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Performance Audit
What is Performance Audit - I?
     INTOSAI Auditing Standard 1.0.40
Performance audit concerned with the audit of economy,
efficiency and effectiveness and embraces:
  Audit of the economy of administrative activities in
accordance with sound administrative principles and
practices and management policies;
  Audit of the efficiency of utilization of human, financial
and other resources, including examination of
information systems,        performance measures and
monitoring arrangements and procedures followed by
audited entities for remedying identified deficiencies; and
  Audit of the effectiveness of performance in relation to
the achievement of the objectives of the audited entity
and audit of the actual impact of activities compared with
the intended impact
What is Performance Audit - II?

“Performance auditing is an
assessment of the activities of an
organization to see if the
resources are being managed
with      due      regard      for
economy,      efficiency      and
effectiveness and accountability
requirements are being met
reasonably.”
Muhammad Akram Khan, D-
Our Legal Mandate for Performance Audit

      Comptroller & Auditor General’s
  (Duties, Powers & Conditions of Service)
                 Act, 1971




         16 17
        15   19
      14       20
     13         23
Objectives of a Performance Audit
  Quality of information and advice available to government
for the formulation of policy
  Existence and effectiveness of administrative machinery to
inform the government whether program objectives and
targets have been determined with a view to fulfilling policy
objectives
  Whether and to what extent, stated program objectives
have been met
 Economy, efficiency, effectiveness, equity and ethics of the
means used to implement a program/activity
  Intended and unintended, direct and indirect other impacts
of programmes/activities, e.g. environmental impact of
government activity
  Compliance with applicable laws and regulations in the
context of the performance audit objectives
Performance vs. Regularity Audit - I

 Features          Regularity                Performance
            Generally     covers   a Covers the program over a
            financial period         period of time
            Coverage is for the Focused only on a part of the
  Scope     whole of the entity for entity’s
            the period              programs
            Audit to be
            completed       by     a Coverage is selective
            stipulated time
Performance vs. Regularity Audit - II
  Features                Regularity                        Performance

              Attestation of                    Covers the subject/program over a
              financial accountability          period of time;
              Audit of financial systems        Focused only on a part of the entity’s
                                                activities/program
              Audit of internal control for     Coverage is selective
              safeguarding assets and
              completeness and accuracy of
              Accounts
              Evaluation of financial records   Audit of economy, efficiency and
                                                effectiveness

 Objectives   Audit of propriety of             Audit of internal controls – 3Es,
              administrative decisions          adherence to management policies,
                                                timely and reliable financial and
                                                management information
              Limited to financial matters      Extends to non-financial /governance
                                                issues too
              Test for assuring compliance to   Assessment of compliance to
              laws, regulations and rules       applicable laws and regulations
                                                required in the context of audit
                                                objectives
              Opinions generally                Conclusions related to audit
              with reference to standardized    objectives set by auditors
              requirements
Performance vs. Regularity Audit - III
 Features         Regularity               Performance
            Financial  statements Variety of forms of evidence
            per se, accounting
            documents, etc.;
            Budgetary
            assumptions          and Quite often   qualitative   in
            appropriation            nature
            authorizations, etc.;
 Evidence
            Transaction
            documents
            Conclusive nature of Persuasive     rather    than
            evidence             conclusive - evidence related
                                 to pre-determined
                                 audit objectives
            Materiality by amount   Materiality guided more by
                                    the nature or by context
                                    rather than amount alone
Performance vs. Regularity Audit - IV
Features     Regularity        Performance
Academic                       Always knowledge-based: of
base         Generally         laws,     social       sciences,
             accounting        economics,         development
             knowledge         studies, public affairs, science
                               and technology, etc
            More or less Varies widely from subject –
Approach & standardized:     manual generally serves as
methodology manual generally basic framework
            forms the
            entire basis
                               Widely varying and subjective
                               with     ample    scope    for
Assessment   Standardized      interpretations & assessment
Criteria     with little scope criteria support the audit
             for subjectivity  objectives, which are unique
                               to the subject of performance
                               audit
Performance vs. Regularity Audit - V
Features        Regularity                Performance
           Opinion     on    the Conclusions on 3Es
           financial
           statements;
           Opinion            on Report      presented    in
           compliance to         variety of forms
           laws, regulations and
           rules
Report
           Generally opinion on Wide-ranging in nature,
           financial statements open to interpretations
           in       standardized and subjective judgment
           format
           Related to specific      Generally       separate
           financial    periods-    publications  on   each
           there is a periodicity   subject of performance
           of reporting             audits
                                    as and when conducted
Typology of Program Evaluation
   Type                        Objective
Process       Assesses program activities’ conformance to
              statutory and regulatory requirements, program
              design    and    professional   standards    or
              expectations

Outcome       Focuses on processes, outputs and outcomes
              (including unintended effects) to judge program
              effectiveness

