Performance auditing in governments

Mort Dittenhofer
Florida International University, Miami, Florida, USA

Keywords
Auditing, Government Introduction Uniqueness of the government
operations
Abstract Internal auditing as a professional business
Governments function differently type activity was formally recognized as a Governments, our current subject of interest,
from business organizations. Thus, profession as a result of the creation in 1940s are creatures of law and as such, they can do
performance or operational only what the law allows, in contrast to
USA of the Institute of Internal Auditors. The
auditing becomes necessary to
name was not descriptive of a unique method organizations in the private sector that can do
replace the measure of success
evidenced by the latter through the of auditing, but it was needed to identify a anything not prohibited by law. Also, we
measurement of profit. difference between it and the external must keep in mind that governments are
Governments are evaluated traditionally almost universally committed to
practice of public accounting. At that time
through performance auditing by
most of the internal auditing was also fiscal accountability, a process that provides
measuring efficiency, economy,
and effectiveness. Unique financial in nature and it was believed that a visible trail as to where resources come
planning, specialized staffing, such a descriptive identity was needed. from and where they go. However,
government oriented scope and development in the USA of the Government
However, as organizations expanded to a
government management reporting
greater extent, and as resources became more Accounting Standards Board will tend to
constitute the parameters of a
performance auditing model scarce, and as the size of organizations defied convert this strict fund accounting into an
appropriate for government personal observation, the auditors were accrual accounting that will provide
officials and stakeholders. governments with more useful information as
encouraged to broaden their investigations
into efficiency in the use of the scarce to the expenditures of government resources.
resources. The auditing for compliance, a There are significant operational
logical part of most financial auditing and differences between the public and private
the auditing for effectiveness came later; the sectors[1].
latter still is in a continuous developmental
. Performance criteria. The private sector
stage. has customer satisfaction converted into
The concept of internal auditing in profits as a measure of performance. The
government was not a new idea, relatively public sector tries to use efficiency,
speaking. It was practiced in China about effectiveness, and conformance to budgets
4,000 years ago. There the validity of the as performance measures. These criteria
handling of the emperor's resources was the are subjective and, therefore, difficult to
subject and the auditing paralleled the early measure.
development of inventory accounting
. Accessibility of government decision
methods. This concept has continued to making to external influence. All
flourish in business practice, however it government work is open to the public, to
was not until the mid 1900s that the interest groups, and to the media.
expansion into performance auditing was Businesses, except in directors' meetings,
started in the US states of Michigan and can operate in reasonable privacy. Thus
California, and in several of the larger US the public official may be responding to
local governments. conflicting priorities and values.
Today most governments of any size use
. Conflict between government policymakers
internal auditing by indigenous or external and administration. Elected officials
staffs and the auditing is generally the broad usually make policy, and the
scope auditing that is identified as administration carries it out. These two
performance auditing. groups generally have different goals and
Managerial Auditing Journal objectives, respond to different interests,
16/8 [2001] 438±442 and are rewarded for different functions.
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civil service systems in government
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Mort Dittenhofer reward employees for political activities safeguarded; laws and regulations are
Performance auditing in or seniority rather than for efficiency and followed; and reliable data are obtained,
governments productivity. maintained, and fairly disclosed.
Managerial Auditing Journal . Intense scrutiny by the media and public- Public officials and others entrusted with
16/8 [2001] 438±442
interest groups. Since government public resources are accountable both to the
resources come from the public in the public and to other levels and branches of
form of taxes, the government is fair prey government for the resources provided to
for the media and public-interest groups. carry out government programs and
Government officials, thus, exert much services.
time and effort in protecting themselves, Audit of government reporting is an
which is counterproductive to innovation essential element of public control and
and risk taking. accountability.
. Emphasis on stability and reliability. The Public officials have a responsibility to
emphasis in government is on reliability, provide audit coverage that is broad enough
accountability, and legality rather than on
to help fulfill the reasonable needs of
maximum effectiveness and flexibility.
potential users of the audit report. Auditors
. Atmosphere of control and mistrust. Since
can assist public officials and others in
the government worker is subject to strict
understanding the auditors' responsibilities
controls designed for the lowest common
and other audit coverage required by law or
denominator in capability and trust, the
capable and trustworthy employee may regulation. This comprehensive nature of
conform to these low expectations. auditing also highlights the importance of
. Difference in status. Working for the auditors clearly understanding the audit
government is, in many ways, considered objectives, the scope of the work to be
a lower-status occupation than working conducted, and the reporting requirements.
for private-sector organizations. This Performance auditing contributes to
situation is a morale problem in many providing accountability because it provides
government agencies. an independent assessment of the
performance of a government organization,
The consideration of these factors is program, activity, or function in order to
important, because they describe a series of
provide information to improve public
unique, personal problems that affect the
accountability and facilitate decision making
attitudes of government officials. The
by parties with responsibility to oversee or
government manager is not only responsive
initiate corrective action.
to the usual personal and group behavioral
To realize governmental accountability,
pressures but also is influenced by reactions
the citizens, their elected representatives,
to many of these factors.
and program managers need information to
assess the integrity, performance, and
stewardship of the government's activities.
