Value for Money Auditing By CS Rajarathinam Srinivasan

Traditional Approach

The role of the public auditor traditionally has been limited to opinions on financial statements and related issues of legality, regularity and fraud. This involved assessments of whether transactions were properly controlled, whether care  was taken in the collection and custody of revenues, whether expenditures were properly incurred and, generally, whether Parliaments intentions were being met. However, this approach does not provide information on waste, inefficiency or effectiveness. With the expanded scope of audit in recent years into the 3 Es (Economy, Efficiency and Effectiveness) or value for money auditing. the auditor has had to change the audit approach.

This article discusses value- for – money auditing by presenting the overview of its scope, objectives and methodologies. Some comparisons to financial auditing are also discussed

Value for money approach: Definition-

Auditing   for value for money addresses three essential elements of economy, efficiency and effectiveness relating to the management of entities, programs, activities and functions and projects.

Economy and Efficiency determines:

  1. Whether the entity is managing and utilising its resources (such as personnel, property), space economically and efficiently:
  2. the causes of inefficient or uneconomical practices and has whether the entity completed with the laws and regulations concerning matters of economy and efficiency:

Effectiveness (program results) determines

  1. whether the desired results or benefits established by the legislature or authorising body are being achieved and
  2. Whether the agency has considered alternatives that might yield desired results at a lower cost.

In practical terms the definitions of economy efficiency and effectiveness provide the link between input and outputs.  Economy compares actual inputs(resources) with optimum input. Efficiency is determined by assessing actual output (results) with actual input, effectiveness concerns itself with comparing actual outputs with planned outputs(targets)

The value for money audit will seek to satisfy the dual responsibility of auditors i.e

  1. Express an opinion on the financial statements and the financial operations of the entity and
  2. Report on the results of the audit on economy, efficiency, and when relevant, effectiveness of programs, activities and functions

Audits to achieve these objectives, may differ in coverage, but the approach. Will essentially be the same. In India for instance, the annual audit soon after the plan provides for the financial audits to be undertaken and completed soon after the accounts are submitted for audit. The financial audit report covers financial and accounting matters and results of audits of departmental operations and activities are reviewed during the period. The objective of the annual plan is to ensure that the financial audit is completed, and the report issued on a timely basis.

The audit planning provides for the selective review of in-depth studies of infrastructure projects, development programs, across – the board studies of specific issues, activities or function to be undertaken on priority considerations based on several criteria including topical interest, risk and materiality. In addition, departmental operations are reviewed over a 3 to 5-year review cycle. The emphasis is on the three Es, but regularity aspects as well.

Audit, Objectives and Coverage

The objectives of a VFM audit are to

  1. Access whether arrangements for planning, appraisal, authorizations and control of the use of resources are operational and effective.
  2. Provide an independent assessment of entities performance in managing resources to attain stated objectives, and
  3. Report on conditions found, draw conclusions and make recommendations.

Since the scope of VFM audit is so vast, the VFM auditor will endeavour to assess whether systems are appropriate, operational and effective in the following areas:

  1. Planning, budgeting and accounting (including EDP areas)
  2. Internal controls of income and expenditure
  3. Personal management including reviews of staff levels, compensation, recruitment and training
  4. Management of procedures including acquisitions, maintenance and disposed of lands, property and buildings
  5. Procurement practices and
  6. Measuring effectiveness and monitoring results against standards and objectives

The extent of coverage of these items will depend on largely on the auditor’s judgement of their need and effectiveness in the attainment of management objectives.

System- based Approach

Value-for money is a systems-based approach and thus focuses attention on the availability and use of information. It is conceived “as a direct examination of an auditable area in terms of the auditing objective of understanding the areas as an integral set of rules, procedures, activities, operations and functions.

The systems approach entails appraising operating systems (design inputs, processes, procedures, outputs, volumes, resources and control) and effectiveness, efficiency with which they are operated.

Financial auditing, on the other hand, is oriented to reviewing the financial state of affairs from a retrospective view point. Interestingly, the approach the VFM auditor takes in many areas of his work is similar to that taken by the financial auditors. Evidence is obtained and documented through the same techniques and methods. The difference, perhaps is in the type of audit of evidence which must be obtained, keeping in mind that operational areas are often not as well organized or as orderly as in the financial areas where generally accepted standards are available. It is therefore, just as important in this area of audit to obtain and record all evidences (physical, testimonial, documentary, analytical) to support the auditors judgements and conclusions regarding the organization, program, activity or function audited.

Since VFM audits concern financial and non-financial operations of an audited entity as a whole, an integrated approach is logical as both the financial and VFM audit complement each other. It is also not always possible or practical for all three elements of VFM audits to be applied in the audit of an entity. Such audits, therefore may review one or two of the aspects.

Variations to the Approach

Basically, in whatever form, the VFM audit approach is 2-fold.

  1. The comprehensive review
  2. In-depth Study

The “Comprehensive Review” of an entity’s key management activities, systems and controls on a cyclical basis is intended to

  1. Access compliance with rules, regulations and adherence to systems, controls and procedures, and
  2. Evaluate Economy, Efficiency and Effectiveness aspects in the management of resources.
  3. The Auditor should examine arrangements for allocating and controlling resources, decision-making processes, operating procedures, and existence of performance standards. The cyclic approach does not necessarily mean that the audit of the entity or certain aspects of it will not be subject to minimum levels of auditing outside the cycle.

Furthermore, in a structured approach to such reviews, it is possible to develop “Client Profiles” of each entity for comparison in future years or with other similar authorities elsewhere.

