Performance audit: Scrutinizing what is working well


Before beginning a performance audit, it is important to understand what a performance audit is and how it differs from other types of audits, such as financial and compliance audits. Performance audit typically tests if a government is making good use of resources to effectively deliver its policy goals and achieve its intended impact. Such audits often intend to examine the implementation of a policy or policies. Performance audit may use tests to examine government performance against relevant criteria to find the reasons for any “underperformance.” Performance audit may also identify what is working well within audited entities or measure how performance has improved due to certain “changes” the entities have made to policy or operations.

Performance auditing is carried out by an independent organ with the objective of examining whether government undertakings, systems, operations, programs, activities, or organizations are operating in accordance with the principles of economy, efficiency and effectiveness and whether there is room for improvement.

A performance audit covers the full range of government activities, including organizational, financial and administrative systems. It may focus on activities including procurement policies of the government. It may also concentrate on outputs such as productivity levels in government-owned industries.

Performance audit may give emphasis to delivery of services, including speed and quality of a particular government service. In this respect, the main objective of performance auditing is to constructively promote economical, effective and efficient governance and to contribute to accountability and transparency.

Performance auditing seeks to provide new information, analysis, or insights and, where appropriate, suggest recommendations for improvement. In Ethiopia, the TPLF junta had not taken action on performance audit reports. In fact, Auditor Generals had been “threatened” for presenting their reports directly to the Parliament without the approval of the Chief Executive, the TPLF.

The audit service may provide new analytical insights, making information more accessible to stakeholders. It may also offer an independent and authoritative view or conclusion based on audit evidence. The conclusion and recommendation is based on an analysis of audit findings, new information, knowledge and value. The three principles of economy, efficiency and effectiveness (3Es) are central to performance auditing. They are also virtuous ways of distinguishing a performance audit from a “compliance” audit. These principles require that auditors set a clearly-defined audit objective(s) that relate to the principles of economy, efficiency and/or effectiveness.

The first principle of economy (E1) focused on keeping the cost low. It emphasizes on how the audited entities succeeded in minimizing the cost of resources or inputs, taking into account the appropriate quality of these resources. Such audit ensures if the resources used were available in due time, of appropriate quantity and quality, and at the best price. When conducting audits of economy an auditor may check if the best prices have been obtained for a given service or labor provided.

The auditor may also check the potential for reducing the cost of services delivered. It is critical to check if there had been a waste of resources in achieving an output. This principle had not been accepted by the TPLF as it had exposed its corrupt functionaries. Auditors could not examine management decisions made by the junta functionaries regarding illicit procurement of goods and services.

The second principle of auditing is efficiency (E2). Efficiency assesses the relationship between inputs and outputs. Auditing efficiency means checking whether the inputs have been put to optimal or satisfactory use. It also means checking whether the same or similar outputs, in terms of quantity, quality and time, could have been achieved with fewer resources. In other words, the output, in terms of quantity and quality, is achieved using available inputs.

Efficiency is about the maximum output obtained for a given level of input or the minimum level of input required for a given output level. Quality is an important concept on the input side, “both” in efficiency and economy. Efficiency focuses on getting the most from available resources. It is concerned with the relationship between inputs used and outputs delivered.

The third principle of effectiveness (E3) deals with outputs, results or impacts. It is about the extent to which policy objectives have been met in terms of the generated output. It is concerned with the relationship between goals on the one hand and outcome on the other.

The question of effectiveness consists of two parts. The first is related to the extent the objectives are met, while the second is related to the output of the policy pursued. Effectiveness is meeting the objectives set and achieving the intended results. This requires suitable measures to monitor and evaluate impacts in a given period. Effectiveness focuses on entities if they are achieving their objectives in all parts of the community.

Effectiveness may be split into two distinct aspects. These are the attainment of specific objectives in terms of “outputs” and the achievement of intended results in terms of “outcomes.” If the focus is purely on outputs, it will probably be on the changes in indicators, such as numbers and proportions.

A more ambitious audit, looking at outcomes, might consider more complex results such as impacts of policy. It assesses if the implementing agency is able to predict and respond to gaps in achievement. In that case, looking for effectiveness in terms of outcomes would be necessary to look at “connections” among entities and institutions. The TPLF party had been operating secretly to hide its business connections. The junta had engaged enterprises that had been directly accountable to the party.

Working on effectiveness can benefit from approaches drawn from disciplines such as program monitoring and evaluation (ME). It is the activity of examining the implementation and “impacts” of policy interventions to identify and assess their intended and unintended effects and costs. Where appropriate, audit experts have to consider the impact of the regulatory or institutional framework on the performance of the audited entities.

Auditing the effectiveness of performance in relation to the achievement of the audited entities’ objectives entails auditing the “actual” impact of activities compared with the intended impacts. According to auditors, effectiveness can be measured by various methods. The most sophisticated methods compare the situation being addressed “before and after” the introduction of the policy or program and involve measuring the behavior of a control group.