Basic premises
The comprehensive nature of auditing
During the development of government places on the audit organization the
performance auditing standards by a work responsibility for ensuring that:
group sponsored by the USA General . the audit is conducted by personnel who
Accounting Office, and later in revisions collectively have the necessary skills,
thereto, it was believed necessary to . independence is maintained, and
establish a series of basic premises to serve . applicable standards are followed in
as a foundation. These premises follow[2]. planning and conducting audits and
Public officials and others entrusted with reporting the results.
handling public resources are responsible for
applying those resources efficiently,
economically, and effectively to achieve the A recommended plan for
purposes for which the resources were government performance auditing
furnished.
Public officials and others entrusted with In a recent monograph, ``Recommended
public resources are responsible for practices for state and local governments''
complying with applicable laws and (1999), the Government Finance Officers
regulations. Association put forth the following:
Public officials and others entrusted with . Every government should use
public resources are responsible for performance auditing to help
establishing and maintaining effective management to maintain comprehensive
controls to ensure that appropriate goals and internal controls ± especially for areas
objectives are met; resources are where there is a high degree of risk.
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Mort Dittenhofer . The performance audit operation should . External impairments such as:
Performance auditing in be established formally by legal charter. external influences or limitations
governments . The audits should be conducted in on audit scope; interference on
Managerial Auditing Journal accordance with a body of professional audit procedures; time restrictions;
16/8 [2001] 438±442
standards such as the US Government interference in the personnel
Audit Standards (Yellow Book). management processes; restrictions
. Performance auditors should report to the of available resources; authority to
head or deputy had of the government or override audit judgment;
to an executive branch audit committee. jeopardizing continual employment
(Note: in many cases such reporting is of audit staff members.
made to a legislative committee or highly
On an overall basis performance auditors
placed official.)
should be removed from the political process.
. The head of the performance audit
Politics can completely destroy the element
function should hold a college degree, of independence. Also, there must be a
possess adequate experience, and have a presumption of independence as well so as to
professional certification. establish the credibility of the audit process.
. All audit reports should be available to a
government audit committee.
Scope of the performance audit
Use of appropriate staff to conduct Governments are not operated on a profit or
the audits loss basis. There is no direct relationship
between the revenues received by a
Because this type of auditing was significantly
government and the various outputs and
different from the traditional financial audits
outcomes achieved by the government
of governments, it was necessary to modify
organization. Thus, there is no direct
the requirements for the competencies of the
relationship between the input of resources
auditors who would perform the expanded
by the government and the results of the
audits. Two specific areas were concerned:
government's operation as there is in the
qualifications and independence: private sector. This phenomena was
1 Qualifications recognized in the early 1970s when the US
. The staff should collectively possess
government developed its Government Audit
the knowledge and skills necessary for Standards (The Yellow Book) and the
the performance auditing operation. governmental work group that generated
For example: government operations, these standards believed it expedient to
management principles, and substitute certain other relationships to
interpersonal relationships. replace the traditional profit and loss
. The staff should have a complete approach and to expand the scope of the
knowledge of government operations, usual audit process.
accounting, and auditing procedures. These expanded measures were believed
. Where specialized skills are not necessary to determine the quality of
present, such skills should be obtained government operations, namely efficiency,
through the use of outside sources. economy, and effectiveness (or program
. The audit staff should be required to results). Thus, the audit examined these
participate in continuous education aspects and reported to government
activities. management, legislatures, and to the people
. The staff should be proficient in the conditions under which their
communication and in the behavioral governments were operating.
aspects of the audit process. Descriptive material from the US
. The staff should be computer literate. Government Audit Standards (1994, p. 14)
2 Independence relative to this audit activity follows:
. The audit staff and the individual staff Economy and efficiency audits include
members must be free from: determining (1) whether the entity is
. Personal impairments relating to: acquiring, protecting, and using its resources
financial interests; biases and/or (such as personnel, property, and space)
prejudices; previous positions of economically and efficiently, (2) the causes of
inefficiencies or uneconomical practices, and
authority; or previous operations
(3) whether the entity has complied with laws
now being audited.
and regulations on matters of economy and
. Organizational impairments efficiency.
relating to the place of the audit Program audits include determining (1) the
organization within the structure of extent to which the desired results or benefits
the government. established by the legislature or other

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Mort Dittenhofer authorizing body are being achieved, (2) the
Performance auditing in effectiveness of organizations, programs, Privileged and confidential
governments activities, or functions, and (3) whether the information
Managerial Auditing Journal entity has complied with significant laws and Governments are unique in that there is
16/8 [2001] 438±442 regulations applicable to the program.
