The traditional approach (to state audit), while still a vital part of the SAI’s mandate, is inadequate to assure public accountability unless transactions are examined against the background of stated objectives, the manner in which inputs are acquired, used and disposed of, and an evaluation of the various outputs, outcomes and impacts.
Extract from “Improving Public Accountability: The Guyana Experience 1985-2007”
Introduction
On the date of his confirmation to the position, the Auditor General made a statement to the effect that the Audit Office had completed two value-for-money (VFM) audits under the renewed mandate given by the Audit Act of 2004. The two studies relate to reviews of: (a) the living conditions at the Palms Geriatic Home; and (b) the Old Age Pension Programme. The related reports can be found in the Audit Office’s website.
Today, we take time off from our review of the Auditor General’s report for 2011 to look at an increasingly important activity of national audit offices. We refer to performance auditing, also known as value-for-money auditing in some jurisdictions.
What is performance auditing?
Performance auditing looks at an organisation from a managerial perspective and examines issues relating economy, efficiency and effectiveness of programmes and activities as well as good management practice.
Performance auditing can be defined as an independent assessment of the extent to which an organisation has utilised the resources at its disposal in an economical, efficient and effective manner to achieve stated objectives. It differs from the traditional financial and compliance audit which involves examining a set of financial statements and conducting tests necessary to express an opinion on the truth and fairness of the statements as well as on compliance with applicable laws, regulations and circular instructions.
Performance auditing examines the objectives of programmes and activities as well as the manner in which they are executed to arrive at a conclusion about whether good value for money has been achieved. An integral part of performance auditing is the comparison between actual outputs, outcomes and impacts with those intended. Shortcomings as well as their causes and their effects are identified, and recommendations are made for improvement.
It is mainly for these reasons that government budgets are usually formulated in a manner that the objectives of programmes and activities are clearly set out, and indicators of achievement are explained in detail and as far as possible quantified to facilitate measurement and ex post facto evaluation. Performance auditing therefore enhances not only public accountability and transparency, but also enables the State Auditor to use his/her unique position, access and insight to add value to the organization.
National audit offices, officially described as supreme audit institutions (SAIs), have their own standards on auditing, known as ISSAIs. ISSAI 3000 elaborates by stating that performance auditing embraces the following:
(a) audit of economy of administrative activities in accordance with sound administrative principles and practices, and management policies;
(b) audit of efficiency of utilisation of human, financial and other resources, including examination of information systems, performance measures and monitoring arrangements, and procedures followed by audited entities for remedying identified deficiencies; and
(c) audit of effectiveness of performance in relation to achievement of the objectives of the audited entity, and the audit of actual impact of activities compared with the intended impact.
Is performance auditing a new concept?
Although this type of auditing can be traced to the 1960s and perhaps earlier, it has taken root as a specialized activity in the late 1970s and early 1980s. This was mainly as a result of: (a) the expansion in the scope of government activities and the consequent increase in government spending; (b) competing claims for resource allocation; (c) development of democratic institutions; and (d) greater public consciousness of the need for governments to deliver more cost-efficient and effective public services.
In most jurisdictions, however, performance auditing is still undertaken as part of financial and compliance audit under the guise of checking for the “avoidance of waste and extravagance”. The results are integrated and reported annually to the Legislature. However, given time constraints for completing the financial and compliance audit, only limited reviews could be carried out. Increasingly, SAIs of developing countries have found it necessary to amend their laws to provide for this type of audit to be undertaken as a specialized activity.
Clarification of the three “Es”
The UK National Audit Office has defined economy, efficiency and effectiveness as follows:
* Economy is concerned with minimizing the cost of resources acquired or used – in short, spending less;
* Efficiency is concerned with the relationship between the output of goods, services or other results and the resources used to produce them. How far is maximum output achieved for a given input, or minimum input used for a given output? – in short, spending well; and
* Effectiveness is concerned with the relationship between intended results and actual results of projects, programmes or other activities. How successful do outputs of goods, services and other results achieve policy objectives, operational goals and other intended effects? – in short, spending wisely.
Performance auditing can be extended to incorporate three other “Es”, namely environmental considerations; ethical conduct or behaviour; and issues relating to equity and fairness. Environmental auditing is fast becoming a specialized form of audit, and in the not-too-distant future, the auditing for the other two “Es” may very well follow suit.
