The reduction in the carry-over of budget surpluses from 2025 suggests improved budget planning or timely re-planning, but a number of problems remain unchanged.
The purpose of the funds carried over was still changed, the agency or the economic content was changed after the decisions to carry over the surpluses had been made, or the funds were used to a greater extent than provided for in the relevant budget line. Such a practice reduces the transparency of the state budget and makes it impossible to verify that the unspent funds were carried over to the following year solely for the purpose for which they were originally allocated. For example, following the approval of the directive on the carry-over of the surpluses of 2024 to 2025, the ministries adjusted the allocation of these surpluses amongst various activities. Furthermore, at the level of budget classifiers, the ministries have budget lines where the 2025 budget has been overspent; in other words, more money has been spent than was allocated for that purpose in the budget.
The National Audit Office sent a memorandum to the ministries, including to the Ministry of Finance, which addresses the problems identified in the carry-over of budget surpluses in greater detail.
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As a result of the audit, the National Audit Office made several recommendations to the Minister of Defence and the Minister of Finance.
The Minister of Defence must take measures to improve financial management and ensure that financial transactions are recognised in accordance with Estonian financial reporting standard. In cooperation with the Director General of the Estonian Centre for Defence Investments and the Commander of the Defence Forces, the Minister of Defence must address the problems identified in asset accounting, stocktaking and other work processes.
In response to the issues identified by the National Audit Office, the Minister of Defence has drawn up an action plan aimed at improving work processes in the Defence Forces and the Estonian Centre for Defence Investments.
The National Audit Office recommends that the Minister of Finance establish and implement a uniform methodology and a centralised reporting and monitoring system for accounting for financial commitments affecting future financial years, and to strengthen controls when carrying over surpluses to ensure that regulations are complied with and that the funds carried forward are used for the same purpose for which they were allocated in the state budget.
Background
The consolidated annual report of the state, including the state budget implementation report, provides the Riigikogu and the public with information on economic transactions that have already been carried out. The consolidated annual report of the state has been prepared pursuant to the State Budget Act and the Estonian Financial Reporting Standard. The consolidated annual report consists of the state’s financial statements (i.e. the state’s consolidated and unconsolidated report) with the state budget implementation report, additional information about local governments, the public sector and the government sector, and the management report.
The Minister of Finance is responsible for the preparation of the consolidated annual report of the state and state accountancy is organised by the Financial Accounting Department of the State Shared Service Centre.
The state’s total revenue in 2025 according to the 2025 state budget implementation report amounted to €18.3 billion. The state’s expenditure and investments totalled €19.1 billion: expenditure amounted to €18.1 billion and investments to €1.0 billion. According to the consolidated financial statements of the state, the monetary volume of the state’s assets as at 31 December 2025 amounted to €27.5 billion and two-thirds of the assets are fixed assets (forest, roads, buildings, machinery). Compared to the previous period, the monetary volume of assets has increased by €0.7 billion (fixed assets, inventories and financial investments have increased).
The state’s liabilities totalled €21.5 billion as at 31 December 2025, which means that they have increased by €0.7 billion compared to the previous period. Long-term liabilities in the amount of €13.6 billion comprise the majority of liabilities. The state has loan liabilities in the amount of €10.1 billion and they have increased by €0.4 billion in comparison with the previous period.
The National Audit Office audits the financial statements in the state’s consolidated annual report and the regularity of the state’s transactions every year. Pursuant to the State Budget Act, the National Audit Office completes the audit no later than on 31 August in the year following the financial year.