Impact        Compares program outcomes with an estimate of
              what would have happened in its absence -
              employed when external factors are known to
              influence the program’s outcomes

Cost          Assesses the least costly alternative to meet to
Effectiveness achieve a single goal or objective
Changing Jargon & Avatars of Performance Audit
New Dimensions of PA’s Operating Environ - I

   New models of governance
   Greater role for NGOs in program/service
 delivery
   Public Private Partnerships
   Direct transfer of development funds to
 provinces
   Enhanced delegation of spending powers to
 relatively junior state officials
   Commercial exploitation of nation’s natural
 resources by private sector & their regulation
   Mass privatization of public utilities & their
 regulation by the state
New Dimensions of PA’s Operating Environ - II
   Mass privatization of public utilities & their
 regulation by the state
   Rising education and standard of living begets
 greater demand for accountability
  Better education also provides better skill sets to
 SAI personnel
   Declining standards of probity in public life
   Young generation no longer used to government
 inefficiency, waste and corruption
   Right to Information Act, Lok Pal Bill, etc.
   Increasing judicial intervention for accountability
   Corruption affects foreign investment           and
 retards domestic saving and investment
Why is Performance Audit good for SAIs?

  Concentrates the audit effort in a public
program/project
  Utilizes slack in diverse skill sets and
synchronizes multi-disciplinary evaluation by SAIs
  Administrative-cum-financial external appraisal
synched with program is greater help to policy
planners, makers and implementers
  Synergize   policy delivery mechanisms with
concurrent accountability
  Well-suited for developing countries where
government still delivers most public programs
  Greater     public     visibility,   debate   and
accountability of public resources
The Performance Audit Schema


       Economy              Efficiency




                 Effectiveness




       Performance Audit
The Performance Audit Schema
Key Terms of Performance Audit
  Accountability     Efficiency

    Activities      Management

   Assessment       Organization

    Economy        Reasonableness

  Effectiveness      Resources
Accountability & Reporting
Legislative control over public finances
established by:
Assessment & Reasonableness
      • Auditor formulates a judgment on the
        basis of relevant and reliable evidence,
        discusses with management and validates
 I      procedures



      • Considers constraints of the management
        and operating environment
 II

      • Does not base its judgment on hindsight
        wisdom
III
Organization, Management & Resources

       Performance auditing takes an overview of the
       activities and functions of an organization as a
       whole. In exceptional cases, it may review an
       isolated project or a programme as well



       Resources of an organization consist of
       money,    men, materials, and machines.
       Performance auditing reviews all these
       resources



       Management covers such functions as planning,
       organization,    resourcing,    directing   and
       controlling. Performance auditing reviews all
       these phases of management cycle. It is not
       concerned merely with the 'use' of resources.
The 3E Schema
What are the 3 Es?
                   Economy
Acquiring resources at the lowest cost keeping in view the
              objectives of the organization




                   Efficiency
    Relationship of inputs and outputs - utilization of
                       resources




               Effectiveness
 Extent to which an organization achieves its objectives
How is PA different from Internal
Appraisal?




         Audit Finding
        Criteria Cause
        Conditions   Effect
Criteria Characteristics

                 Reliable




  Comparable                 Acceptable




Comprehensible               Complete




                 Objective
What is an Audit Criteria?
What is Audit Criteria in Real Life?
A Program Logic Model
         Socio-economic Problems
Needs                              Objectives


                 Action
Inputs                             Processes


                Outcome
Output                               Results



  Impact on Socio-economic Problems
Where do the 3Es fit in?

     Allocation of Inputs


     Use of Inputs
     Processes
     Outputs

     Results > Objectives
     Impact > Objectives
What is Economy?

 Spending only that much which is
 barely essential to achieve
 organizational goals


 For example, if lowest bidder leads
 to interruption in operations, it may
 not be the most economical manner
 of buying these supplies


 Therefore, while reporting on
 economy the, auditor should keep
 in view effectiveness of the
 organization in achieving its goals
How do I judge economy?

Right          Right       Right
Time           Place       Cost
                              Capital
 Demand
                Idle HR
                            Operating

Procurement                Maintenance


               Automated    Down Time
               assembly
Availability
                           Salvage Value
Yardsticks for Judging Costs

       • Costs estimated in the form of streams over the
         life-time of the asset
 I

       • Cost streams then discounted to the present
         using an appropriate discount rate
II

       • Not a simple comparison of one-time capital
         cost, usually done in traditional auditing
III

       • Calculation of minimum cost presumes
         estimates of cost would be prepared for all
IV       available alternatives
What is Efficiency?

