Value for Money Audit Process
1) Introduction Value for money auditing is a recent expansion in the scope of auditing. In the public sector, State Auditors were traditionally concerned with regularity of expenditure and compliance with laws, rules and regulations. They also reported to Parliament on the deficiencies in revenue collections and any wastage of public funds. In the early 1970s, the role of state auditors began to change dramatically. Changes began in USA, Canada and in several European countries. The elected representatives of the people started demanding information on the efficacy and the effectiveness of public expenditure. They expressed dissatisfaction with the traditional role of audit which focussed merely on regularity and compliance aspects. They wanted to know value for money being achieved from the expenditure of public funds. They expected greater accountability from public officials in the management of public funds. The state auditors tried to respond to this challenge and started value for money auditing. The value for money auditing is also referred to as performance auditing, comprehensive auditing, management auditing, efficiency auditing, etc. 2) There is no universally accepted definition of value for money audit. The Canadian Comprehensive Auditing Foundation defines VFM auditing as “A comprehensive audit is an examination that provides an objective and constructive assessment of the extent to which: • Financial, human and physical resources are managed with due regard to economy, efficiency and effectiveness; and • Accountability relationships are served.” The United States General Accounting Office Auditing Standard defines VFM as, “performance audits include economy and efficiency and program audits. (a) Economy and efficiency audits include determining; i. whether the entity is acquiring, protecting and using its resources (such as personnel, property and space) economically and efficiently, ii. the causes of inefficiencies or uneconomical practices, and iii. Whether the entity has complied with laws and regulations concerning matters of economy and efficiency. (b) Program audits include determining; i. The extent to which the desired results or benefits established by the legislature or other authorizing body are being achieved, ii. The effectiveness of the organization, programs, activities or function, and iii. Whether the entity has complied with laws and regulations applicable to the program.” The definition used by the Auditor General of Pakistan is “an independent appraisal of an audit entity to determine the extent to which resources were managed with due regard to economy, efficiency and effectiveness and in conformity with applicable regulations, rules and procedures. While there are some differences in the definition of VFM auditing, it is clear from the above definitions that the core of value for money auditing is the framework of
Definition of Value for Money Auditing
economy, efficiency and effectiveness.
2.1 Economy
Economy may be defined as “minimizing the cost of resources used for an activity having regard to the appropriate quality”. Economy relates to all types of resources such as physical, financial, human and information. The question of economy is relevant to the acquisition of resources. Auditors try to determine whether the resources have been acquired in the right amount, at the right place, and the right time, of right kind and at the right cost. This by itself is not very easy. It presumes that there are standards available to judge whether considerations of economy were kept in view in acquiring resources. One example of a standard for economy is to accept the lowest open bid for buying an asset. But it is not so simple. It is common knowledge that this is not a fool-proof method. Bid-rigging is a practice known in almost all countries. The bidders join hands to suppress genuine competition and thus fool the system of open bidding. Therefore, the crude standard of accepting the lowest bid may not be sufficient. In this situation when we seek economy in relation to quantity, quality, place, time and cost, more comprehensive standards are required to assess weather economy was observed in acquiring the resources. 2.2 Efficiency
Efficiency refers to the relationship of inputs and outputs. It is relevant to the use of resources. Examples of efficiency are: teacher-pupil ratio in a school and machine-hours to output ratio in a factory. An increase in output without a corresponding increase in input or getting the same output as before with a reduced input indicates an increase in efficiency.
Efficiency is usually a matter internal to the organization. Efficiency does not directly affect the activities of organization’s environment, external to it. For example, in the case of a hospital, efficiency measures may measure the utilization of hospital beds, operation theatres or use of drugs, etc. However, such measures may not directly affect the quality of care or the state of disease or health in the community which the hospital is serving.