usually information that is prohibited from
These aspects of auditing also can be applied general disclosure. The information is
to organizations in the private sector. provided on a need-to-know basis only to
However, they are more diagnostic and persons authorized by law or regulation to
indicative of problem areas. Thus receive it (US Government Audit Standards,
government they are substitutes for the 1994, p. 97). If the audit report omits such
wellbeing status of the government. information, the audit report should state the
There is an additional area of coverage in nature of the information omitted and the
governmental performance audits that is reason why it is omitted.
unique. That is the attention by the auditor Implied here is the requirement that the
to compliance with statutes, laws, and auditors who are working in the area where
regulations. Because the government may do such information is available must be cleared
only the things that it is authorized to do, and for the exposure to the restricted information.
in many cases using the methods that are It also means that the audit organization must
prescribed. Thus the compliance audit have secured areas for the storage of the
assumes a major part of the governmental restricted information. Where the transfer of
audit activity, not necessarily replicated to information is necessary, adequate security
the same degree in the private sector. The
provisions must also be provided.
compliance audit also applies to determining
compliance with contracts, grants and other
instruments both direct and indirect.
Government performance audit
reporting
The audit of internal controls There are some specific unique aspects
relative to the reporting on the performance
An area of performance audit activity that is audits of governments (US Government Audit
replicated from private sector auditing is the Standards, 1994, pp. 88ff). Obviously all
review of internal controls. This review may
audits should culminate in a report,
be even more important in government
occasionally oral but always finalized in a
because of the predominance of statutes and
written document. Specifically audit reports
regulations that are descriptive of the
should:
expected results but that are not explicit as to . be available to the public[3];
the methods to be used to achieve them and . be open to the media on a timely basis;
especially as to the internal controls that . provide timely information to all
should protect the government. Some of the
appropriate levels of government
control-related matters that are identified in
management.
the US Government Audit Standards (1994,
pp. 56-7) include: As to report content, the Standards state that
. lack of segregation of duties; the reports should include:
. lack of reviews of transactions, . The audit objectives.
accounting and systems output; . The scope of the audit as related to the
. lack of safeguarding of assets; depth of the audit and the coverage such
. intentional override of control systems; as efficiency, economy, effectiveness,
. absence of control tasks such as compliance, and management controls.
reconciliations; . The methodology used including comment
. absence of control consciousness in the on constraints that may have influenced
organization; and the audit results.
. deficiencies in design of control systems . Significant audit findings including
e.g. internal check and documentary noncompliance and abuse.
controls. . Conclusions or inferences about the
In addition, there are several other internal subject matter of the audit.
control elements that are important to the . Recommendations as to actions that
government operation. Three of these are: should be taken to resolve conditions
1 lack of a system of authority and reported as audit findings.
responsibility; . The views of responsible officials of the
2 lack of a clearly defined organizational auditee organization along with the
structure; auditors' comments pertinent to the
3 absence of an internal audit operation. auditee's views.
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Mort Dittenhofer . Noteworthy accomplishments by the available funding is not keeping pace.
Performance auditing in auditee. Citizens are unwilling to tolerate tax
governments increases, but the responsibilities of
. Items needing further study.
Managerial Auditing Journal governments are increasing. Performance
16/8 [2001] 438±442 The audit reports should be complete,
auditing can contribute materially to the
accurate, objective, convincing, clear,
resolution of this situation.
and concise and should be distributed
according to law or regulation in a timely
Notes
manner.
1 The list of unique aspects of government are
those used by the author in lectures, augmented
by ideas obtained from Eddy (1981).
Conclusion 2 The premises are stated in abbreviated form
Reference to Government Audit Standards
In conclusion, it seems appropriate to quote
published by the US General Accounting
from a recent article by the State Auditor of
Office, June 1994, pages 8 to 10, should be made
Texas (Internal Auditor, 1992):
for the complete explanatory language.
Government leaders are being forced to look
3 Except for classified or confidential reports or
at government spending in new ways.
information that is excluded in compliance
Because there are limited resources and
unlimited needs, leaders must decide which with statute or regulation (see previous
programs to fund and which to cut. section). Presumably includes those with a
``need to know'' and those who, for further
Before setting spending priorities, coordination, should be informed.
government leaders need to know:
. Which programs provide the most for the References
money (economy). Alwin, L.F. (1992), ``Reinventing the government
. Which programs work well (efficiency). auditor'', Internal Auditor, February,
. Who really gets the services pp. 16-17.
(effectiveness). Eddy (1981), Public Organization Behaviour and
. Which programs actually produce Development, Winthrop Publishers,
(program results). Cambridge, MA.
. Which program can be reduced or Recommended Practices for State and Local
eliminated. Governments, (1999), Government Finance
Officers Association, Chicago, IL, pp. 17-18.
In today's economy, all levels of government US Government Audit Standards, (1994), US
face serious funding problems. Demand for General Accounting Office, Washington, DC,
government services continues to grow, but p. 14.

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