An economic state is one in
which      every    resource    is
optimally allocated to serve each
person in the best way while
minimizing         waste       and
inefficiency
Can Government Always be Efficient?
      • Unlike profit-making entities, government is a
 I      developmental entity in which there are few choices

      • Government is slave to people’s will represented by
 II     the Legislature

      • Government     focuses    on   entire   nation   and     its
III     problems


      • Availability & Flexibility of use of resources limited
IV

      • Public policy is therefore a political animal
V

      • Yet Governments remain accountable to the people
VI
How do I measure efficiency?
      • Are all levels of the organization aware of their
I       goals?


      • Is there a reliable system in place to monitor the
II      output of each level?


      • Does management receive regular reports on
III     current levels of efficiency or services rendered?


      • What are the measures taken by management to
IV      improve its efficiency?


      • What efficiency measures are feasible in the
V       given situation?
How does efficiency relate to productivity?
         Productivity = Amount of goods or services
         produced / amount of resources used i.e. ratio
         of input and output or capital output ratio

         Efficiency is the relationship        of actual
         input/output (productivity) to a      prescribed
         performance standard

         Time taken for producing 80 bags of cement is
         one machine-hour is productivity of the plant

         This level of productivity may however, be 80%
         of the standard which is 100 bags per machine-
         hour

         Efficiency is, therefore, measured in terms of
         rate of return of production, work done in a time
         span or unit cost
Prerequisites for Measuring Efficiency
        Outputs should be uniform and repetitive, e.g. filling in
        prescription by the pharmacist in a hospital


        Non-uniform output like police programme, writing
        press briefs by Information Department etc., cannot be
        measured

        There must be an agreed standard of performance
        against which actual output has to be measured, e.g. in
        case of a school the number of class-contact hours for a
        teacher in a week should be laid down as a standard


        If standards do not exist then output may be measured
        with previous years



        Sometimes measurements are compared between two
        geographical locations, or, comparison with private
        sector - data of past years should be available
Measuring Efficiency in Government - I
         Assess whether the objectives of and the
         means provided (legal, financial, etc.,) for
         a new – or ongoing – public sector
         program are proper, consistent, suitable
         or relevant to the policy


         Assess the effectiveness of public sector
         programs and/or individual components,
         i.e. assess whether objectives are met


         Assess whether the observed direct or
         indirect social and economic impacts of a
         policy are due to the policy or to other
         causes, but only if it can be established
         with evidence
Measuring Efficiency in Government - II

        Identify factors inhibiting satisfactory
        performance or goal-fulfilment


        Assess whether the programme
        complements, duplicates, overlaps or
        counteracts other related programmes

        Assess the adequacy of the
        management control system for
        measuring, monitoring and reporting a
        program’s effectiveness

        Identify ways of making programmes
        work more effectively
Advantages of Efficiency Measures

 I
      • Control quality and quantity


II
      • Demonstrate achievements


III
      • Prepare Budgets and Plans


IV
      • Rationalize pricing of products


V
      • HR performance appraisal
Efficiency Measurement Tools– I

Inter-authority Comparison
Comparison               with         similar
authorities, delivering similar programs and
operating in comparable environments with
following illustrative parameters:

  Operating expenses
  Usage of service or the client population
  Unit cost of service provision
  Manpower levels
  Performance indicators
Efficiency Measurement Tools – II
Internal Comparison
   Comparison of costs between different services
or facilities provided by the same authority at
different locations or in different departments

 For example, repair costs by class of vehicle, or
energy consumption by schools or residential
units

 Large range of performance indicators can be
developed by the auditor from the internal data
such as:

 ratio of administrative cost to operational costs
 ratio of over time payments to total payroll
 number of issues per hour in a library
Efficiency Measurement Tools – III
Past Performance & Targets

           Comparison with past years may
           show potential areas for saving


            Auditor should analyze cost and
                     output trends

            Targets set and achieved by the
            management for itself should be
            used as comparison measures
Judging Effectiveness - I

      • Are objectives precisely defined ?
I

      • Are objectives based on reliable facts and
II      forecasts?

      • Are    policy instruments to operationalize
        objectives based on detailed analysis of
III     alternatives?

      • Can progress be reasonably attributed to the
IV      activities and policies of t he auditee?


      • Does the auditee adequately monitor      the
V       effectiveness of a policy instrument?
Judging Effectiveness - II

       • In measuring effectiveness a
         distinction needs to be made
I        between output and outcome


       • Output relates to results of
         certain   inputs within  the
II       organization


       • Outcome relates to the results
         external to the organization
III
Performance Measures for Effectiveness

Three main problems:
  Jointness: Where a number of different policies may
contribute to satisfying unmet needs
  Ex: Educational standards may be affected by the size
of classes, the quality of teachers and the supply of
equipment
  External factors: May affect the outcome of a project or
programme
  Ex: Income and social status of consumers
  Cost: Sometimes programmes cannot be carried out in
the most effective manner due to prohibitive cost.
  Ex: It may be more effective to have more teachers than
to provide more books. But the cost of the former may be
prohibitively high.
What should the Auditor do?