Measuring efficiency presumes the existence of acceptable standards/criteria. It is often necessary for auditors to develop such standards/criteria if they do not exist. Therefore, auditors often have to work with the auditee management and other specialists to identify or develop efficiency standard/criteria. Even where standards/criteria exist auditors need to satisfy them that these standards/criteria continue to be relevant. Sometimes efficiency standards/criteria become outdated in changed circumstances but remain in use. For example, the standard of efficiency in an accounts office for processing payment claims may have been devised when computers were not in use. With the advent of computers, the time needed to process a payment claim may have undergone a change. The auditors need to remain vigilant to such changes before accepting the existing standards.
It is relatively easier to measure efficiency in cases where the inputs and outputs are of a repetitive or mechanical nature. We can devise standards for measuring efficiency in such situations. As compared to this, it is quite difficult to measure efficiency where the inputs and outputs are non-repetitive. For example, it is easier to
determine the efficiency of a power house in producing electricity as compared to measuring the efficiency of a doctor who is examining patients, each of whom may be unique. 2.3 Effectiveness Effectiveness has been defined as an ends oriented concept that measures the degree to which predetermined goals and objectives for a particular activity or program are achieved (the attainment of the right results from the usage of resources and organizational operations). Of all the meanings attached to the word effectiveness, probably the most common is related to the achievement of goals. Different authors, with different value systems have their own conceptions of effectiveness, but what brings them near one another is goal accomplishment or performance in meeting objectives. This is how legislative auditors have generally viewed effectiveness for their own work. Although, making goal accomplishment central to effectiveness gives it a clear focus, the problems and implications remain very substantial. The literature on effectiveness contains many studies that raise issues surrounding this particular perspective. Among the observations on this aspect are the following:- Goals are often ill-defined, complex, changing, and contradictory; • It is often unclear at what level or with respect to what units the attainment of goals should be measured; • More than one technology or strategy produces the same outcome; • Goal-based perspectives usually take into consideration the preferences of managers, not all constituencies; and • Goal-based definitions have failed to clarify distinctions between organizational effectiveness, managerial effectiveness and manager and subordinate behaviour and attitudes. The assessment of effectiveness is by far the most important contributor of an accountability regime and at the same time the most elusive. One reason may be that there is no single, high level, generally agreed- upon definition of effectiveness. In daily conversation, being effective describes the capacity or the ability to achieve results. Often, it goes beyond this capacity and being effective means having reached one’s goals, to be successful. The word may also be used to emphasize the impact of one’s efforts or actions. Frequently, it merely describes that capability is actually in use, or that a law or a rule is in force. In practice, when discussing organizations, the word effectiveness is typically modified by one of three terms: Program, operational and organizational. • Program effectiveness relates to the continuing relevance of a program, the attainment of its intended objectives, its impact, and its cost-effectiveness; • Operational effectiveness relates to the achievement of output targets, to the delivery systems for the goods and services produced and the cost-effectiveness of these systems; • Organizational effectiveness relates to the overall capability of the organization and the interactions among strategic planning, management structures and processes and human and financial resources all in relation to the mission and goals of the organization and the external environment. Some writers have refined the notion of effectiveness by making explicit the consideration of cost effectiveness, which is the attainment of the objectives at the least cost, at a lesser cost, or at least at a reasonable cost in relation to the value of the outcome. Some have also included intended and unintended results or outcome of a program as factors in the measurement of effectiveness. Others still, particularly program evaluators have included the assessment of the continued need for the program in their conception of effectiveness. They ask the question: are the reasons that gave rise to the program in the first place still valid today? How effectiveness is viewed will depend on who is looking for it. Different views may be taken by the electorate, specific constituencies, customers, governing bodies, managers and so on. Each view has validity in its own context. 