What public sector entities should focus on in addition to annual financial statements audits.
THERE are different types of audits that can be carried out on entities either as statutory or regulatory requirements or on special request by the entity itself or third parties. Clarity is necessary to avoid the wrong type of audit being recommended given the situation and circumstances on hand.
Regularity or compliance audits aim to check the compliance of activities with set criteria; laws and regulations, ie hard and soft law applicable to the specific industry, sector or entity, for example tariffs to be complied with, or taxes to be paid. Statutory annual financial statements audits check whether the financial statements are prepared, in all material respects, in according with applicable financial reporting standards and framework. Performance audits aim to check the economy, efficiency and effectiveness of related affairs. All these types of audits are important for public sector entities to ensure they operate in the public interest.
These are objective and systematic examinations of the programs, functions, operations or management systems and procedures of entities to assess whether they are achieving economy, efficiency and effectiveness in the employment of available resources. The audits are useful on providers of public services and utilities. They can be carried out by outside entities or from within the entity for example by internal auditors, provided appropriate independence requirements are met and the required skills and competences are adequate.
The audit of economy, aims to establish the extent to which the entity has minimised the cost of resources without compromising on quality (spending less). The audit of efficiency examines the relationship between the output, in terms of goods, services and other results and the resources used to produce them (spending well), and effectiveness examines the extent to which objectives are achieved and the relationship between the intended impact and the actual impact of an activity (spending wisely).
Performance auditing offers considerable scope for adding real value to public sector entities. It also aims to ensure those managing public resources remain accountable for their actions. Performance auditing shares similar approaches and methodologies to program evaluation but does not generally extend to assessing policy effectiveness or policy alternatives. By promoting public accountability, performance auditing aids good governance. It also encompasses the concept of traditional financial statements and compliance and propriety audits. Compliance audits deal with legal and regulatory compliance issues while propriety refers to the concept of best practice in public management, like public funds should not be misused and expenditure on programs should not exceed what the program was budgeted for without justification. Where ever possible, performance auditors utilise these requirements in the course of their audit.
Performance auditors should not confine the audit to ‘what has been done’ but should also examine ‘what has not been done’ to meet the policy objectives.
Compared with financial statements audits, performance audit involves more judgment and interpretation, more selective coverage in samples, criteria for evaluation are not pre-defined, evidence tends to be at best persuasive rather than conclusive, and the reports contain more discussion and reasoned argument.
Fraud prevention and detection
Cases of occupational fraud and abuse for all the three categories of fraud; corruption, asset misappropriation, and financial statements fraud are growing risks for organizations and particularly corruption for the public sector. These require experts who can help to minimize exposure. If not properly managed, the risks can have serious consequences in terms of financial loss, credibility of government and other public sector operations, business performance, staff morale, negative publicity or regulatory infringement. The Association of Certified Fraud Examiners estimates that on average enterprises lose at least 5% of their turnover to occupational fraud and abuse annually. The risks increase in times of economic hardships, where there are weak controls, and where fraud can be rationalized.
Fraud risk can be reduced by adopting systems designed to help prevent and detect all the three forms of fraud or though timely investigation followed by appropriate sanction. All these required forensic expertise together with accounting, auditing and investigation skills. Controls aimed at preventing fraud or its early detection should be preferred to the usually costly fraud investigation which only occurs after the entity has already suffered loss and recovery is usually difficult.
Procurement probity and assurance
Procurement is one area that has high risk of fraud and occupational abuse, specifically though corruption. This makes probity and assurance essential in any procurement process. Public sector entities should have procurement systems advisers or utilize in house procurement departments (where they exist) and these should have appropriate competences to enable them to understand the risks that may jeopardize the integrity of a procurement process. This requires the professionalization of any in house procurement departments in public sector entities, ensuring they have competences and skills that enable them to provide timely, objective and commercially practical advice to reduce the risk of loss through procurement. Sound procurement systems must be embedded across all the systems of the public sector entities and not operate as a patched stand alone functions in the entity operations.
Where procurement advisers are used, they should understand that the circumstances and requirements of each procurement process are unique and should tailor their advisory services to each individual process with common sense and flexibility.
Procurement probity advisory services should range from comprehensive involvement before, during and after the course of a procurement process, through to the provision of advice sought on specific issues.
Procurement audit activity is generally undertaken after the procurement process has been completed, while probity assurance can be provided at any logical stage during the procurement process. Probity affords an opportunity to introduce process improvements and controls in subsequent activities of the procurement process.
Sonny Mabheju is a World Bank international consultant in financial reporting and public financial management covering the Africa, Caribbean and South Asia Regions.
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