 Decide indicators in consultation with
management

  Also keep in view any national or
international standards already available

  Objectives laid down in the plan may
be taken as a bench mark for some of
the outcomes

  In no case should the auditor
restrict his audit criteria to the
original plan only
Some PA Tools We Use

 I   • Survey

II   • Statistical sampling

III • Benchmarking
IV • Focus groups
V • Interviews
VI • Case studies
VII • Qualitative data analysis
VIII • Program Logic Model

IX   • Flow charts
Potential Impact Areas of PA
Economy          Reduction in costs through better
                 contracting, bulk buying, etc
                 Reduction in costs through economies on usage
                 of personnel or other Resources
                 Greater outputs from same inputs
Efficiency       Remedying duplication of effort or lack of
                 coordination
                 Better sub-objectives and targets
Effectiveness    Better achievement of objectives by changing
                 the nature of outputs or improved targeting
                 Shorter waiting lists
Service          Improved equity in access to programmes
Planning &       Better control and management of human
Control          resources, assets, projects and resources
                 Improved forms of account, including
                 commercial formats
Accountability   Better and/or more accurate performance
                 indicators
PA of I-T Systems - I
  Strategic and operational management of IT within
the entity, including assurance that IT is included in
the overall corporate governance of the entity
  IT project management within the entity, including
the entity’s record in meeting legislative and other
deadlines;
  The risk management practices of the entity in
relation to IT
  IT system design, development and maintenance
controls
  Compliance    with    standards,   including   external
standards
 Application controls
  Processing controls, including audit trails
PA of I-T Systems - II

 Business continuity arrangements

  Data integrity, including sampling of data
(possibly using CAATs)

  Access controls and the physical and logical
security of networks and computers, including
Internet firewalls

 Controls to safeguard against illegal software

 Performance management and measurement

 Other issues that arise during the audit
Software used in I-T PA Audit
                        Teamrisk – risk assessment tool for
                        preparing risk based audit plan
     TeamMate           Teamschedule – tool for scheduling staff
       (PWC)            resources to audit
                        Teammate (EWP) – electronic work paper
                        system
                        Teamcentral – web-based issue tracking
                        system
     Crystal Ball       Uses     Monte   Carlo   simulation    in
      (US GAO)          conjunction with a cost estimation
                        spreadsheet on the costs to give a range
                        of values and the probability or the
                        certainty of the values - useful for
                        performing cost and uncertainty analysis
Earned Value Analysis   Measure progress of project
                        Provide schedule and budget variances
                        on a particular date
                        Forecast completion date and cost of
                        completion of project
Sources of Performance Measures
  Citizen surveys: Especially in areas of social
services, police, garbage collection etc. - extreme
care be exercised in determining sample size and
preparing questionnaires
  Trained observer ratings: Used to rate conditions
in a particular area, using a pre-designated rating
criteria such as street cleaning
  Industry standards: Comparison of the results
with prevalent standards in that area or with similar
programs
 Internal records: Occupancy rate for residential
homes, user complaints, etc.
Some Words of Caution - I
  Auditor not expected to carry out the
above exercise himself
   Primary duty is to see if the auditee has
a reliable system to evaluate its own
effectiveness
  In that case, he would focus his attention
on the adequacy of these procedures
   In case the auditee does not have a
reliable mechanism to measure its own
effectiveness the auditor may have to do it
himself
Some Words of Caution - II
  Simple explanation of possible reasons for
shortfall in achievement of goals not enough
  Ex: Not enough to say that the agency could not
achieve its goals because of cost over run or time
over-run
  Instead auditor should analyze the reasons in
following two categories:
  Factors that could have been influenced by the
agency
  Factors that could not be influenced by the
agency such as Government policy, applicable
rules, socio- political environment, appropriation
of funds and availability of trained manpower, etc.
Format of PA Report - I
If the management has a system of effectiveness measurement
the PA auditor:

 Documents the management's system of effectiveness
measurements

 Assesses the appropriateness of performance indicators

 Verifies the results and compares them with the appropriate standard

 Formulates an opinion on the effectiveness of management's system

Effectiveness measures differ from efficiency measures

  Ex: A government department has the mandate to develop and
economically backward region

 Efficiency measures would be the number of industries which
moved to the backward region

  Effectiveness measures would relate to the figures of unemployment
or income level
Format of PA Report - II
If there does not exist (or is weak) a system of
effectiveness measurement then the auditor
has to generate his or her own data

Auditor should be careful about:

  Externalities of the programme

  Cost of data collection

 Method   should       be    agreeable     with
management
Some Sample Report Layouts - I
Report No. 9 of 2009-10, National Rural Health Mission

  Executive Summary
  Introduction
  Planning & Monitoring
  Convergence
  Fund Flow Management
  Infrastructure Development & Capacity Building
  Procurement & Supply of Medicine & Equipment
  Information, Education & Communication
  Achievements in healthcare
  Conclusions & Summary of Recommendations
Some Sample Report Layouts - II