Benefits of performance auditing
Increasingly, performance audits are disaggregated from the financial audits to provide for more in-depth reviews and the results reported separately. A key benefit is a significant shortening of the SAI’s annual report to the Legislature through a refocusing on regularity, compliance and internal control issues; and a corresponding replacement with stand-alone dedicated studies of cross-cutting and transversal issues across the operations of government. The results of such studies are then reflected in shorter and more concise reports issued throughout the course of the fiscal year. In this way, legislators and the public do not have to wait for at least nine months of the close of the financial year (in the case of Guyana) to be become aware of the SAI’s findings.
Other benefits include:
* Minimising the risks to and maximising the benefits from major capital investments;
* Improving the budget processes, including the elimination of programmes and activities not considered cost-effective;
* Securing direct cash savings and consequent reductions in expenditure, such as on consultants;
* Greater revenue resulting from improved methods of assessment and collection; and
* Enhanced customer satisfaction through more efficient and effective delivery of public services.
Performance auditing is not a substitute for the evaluation of an entity’s programmes and projects whether conducted by management or by internal audit bodies. Rather, it is a highly targeted activity designed to address risks to value for money in the way public resources are used. It also seeks to complement the work of internal audit. It is mainly for this reason that a significant degree of cooperation and collaboration is necessary between SAIs and internal audit to avoid unnecessary duplication of efforts and possible cost implications.
Performance auditing and international organisations
International organizations, such as the United Nations, are also likely to benefit from their external auditors undertaking performance audits. ISSAI 5000 states that, “International institutions are basically funded by public funds through contributions or from the member states. Supreme audit institutions (SAIs) have the same fundamental interest in good governance, accountability and transparency in international institutions, and strongly believe that good, well-organised and independent audit systems will contribute to better and more transparent control of these institutions, thus contributing to their economy, efficiency and effectiveness.”
Performance auditing in the Audit Office of Guyana
Attempts to introduce performance auditing can be traced back to 1984 when the then Auditor General recommended that the existing legislation be amended to provide him with “the authority and responsibility for carrying out value for money audit in its entirety and not limited to the avoidance of waste and extravagance”. The Government quite understandably did not act on the recommendation. Perhaps it was too premature since the United Kingdom (to whom we look upon to provide leadership in the field of accounting and auditing) had only recently passed legislation to provide its SAI with the mandate to carry out VFM auditing. In addition, specialized skills, such as those of engineers, are required to carry out such an audit, and Guyana’s Audit Office did not possess such skills at that time.
In 1994, the Audit Office made formal representation to the government to provide it with the legal mandate to carry out VFM auditing. The Government for a second time ignored the representation. As a result, the Audit Office was forced to continue carrying out performance auditing as part of the financial and compliance audit and reporting its findings in an integrated way. At the same time, recognizing the importance of having in place skills other than accounting and auditing, the Audit Office recruited three engineers to assist, among others, the physical verification of capital and major maintenance works. A new approach, nicknamed as “the clipboard approach”, was also developed to facilitate the physical verification of the works, and officers were trained in the use of this new technique.
In 2003, the Fiscal Management and Accountability Act replaced certain sections of the Financial Administration and Audit Act. This created an opportunity to similarly reform and modernize the legislation relating to the Audit Office. The initiative to do so received strong support from the World Bank and the Inter American Development Bank. As a result, the Audit Act 2004 was passed, providing the Audit Office with the full legal mandate to undertake performance auditing, thereby ending years of struggle to have this important aspect of public audit institutionalized.
Conclusion
Among Caribbean countries, it is perhaps fair to state that Guyana has the most modern legislation relating to public auditing, comparable to those of the more developed countries. This is quite an achievement, especially in the area of performance auditing. However, eight years have passed since the Audit Act was promulgated but only two performance audit studies have so far been undertaken.
Now that the Auditor General has been confirmed in his position, we look forward to the Audit Office intensifying its efforts to conduct more performance audit studies. Among the several areas that cry out for such studies, public procurement perhaps stands out as the most significant risk to value for money. We also look forward to a significant shortening of the Auditor General’s annual report and a corresponding increase in the number of short and concise reports reflecting the results of performance audits undertaken throughout the course of the year.