Qualitative methods are better suited to gain insight into causal relations between policy or program and effect. When concluding the causal relation between policy or program and effects, it is important to clearly communicate the strengths and limitations of the methods used. In practice, it will be difficult to make these comparisons.

The reason for this is lack of suitable comparative material. It can be extremely difficult to isolate the impacts of the policy or program being audited from “other” outside factors. More commonly, auditors may assess the plausibility of the assumptions on which the policy is based. They may also assess if earlier steps in the program have been achieved. Less ambitious audit may be needed, such as assessing to what extent the objectives have been achieved.

An audit will often focus mainly on one of the 3Es. It is, however, advisable not to examine aspects of economy, efficiency or effectiveness of activities in isolation. Looking at economy without also considering the outcome of a policy might lead to inexpensive but ineffective interventions. Conversely, in an audit of effectiveness, the auditor may also wish to consider aspects of economy and efficiency.

The outcomes of an audited entity, activity, program, or operation may have the desired result, but at any cost. Using the 3Es in performance audit, it is possible to look at more than one area, and the relationship between them is important to understand. An auditor may be looking at resources being used over a given period to achieve an objective. It is important to understand the relationship between the intervention and its objectives, inputs, processes, outputs, outcomes and results and impacts.

It is necessary to explain the relationship between the 3Es with regard to inputs, outputs and outcomes. Performance auditing promotes accountability by helping those with governance and oversight responsibilities understand the actions needed to improve performance in relation to the 3Es. It can bring to light hidden problems by examining if decisions by the legislature or the executive are economically, efficiently and effectively prepared and implemented and whether taxpayers and citizens have received value for money.

In Ethiopia, during the TPLJF regime, questioning the intentions and decisions of policy makers were not encouraged. It was also difficult for auditors to divulge any shortcomings during implementation that prevented objectives from being achieved.

The outputs of performance audit will be of interest to different entities. These may include government and legislative bodies; it is also of interest to taxpayers and other sources of public finance; it may relate to those targeted by government policies; and in some cases, the media may be involved. Thus, performance auditing directly contributes to providing useful information to citizens while also serving as a basis for learning and improving the public sector.

Performance audits also help the legislature hold government accountable for performance. The TPLF junta did not allow audit reports to be delivered directly to the legislature, without its prior approval. Had audit reports been the basis for hearings at the Ethiopian legislature, they could have made the TPLF accountable for embezzling public funds.

Performance auditing focuses on areas in which it can add value for citizens. It focuses on areas which have the greatest potential for improvement. Performance audit provides constructive recommendations for the audited entities to take appropriate action to improve on achievements. Generally, performance audit offers “benefits” such as: identifying waste and inefficiency in delivering public services; opportunities to maximize return on investment in public services; risks to the achievement of policy goals; and matters of social and economic concern to citizens. It explains ways in which entities can make a difference in the lives of citizens. It shows the specific contributions that performance auditing can make. Public sector auditing is an important factor in improving the lives of Ethiopian citizens.

Audit reminds the custodians and guardians of public resources on how well they should use resources. Such awareness supports desirable values and underpins accountability mechanisms, which in turn leads to informed and improved decisions. Studies show that once audit results have been made public, citizens can hold the custodians of public resources “accountable.” In this manner, audit promotes the efficiency, accountability, effectiveness and transparency of public administration. Performance audit increases value and to this end auditors design methods, analyze and communicate strategies that maximize the impact of audit. Integrity of audit provides assurance on holding public sector entities “accountable” for their supervision and use of public resources.

In conclusion, the three parties in public-sector audits are the auditor, the ruling party and the intended beneficiaries. They may assume distinct characteristics in performance auditing. The auditor’s role is fulfilled by the persons to whom the task of conducting the audits is delegated. Audit reports are signed only by the Auditor General, who takes responsibility for the audit.

The audit rules have to be interpreted according to institutional responsibility. Auditors in performance audits typically work in a team offering different and complementary skills. The responsible party and the intended users have to provide the auditor with the required information. Intended users are the organizations for whom the auditor prepares the audit report. They may be the legislature, executive, government agencies, or parties concerned with the audit, and the public.

It is important that the auditor should consider the needs and interests of the intended users and responsible parties. Audit reports should be reported periodically without delay. As time elapses audit reports lose their effectiveness. Culprits, offenders, felons and embezzlers of public funds will have the opportunity to escape punishment if the government does “not” act in time on audit reports submitted to it. Similarly, the legislature or the parliament “misses” the opportunity to demand the government on actions taken on offenders on the basis of audit reports.

If no action is taken by both the executive and the legislative/parliament based on audit report, then there is “no” need to have audit services that waste public fund. It would only be repeating the bad experience of the TPLF junta that embezzled resources of the poor Ethiopian people. In this regard, all branches of the government of Ethiopia should pay close attention and “act” on the basis of audit reports prepared and submitted by auditors.

 Editor’s Note: The views entertained in this article do not necessarily reflect the stance of The

The January 8/2022

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