      Report No. 35 of 2010-11
   Management of Defense Estates

Preface
Summary of Recommendations
Introduction
Land norms, records & ownership
Land use
Management of Leases
Management of old grant bungalows
Conclusion
Some Sample Report Layouts - III

        Report No. 18 of 2010-11
 Taxation of payments to non-residents

  Preface
 Executive Summary
  Introduction
  Oversight on forex flows
  Controls on Remittances
  Sectorwise Analysis
  Mistakes in Assessment
Concluding Concerns
      • PA reporting an administrative appraisal
I       than financial/certification audit

      • Fine line of distinction between audit of
II      policy and audit of policy implementation

      • Clash of perspectives and interpretations
III     between audit and management

      • Charges of data manipulation         and
IV      interpretation by auditors

      • Charges of auditors turning blind eye to
V       management replies
The Performance Auditor’s Profile
Who you ARE:




              √
 Independent evaluator
 Economist/Statistician
 Public policy analyst
 Accountant/Auditor
 Aid to administration    Who you are NOT:
                           Legislative policymaker




             X
                           Implementing executive
                           Judicial officer
                           RTI activist/Journalist
                           Anti-corruption crusader
Measuring Institional Effectiveness by Performance Audit
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Measuring Institional Effectiveness by Performance Audit

  • 2. What is Performance Audit - I? INTOSAI Auditing Standard 1.0.40 Performance audit concerned with the audit of economy, efficiency and effectiveness and embraces: Audit of the economy of administrative activities in accordance with sound administrative principles and practices and management policies; Audit of the efficiency of utilization of human, financial and other resources, including examination of information systems, performance measures and monitoring arrangements and procedures followed by audited entities for remedying identified deficiencies; and Audit of the effectiveness of performance in relation to the achievement of the objectives of the audited entity and audit of the actual impact of activities compared with the intended impact
  • 3. What is Performance Audit - II? “Performance auditing is an assessment of the activities of an organization to see if the resources are being managed with due regard for economy, efficiency and effectiveness and accountability requirements are being met reasonably.” Muhammad Akram Khan, D-
  • 4. Our Legal Mandate for Performance Audit Comptroller & Auditor General’s (Duties, Powers & Conditions of Service) Act, 1971 16 17 15 19 14 20 13 23
  • 5. Objectives of a Performance Audit Quality of information and advice available to government for the formulation of policy Existence and effectiveness of administrative machinery to inform the government whether program objectives and targets have been determined with a view to fulfilling policy objectives Whether and to what extent, stated program objectives have been met Economy, efficiency, effectiveness, equity and ethics of the means used to implement a program/activity Intended and unintended, direct and indirect other impacts of programmes/activities, e.g. environmental impact of government activity Compliance with applicable laws and regulations in the context of the performance audit objectives
  • 6. Performance vs. Regularity Audit - I Features Regularity Performance Generally covers a Covers the program over a financial period period of time Coverage is for the Focused only on a part of the Scope whole of the entity for entity’s the period programs Audit to be completed by a Coverage is selective stipulated time
  • 7. Performance vs. Regularity Audit - II Features Regularity Performance Attestation of Covers the subject/program over a financial accountability period of time; Audit of financial systems Focused only on a part of the entity’s activities/program Audit of internal control for Coverage is selective safeguarding assets and completeness and accuracy of Accounts Evaluation of financial records Audit of economy, efficiency and effectiveness Objectives Audit of propriety of Audit of internal controls – 3Es, administrative decisions adherence to management policies, timely and reliable financial and management information Limited to financial matters Extends to non-financial /governance issues too Test for assuring compliance to Assessment of compliance to laws, regulations and rules applicable laws and regulations required in the context of audit objectives Opinions generally Conclusions related to audit with reference to standardized objectives set by auditors requirements
  • 8. Performance vs. Regularity Audit - III Features Regularity Performance Financial statements Variety of forms of evidence per se, accounting documents, etc.; Budgetary assumptions and Quite often qualitative in appropriation nature authorizations, etc.; Evidence Transaction documents Conclusive nature of Persuasive rather than evidence conclusive - evidence related to pre-determined audit objectives Materiality by amount Materiality guided more by the nature or by context rather than amount alone
  • 9. Performance vs. Regularity Audit - IV Features Regularity Performance Academic Always knowledge-based: of base Generally laws, social sciences, accounting economics, development knowledge studies, public affairs, science and technology, etc More or less Varies widely from subject – Approach & standardized: manual generally serves as methodology manual generally basic framework forms the entire basis Widely varying and subjective with ample scope for Assessment Standardized interpretations & assessment Criteria with little scope criteria support the audit for subjectivity objectives, which are unique to the subject of performance audit