2.3.1 Public Sector Reform The public sector reform is moving towards results that matters to the citizens. In many countries progress have been made in moving in this direction. In the case of managing for results and particular outcomes, a public officer’s control and supervision vary considerably in different situations. In some cases, a public officer may have significant control over outcomes. In other cases several officers may be given responsibility and authority for the management of resources to influence the achievement of intended outcomes. The programs and projects managed by the Government are intended to provide certain outcomes. • Employment creation • Healthier public • Better standard of living • Poverty alleviation Effective program/projects are those that make a difference in meeting these objectives. We can ascertain with some difficulties whether or not the above outcomes are occurring. But, it is more difficult to determine to what extent the specific program/project in question has made to the outcome. How much of the success or failure can be attributed to the program/project. What has been the contribution made by the program/project? Despite measurement difficulty, attribution is a problem that cannot be ignored when trying to assess Government programs/projects. There are many other factors at play in addition to the impact of particular programs. There are other Government actions or programs, social trends and economic factors can have impact on the outcomes. The Government and the public would like to know contribution to outcomes from a particular program. Without solving the measurement problem, it is difficult to demonstrate that a particular program is making a difference. 3) Selection of Projects/ Topics for VFM Audit Governments spend money on several program and projects. It is important that the money is spent to achieve the desired objectives with emphasis on 3 E’s. (economy, efficiency and effectiveness). Public Officers are responsible for ensuring, programs and projects are managed in a proper manner. Auditors are responsible for providing independent assistance to Parliament whether value for money has been received. Auditors, due to limitations on resources cannot afford to audit all programs and projects. Therefore, selection of individual projects for audit is a key judgement that an auditor must make. The auditors should focus on those audits with maximum value added in terms of improved accountability, economy, efficiency and effectiveness. National Evaluation Conference 2003, Session 1, Paper 3 Page It is useful to rank VFM Projects/Topics subjectively against the following selection factors. • Overall estimated audit impact • Financial materiality • Risk to good management • Significance of program to the activities of the entity • Previous audit coverage • Auditability The factors to be considered for selection of a VFM audit alone will not enable us to select a project. Source from which we can obtain information and data on different projects /topics with respect to the various factors are given below. • Budget speech of the Finance Minister • Accounts and Reports of Government Ministries and Departments • Media Reports • Earlier evaluation reports • Agreements with Donor Agencies • Reports of Parliamentary Committees 4) Audit Objective and Scope The first step in planning of VFM audit is to define carefully the audit objectives. The statement of audit objectives should articulate what the audit is to accomplish. The objective of VFM audit may be to express an opinion on economy, efficiency and effectiveness of management. The auditor may set an objective of only reporting exceptions. Audit objectives are generally expressed in terms of what questions the auditor is expected to answer. Example – Results achieved Report on exceptions Focus on systems and procedures Focus on results 5) Audit Criteria Audit criteria are reasonable and attainable standards of performance against which economy, efficiency and effectiveness of activities can be assessed. If audit criteria are not set, there will be no basis for comparison and consequently no basis for arriving audit findings, conclusions and recommendations. In financial auditing, the auditors usually apply generally accepted auditing practices which evolve through practice and academic work. VFM auditing attempts to evaluate vast varieties of activities and functions and therefore, there are no generally accepted criteria. VFM auditors, therefore, operate in more difficult terrain than the financial auditors. 5.1 Types of audit criteria
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i.General criteria
ii.Specific criteria
General criteria General criteria are broad statement of acceptable and reasonable performance. For example the procedures in an organization may be cumbersome to be effective. In this case generally accepted management practices can be adopted as audit criteria. Specific criteria Specific criteria are more closely related to an entity’s objectives, programs, systems and controls. In highly specialized technical areas, auditors may require the assistance of technical experts. For technical projects this competence can be achieved through a team of auditors consisting of auditors and technical experts from different discipline. In VFM auditing auditors access the performance of a Program/Project against pre-determined expectations of performance or criteria. In order to be acceptable criteria must have certain characteristics as reliability, objectivity, usefulness, understandability, comparability, appropriate and acceptable.
6) Audit Evidence
Audit evidence can be defined as information collected and used to support audit findings.
INTOSAI Auditing Standards and ASOSAI Performance Auditing Guidelines state that evidence should be:-
“Competent, relevant and sufficient to support the auditor’s judgement and the conclusions regarding the organization’s program, activity or function under audit”.
Competent Conforms to facts
Evidence from personal observation
Documentary evidence
Original documents
Relevance Relationship to the audit objectives
Sufficient Adequacy of evidence
The quality of evidence
The level of materiality
Audit evidences usually fall into four types.
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