The second form of value-for-money is “In-depth” examination which involves detailed study of the economy, efficiency and effectiveness of the program/ activity, function or project to determine whether the use of resources is optimal and that the arrangements for securing it is adequate, relevant and effective.

In Undertaking “comprehensive reviews” or “In-depth” study, it is neither possible or practical to examine all the operations and transactions within the critical areas selected for review. It is sufficient for an auditor to review or test on a selective basis and apply procedures in such detail as desired necessary in his/her professional judgement based upon his/ her review and evaluation of existing internal control procedures within the problem area concerned. In fact, it may not be necessary for the auditor to examine support systems such as financial management systems, procurement systems etc in any great details, if they are subject to through internal audit scrutiny. In such cases it would be adequate for the external auditor to review the work of internal auditor in VFM audits.

The area of audit where the systems approach to VFM audit is most clearly defined is the audit of computer-based systems. General controls in data processing systems should be reviewed to ensure that controls are designed in keeping with legal and management requirements and are operating efficiently to provide reliability and security over the data being processed. It is necessary to mention in this audit area; the auditor should have a role in the design and development of EDP system or applications to ensure that controls are built into the system and there are audit trails.

Constraints to Effectiveness Audit

The work of the auditor may prove difficult as no clear-cut objectives may exist and, as a result measurable outputs, performance standards and targets cannot be set. The auditor should inquire whether decisions are based on sound and relevant data and are in conformity with objectives, whether due consideration is given to alternative opinions and whether there is any conflict between policy objectives and the means to implement them.

Criteria and standards

Auditing is clearly an important management tool in evaluating whether operations are being executed economically. efficiently and effectively.

However, it is basically a management responsibility to ensure that systems controls, procedures, rules and regulations are in place to achieve value-for-money objectives, goals and results.

It is therefore necessary that criteria and standards be developed which can be generally accepted by all levels of governments/managements. Standards are general measures of the quality and adequacy of the work performed. Criteria are reasonable standards against which management practices, controls and reporting systems can be assessed.

A comprehensive set of criteria and standards will ensure that

  1. Benchmarks are set for assessing management of financial and other     resources for determining whether value for money is achieved
  2. Managers develop and evaluate their own systems and procedures.
  3. Standards for public sector organisations programs and activities have been designed in some countries which are of general applicability and which could be adapted for local use by incorporating standards, where appropriate prescribed by the local professional accounting body.

It must also be remembered that general criteria may not be applicable in each situation and may be developed according to need and relevance in areas where criteria do not exist, they can be developed from many sources such as existing regulations, directives and pronouncements.

Quality Assurance

Apart from the responsibilities of team members, supervisors and audit mangers for ensuring effective audit evaluations of VFM audits, quality controls should be installed to provide assurance that professional standards and maintained. Quality assurance programs take the form of

  • Quality control circles (QCC)

Introduced in India a few years ago, the accent here is on teamwork. This concept requires team members to rationalize their work programs, evaluate options and generally coordinates their efforts during the conduct of the audit Decisions taken at this level are reviewed by the audit advisory committee.

  • Auditor Advisory committee (AAC)

The AAC provides professional advice coordinates management activities, particularly with regard to audit reporting and methodology development, and reviews critically the logic and fairness of the findings, conclusions recommendations being developed.

  • Post- audit quality reviews

This post-mortem function enhances audit-management’s confidence in the accuracy appropriateness, relevance and fairness of findings, conclusions and recommendations, and helps guarantee that the whole audit process (planning, execution and reporting) is well managed and controlled. The quality review also provides assurance of the practicability of the audit approach and the appropriateness of criteria, standards and practices.

Securing Effective action on VFM-Audit findings and reports

Developing audit findings and reporting is the final phase in the VFM audit process in fulfilling the audit objectives of making practical and cost-effective recommendations to management. The usefulness of the VFM audit both to the legislature and to the auditees depends almost entirely upon the contents and timeliness of the reports. Reports must, therefore, be constructive and related to the needs of the clients.

Positive response can be secured under the following conditions:

  • The draft audit reports should be made available to responsible key officers and discussions between officials and auditors should take place at ‘”exit conferences” to discuss conclusions and recommendations so as to reflect fairly managements views.
  • Reports should   clearly   state   the scope   of   audit   and   also   identify limitations.
  • Report presentations — tone, structure clarity, completeness of findings, conclusions and implications—should be a catalyst for management improvements.
  • The report should reflect a balanced perspective i.e satisfactory aspects as well as deficiencies should be noted. Major accomplishments as well as unusual difficulties or circumstances faced by operating officials should be recognised along with problems. Highlighting problems can create defensive attitude. Reports should show the specific actions taken or that will need to be taken to correct reported problems
  • Findings must take cognizance of materiality. Minor issues should be avoided which would detract from substantive issues.
  • Reports must have relevance, be factual and findings and conclusions should be supported by objective evidence.
  • Separate and timely reports to clients nn VFM audits has the advantage of soliciting comments and promote corrective actions. Deferring such reports to the annual report may prove less effective as time may have overtaken events. The usefulness of a report decreases as the time taken to complete the audit increases.
  • Distribution of reports should be to clients and other legally prescribed recipients. Copies of report should be available for public inspection.
  • Reports should be given wide publicity. Adequate coverage of audit reports in the mass media has had salutary effect on the speed with which administrations react to audit findings and recommendations;
  • Administrative processes should be in place to ensure that proper follow-up action is taken on findings and recommendations.

As a general   rule, the effectiveness of the action taken on  VFM-  audit findings and reports can be measured by the promptness in correcting deficiencies, strengthening system controls, and improving performance. The positive response will be noted at both central agency and entity levels.

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