  • 10. Performance vs. Regularity Audit - V Features Regularity Performance Opinion on the Conclusions on 3Es financial statements; Opinion on Report presented in compliance to variety of forms laws, regulations and rules Report Generally opinion on Wide-ranging in nature, financial statements open to interpretations in standardized and subjective judgment format Related to specific Generally separate financial periods- publications on each there is a periodicity subject of performance of reporting audits as and when conducted
  • 11. Typology of Program Evaluation Type Objective Process Assesses program activities’ conformance to statutory and regulatory requirements, program design and professional standards or expectations Outcome Focuses on processes, outputs and outcomes (including unintended effects) to judge program effectiveness Impact Compares program outcomes with an estimate of what would have happened in its absence - employed when external factors are known to influence the program’s outcomes Cost Assesses the least costly alternative to meet to Effectiveness achieve a single goal or objective
  • 12. Changing Jargon & Avatars of Performance Audit
  • 13. New Dimensions of PA’s Operating Environ - I New models of governance Greater role for NGOs in program/service delivery Public Private Partnerships Direct transfer of development funds to provinces Enhanced delegation of spending powers to relatively junior state officials Commercial exploitation of nation’s natural resources by private sector & their regulation Mass privatization of public utilities & their regulation by the state
  • 14. New Dimensions of PA’s Operating Environ - II Mass privatization of public utilities & their regulation by the state Rising education and standard of living begets greater demand for accountability Better education also provides better skill sets to SAI personnel Declining standards of probity in public life Young generation no longer used to government inefficiency, waste and corruption Right to Information Act, Lok Pal Bill, etc. Increasing judicial intervention for accountability Corruption affects foreign investment and retards domestic saving and investment
  • 15. Why is Performance Audit good for SAIs? Concentrates the audit effort in a public program/project Utilizes slack in diverse skill sets and synchronizes multi-disciplinary evaluation by SAIs Administrative-cum-financial external appraisal synched with program is greater help to policy planners, makers and implementers Synergize policy delivery mechanisms with concurrent accountability Well-suited for developing countries where government still delivers most public programs Greater public visibility, debate and accountability of public resources
  • 16. The Performance Audit Schema Economy Efficiency Effectiveness Performance Audit
  • 18. Key Terms of Performance Audit Accountability Efficiency Activities Management Assessment Organization Economy Reasonableness Effectiveness Resources
  • 19. Accountability & Reporting Legislative control over public finances established by:
  • 20. Assessment & Reasonableness • Auditor formulates a judgment on the basis of relevant and reliable evidence, discusses with management and validates I procedures • Considers constraints of the management and operating environment II • Does not base its judgment on hindsight wisdom III
  • 21. Organization, Management & Resources Performance auditing takes an overview of the activities and functions of an organization as a whole. In exceptional cases, it may review an isolated project or a programme as well Resources of an organization consist of money, men, materials, and machines. Performance auditing reviews all these resources Management covers such functions as planning, organization, resourcing, directing and controlling. Performance auditing reviews all these phases of management cycle. It is not concerned merely with the 'use' of resources.
  • 23. What are the 3 Es? Economy Acquiring resources at the lowest cost keeping in view the objectives of the organization Efficiency Relationship of inputs and outputs - utilization of resources Effectiveness Extent to which an organization achieves its objectives
  • 24. How is PA different from Internal Appraisal? Audit Finding Criteria Cause Conditions Effect
  • 25. Criteria Characteristics Reliable Comparable Acceptable Comprehensible Complete Objective
  • 26. What is an Audit Criteria?
  • 27. What is Audit Criteria in Real Life?
  • 28. A Program Logic Model Socio-economic Problems Needs Objectives Action Inputs Processes Outcome Output Results Impact on Socio-economic Problems
  • 29. Where do the 3Es fit in? Allocation of Inputs Use of Inputs Processes Outputs Results > Objectives Impact > Objectives
  • 30. What is Economy? Spending only that much which is barely essential to achieve organizational goals For example, if lowest bidder leads to interruption in operations, it may not be the most economical manner of buying these supplies Therefore, while reporting on economy the, auditor should keep in view effectiveness of the organization in achieving its goals
  • 31. How do I judge economy? Right Right Right Time Place Cost Capital Demand Idle HR Operating Procurement Maintenance Automated Down Time assembly Availability Salvage Value
  • 32. Yardsticks for Judging Costs • Costs estimated in the form of streams over the life-time of the asset I • Cost streams then discounted to the present using an appropriate discount rate II • Not a simple comparison of one-time capital cost, usually done in traditional auditing III • Calculation of minimum cost presumes estimates of cost would be prepared for all IV available alternatives
  • 33. What is Efficiency? An economic state is one in which every resource is optimally allocated to serve each person in the best way while minimizing waste and inefficiency
  • 34. Can Government Always be Efficient? • Unlike profit-making entities, government is a I developmental entity in which there are few choices • Government is slave to people’s will represented by II the Legislature • Government focuses on entire nation and its III problems • Availability & Flexibility of use of resources limited IV • Public policy is therefore a political animal V • Yet Governments remain accountable to the people VI
