Performance or value-for-money audit
In recent years there has been increased use of performance or value-for-money audit and there is some debate over its relative priority compared with financial audit.
Many ACCA members believe that the basic objective of the auditor-general is to undertake financial audit - to form an opinion on the probity and regularity of the budget out-turn report and other financial statements.
The public audit process provides comfort to the electorate that the government does not spend more in total than was agreed by parliament in the budget and that it has been spent on the goods and services which parliament determined. The public audit process also provides comfort that the public service operates with appropriate propriety and regularity. If the government's spending is not regular and proper then the media will provide the main means by which the adverse audit reports are communicated to the electorate.
The scope of the work of the auditor-general may be extended to performance or value-for-money (VFM) audit if this is considered to be cost effective, especially in governments with sound internal control and low levels of fraud and corruption.
The INTOSAI Lima Declaration of Guidelines on Auditing Precepts - (October 1977) includes the following section on Financial Audit and Performance Audit:
- 'The traditional task of Supreme Audit Institutions is to audit the legality and regularity of financial management and accounting.
- In addition to this type of audit, the importance and significance of which is undisputed, there is another type of audit which is orientated towards performance, effectiveness, economy and efficiency of public administration. This audit includes not only specific aspects of management, but comprehensive management activities including organisation and administrative systems.
- The auditing objectives of Supreme Audit Institutions – legality, regularity, efficiency, effectiveness and economy of financial management - basically are of equal importance; it is left to the Supreme Audit Institution to determine the relative prominence to be given to each.'
The National Audit Office (NAO) (UK) and the General Accounting Office (GAO) (US) spend around three-quarters of their time and resources on financial audit. This will always remain the core part of the role of the auditor-general in any country.
In addition, some commentators have criticised the move to adopting a value-for-money approach for public audit. 'Tensions exist within the very concept of VFM. Most notable in the eyes of many commentators... is the tension between the theme of fiscal crisis, questions of economy, efficiency and cost control, and the theme of service quality enhancement or effectiveness' (Michael Power, The Audit Society, 1997, page 44). In addition, 'many VFM auditors were caught between the constraints of their competence and a desire for impact' (Power, page 117). Value-for-money or performance audit is a more complex, difficult and expensive approach. Thus, there is a high risk that performance audit itself will not provide value for money. While value for-money consists of the three aspects of economy, efficiency and effectiveness, the emphasis appears to be on economy. Thus, the National Audit Office claims on each of its reports that it saves taxpayers £8 for each pound (GBP) that it spends. The GAO makes similar claims for the effectiveness of its work in this area.
In addition, the IMF code of fiscal transparency, states that a:
'national audit body or equivalent organization, which is independent of the executive, should provide timely reports for the legislature and public on the financial integrity of government accounts'.
(see also section International Monetary Fund (IMF))
Despite this, the auditor-generals' offices in many developing countries are being encouraged to adopt the value-for-money approach as a matter of priority and are being judged, in part, on the basis of the proportion of audit time spent on this type of work.
The scope of work of the auditor-general may be extended to include value for money, but in many countries the most effective way to improve the value for money with which public services are provided is by reducing the level of irregularity and fraud through improvements to the government's systems of internal financial control. This will usually be most effectively achieved through the traditional financial audit approach.
Thus, many ACCA members believe that the basic objective of the auditor-general should be to undertake financial audit - to form an opinion on the probity and regularity of the budget out-turn report and other financial statements.
Financial or performance audit [PDF, 329k]
August 2003. In recent years there has been increased use of performance or value-for-money audit and there is some debate over their relative priorities. This presentation outlines the relative importance of financial audit and dedicated value-for-money work. It also considers the risks involved with adopting a value-for-money approach to audit.
The IMF code of fiscal transparency
This is the foundation document from the International Monetary Fund which is commonly used to assess the extent to which a government has open and transparent financial management and accountability.
The Lima Declaration of Guidelines on Auditing Precepts
October 1977. The basic document which outlines the most important aspects of public sector external audit is the Lima Declaration of Guidelines on Auditing Precepts. The chief aim of the Lima Declaration is to call for independent government auditing. The Lima Declaration is the foundation document, with its comprehensive precepts on auditing in the public sector.
The Sharman Report [PDF]
2001. Holding to account - the review of audit and accountability for central government in the UK.