  • 35. How do I measure efficiency? • Are all levels of the organization aware of their I goals? • Is there a reliable system in place to monitor the II output of each level? • Does management receive regular reports on III current levels of efficiency or services rendered? • What are the measures taken by management to IV improve its efficiency? • What efficiency measures are feasible in the V given situation?
  • 36. How does efficiency relate to productivity? Productivity = Amount of goods or services produced / amount of resources used i.e. ratio of input and output or capital output ratio Efficiency is the relationship of actual input/output (productivity) to a prescribed performance standard Time taken for producing 80 bags of cement is one machine-hour is productivity of the plant This level of productivity may however, be 80% of the standard which is 100 bags per machine- hour Efficiency is, therefore, measured in terms of rate of return of production, work done in a time span or unit cost
  • 37. Prerequisites for Measuring Efficiency Outputs should be uniform and repetitive, e.g. filling in prescription by the pharmacist in a hospital Non-uniform output like police programme, writing press briefs by Information Department etc., cannot be measured There must be an agreed standard of performance against which actual output has to be measured, e.g. in case of a school the number of class-contact hours for a teacher in a week should be laid down as a standard If standards do not exist then output may be measured with previous years Sometimes measurements are compared between two geographical locations, or, comparison with private sector - data of past years should be available
  • 38. Measuring Efficiency in Government - I Assess whether the objectives of and the means provided (legal, financial, etc.,) for a new – or ongoing – public sector program are proper, consistent, suitable or relevant to the policy Assess the effectiveness of public sector programs and/or individual components, i.e. assess whether objectives are met Assess whether the observed direct or indirect social and economic impacts of a policy are due to the policy or to other causes, but only if it can be established with evidence
  • 39. Measuring Efficiency in Government - II Identify factors inhibiting satisfactory performance or goal-fulfilment Assess whether the programme complements, duplicates, overlaps or counteracts other related programmes Assess the adequacy of the management control system for measuring, monitoring and reporting a program’s effectiveness Identify ways of making programmes work more effectively
  • 40. Advantages of Efficiency Measures I • Control quality and quantity II • Demonstrate achievements III • Prepare Budgets and Plans IV • Rationalize pricing of products V • HR performance appraisal
  • 41. Efficiency Measurement Tools– I Inter-authority Comparison Comparison with similar authorities, delivering similar programs and operating in comparable environments with following illustrative parameters: Operating expenses Usage of service or the client population Unit cost of service provision Manpower levels Performance indicators
  • 42. Efficiency Measurement Tools – II Internal Comparison Comparison of costs between different services or facilities provided by the same authority at different locations or in different departments For example, repair costs by class of vehicle, or energy consumption by schools or residential units Large range of performance indicators can be developed by the auditor from the internal data such as: ratio of administrative cost to operational costs ratio of over time payments to total payroll number of issues per hour in a library
  • 43. Efficiency Measurement Tools – III Past Performance & Targets Comparison with past years may show potential areas for saving Auditor should analyze cost and output trends Targets set and achieved by the management for itself should be used as comparison measures
  • 44. Judging Effectiveness - I • Are objectives precisely defined ? I • Are objectives based on reliable facts and II forecasts? • Are policy instruments to operationalize objectives based on detailed analysis of III alternatives? • Can progress be reasonably attributed to the IV activities and policies of t he auditee? • Does the auditee adequately monitor the V effectiveness of a policy instrument?
  • 45. Judging Effectiveness - II • In measuring effectiveness a distinction needs to be made I between output and outcome • Output relates to results of certain inputs within the II organization • Outcome relates to the results external to the organization III
  • 46. Performance Measures for Effectiveness Three main problems: Jointness: Where a number of different policies may contribute to satisfying unmet needs Ex: Educational standards may be affected by the size of classes, the quality of teachers and the supply of equipment External factors: May affect the outcome of a project or programme Ex: Income and social status of consumers Cost: Sometimes programmes cannot be carried out in the most effective manner due to prohibitive cost. Ex: It may be more effective to have more teachers than to provide more books. But the cost of the former may be prohibitively high.
  • 47. What should the Auditor do? Decide indicators in consultation with management Also keep in view any national or international standards already available Objectives laid down in the plan may be taken as a bench mark for some of the outcomes In no case should the auditor restrict his audit criteria to the original plan only
  • 48. Some PA Tools We Use I • Survey II • Statistical sampling III • Benchmarking IV • Focus groups V • Interviews VI • Case studies VII • Qualitative data analysis VIII • Program Logic Model IX • Flow charts
  • 49. Potential Impact Areas of PA Economy Reduction in costs through better contracting, bulk buying, etc Reduction in costs through economies on usage of personnel or other Resources Greater outputs from same inputs Efficiency Remedying duplication of effort or lack of coordination Better sub-objectives and targets Effectiveness Better achievement of objectives by changing the nature of outputs or improved targeting Shorter waiting lists Service Improved equity in access to programmes Planning & Better control and management of human Control resources, assets, projects and resources Improved forms of account, including commercial formats Accountability Better and/or more accurate performance indicators
  • 50. PA of I-T Systems - I Strategic and operational management of IT within the entity, including assurance that IT is included in the overall corporate governance of the entity IT project management within the entity, including the entity’s record in meeting legislative and other deadlines; The risk management practices of the entity in relation to IT IT system design, development and maintenance controls Compliance with standards, including external standards Application controls Processing controls, including audit trails
  • 51. PA of I-T Systems - II Business continuity arrangements Data integrity, including sampling of data (possibly using CAATs) Access controls and the physical and logical security of networks and computers, including Internet firewalls Controls to safeguard against illegal software Performance management and measurement Other issues that arise during the audit
  • 52. Software used in I-T PA Audit Teamrisk – risk assessment tool for preparing risk based audit plan TeamMate Teamschedule – tool for scheduling staff (PWC) resources to audit Teammate (EWP) – electronic work paper system Teamcentral – web-based issue tracking system Crystal Ball Uses Monte Carlo simulation in (US GAO) conjunction with a cost estimation spreadsheet on the costs to give a range of values and the probability or the certainty of the values - useful for performing cost and uncertainty analysis Earned Value Analysis Measure progress of project Provide schedule and budget variances on a particular date Forecast completion date and cost of completion of project
  • 53. Sources of Performance Measures Citizen surveys: Especially in areas of social services, police, garbage collection etc. - extreme care be exercised in determining sample size and preparing questionnaires Trained observer ratings: Used to rate conditions in a particular area, using a pre-designated rating criteria such as street cleaning Industry standards: Comparison of the results with prevalent standards in that area or with similar programs Internal records: Occupancy rate for residential homes, user complaints, etc.
  • 54. Some Words of Caution - I Auditor not expected to carry out the above exercise himself Primary duty is to see if the auditee has a reliable system to evaluate its own effectiveness In that case, he would focus his attention on the adequacy of these procedures In case the auditee does not have a reliable mechanism to measure its own effectiveness the auditor may have to do it himself
  • 55. Some Words of Caution - II Simple explanation of possible reasons for shortfall in achievement of goals not enough Ex: Not enough to say that the agency could not achieve its goals because of cost over run or time over-run Instead auditor should analyze the reasons in following two categories: Factors that could have been influenced by the agency Factors that could not be influenced by the agency such as Government policy, applicable rules, socio- political environment, appropriation of funds and availability of trained manpower, etc.
  • 56. Format of PA Report - I If the management has a system of effectiveness measurement the PA auditor: Documents the management's system of effectiveness measurements Assesses the appropriateness of performance indicators Verifies the results and compares them with the appropriate standard Formulates an opinion on the effectiveness of management's system Effectiveness measures differ from efficiency measures Ex: A government department has the mandate to develop and economically backward region Efficiency measures would be the number of industries which moved to the backward region Effectiveness measures would relate to the figures of unemployment or income level
  • 57. Format of PA Report - II If there does not exist (or is weak) a system of effectiveness measurement then the auditor has to generate his or her own data Auditor should be careful about: Externalities of the programme Cost of data collection Method should be agreeable with management
  • 58. Some Sample Report Layouts - I Report No. 9 of 2009-10, National Rural Health Mission Executive Summary Introduction Planning & Monitoring Convergence Fund Flow Management Infrastructure Development & Capacity Building Procurement & Supply of Medicine & Equipment Information, Education & Communication Achievements in healthcare Conclusions & Summary of Recommendations
  • 59. Some Sample Report Layouts - II Report No. 35 of 2010-11 Management of Defense Estates Preface Summary of Recommendations Introduction Land norms, records & ownership Land use Management of Leases Management of old grant bungalows Conclusion
  • 60. Some Sample Report Layouts - III Report No. 18 of 2010-11 Taxation of payments to non-residents Preface Executive Summary Introduction Oversight on forex flows Controls on Remittances Sectorwise Analysis Mistakes in Assessment
  • 61. Concluding Concerns • PA reporting an administrative appraisal I than financial/certification audit • Fine line of distinction between audit of II policy and audit of policy implementation • Clash of perspectives and interpretations III between audit and management • Charges of data manipulation and IV interpretation by auditors • Charges of auditors turning blind eye to V management replies
  • 62. The Performance Auditor’s Profile Who you ARE: √ Independent evaluator Economist/Statistician Public policy analyst Accountant/Auditor Aid to administration Who you are NOT: Legislative policymaker X Implementing executive Judicial officer RTI activist/Journalist Anti-corruption crusader