PERFORMANCE AUDITS

Performance audits, the public version of operational audits, are conducted to determine if an entity's operations, programs, or projects are functioning effectively and efficiently to achieve goals established. All levels of public administration in the United States—from municipalities to the federal agencies—undergo performance audits. Since all levels of government in the United States have some federal funding, the professional standards for performance audits established by the U.S. Government Accountability Office (GAO) are required for auditors who perform such engagements. Government auditing standards include the following definition for a performance audit:

An objective and systematic examination of evidence to provide an independent assessment of the performance and management of a program against objective criteria as well as assessments that provide a prospective focus or that synthesize information on best practices or cost-cutting issues. (GAO, 2003, p. 21)

Accountability is the key motivation for performance audit engagements. The performance audit, therefore, is perceived to be a valuable means of determining if goals have been achieved, as well as valuable in identifying what is needed to improve program operations.

The specific objectives of such audits, as noted in the GAO standards, are varied. Among objectives are those relating to program effectiveness, economy and efficiency in the use of resources, internal control, extent of compliance with legal requirements and policies, and prospective analyses.

NATURE OF PROFESSIONAL GUIDANCE PROVIDED

The GAO professional standards for performance audits are categorized as general, field, and reporting. The general standards established by the GAO apply to not only performance audits, but also to financial and attestation engagements. There are field and reporting standards, however, specifically for performance audits. The authority of the standards is identified in a footnote that states:

Requirements in generally accepted government auditing standards (GAGAS) are identified by statements that include the word "should." Auditors are expected to comply with these requirements if they apply to the type of work being performed. (GAO, p. 5)

General Standards

The general standards that guide government auditors, as well as other independent auditors, stated in summary style, are:

• Independence: The auditor and his/her firm must be free, in both fact and appearance, from all types of impairments of independence.
• Professional judgment: The auditor should use professional judgment in planning and performing all audits.
• Competence: Those individuals assigned to the audit must possess adequate professional competence for the tasks required to complete the engagement.
• Quality control and assurance: Audits must be performed by auditors whose organizations maintain an internal quality control system and have an external peer review on a regular basis.

As noted, these general standards are the same for all types of audits that are GAO engagements. These general standards impose responsibility on both the audit entity and the individual auditors to ensure that those who participate in such audits are independent in fact and appearance, able to make good judgments, and qualified for engagement tasks. Furthermore, it is expected that the entity that employs auditors for such audits maintains oversight of the work performed to be assured that the quality of performance is adequate and the tasks have been completed.

Field Standards

The field standards deal with planning; supervising staff; collecting evidence that is sufficient, competent, and relevant; and preparing adequate audit documentation.

Planning:

All aspects of the work of the audit must be adequately planned. While planning for a performance audit is a continuous process, initial planning is important. Decisions to be made initially include determining:

1. Audit objectives, which state operationally what is intended to be accomplished, must be recorded. Audit objectives, for example, may be the cost-effectiveness of program performance or the extent to which specific organizational goals are being achieved.
2. The scope, which is established by determining the boundaries for the engagement and should reflect the audit objectives.
3. The methodology, which comprises what is to be done to gather and analyze data to achieve the objectives.

Supervision:

During an audit, staff must be properly supervised. The tasks of supervision primarily include providing appropriate guidance to staff members, maintaining alertness to significant problems that arise, reviewing the work while it is in progress, and providing useful on-the-job training.

Evidence:

The major task of the auditors' work relates to gathering evidence that is sufficient, competent, and relevant to the data for meeting the objectives of the audit. Ultimately, it is the evidence that supports the judgments and conclusions relevant in the report.

Auditors, to meet the objectives of their audits, are able to use different types of evidence. Commonly used evidence sources include: direct observation of individuals, properties, events; documents, such as memoranda, charts, reports; inquiries, interviews, questionnaires; and analytical evidence that includes computations and disaggregating information for detailed assessment. Auditors must make a professional judgment about the sufficiency of their evidence in relation to the objectives earlier identified. There are no quantified requirements for the amount of evidence.

Audit Documentation:

Auditors are expected to prepare and maintain sufficient documentation to provide a complete account of the planning, conducting, and reporting related to the audit. Everything from planning to conclusions must be documented. The supervision, as well as other reviewers of documentation, must determine if the work performed is satisfactory or needs to be extended. Quality control at the firm, which is confirmed through periodic outside peer reviews, is primarily based on audit documentation. A framework for the assessment of audit documentation is the standards established by the GAO.

Reporting

There are two reporting standards, communicating results and content.

Communicating Results

An audit report is to be appropriate for its intended recipient and is to be provided in writing or in some other retrievable form. Since the government has responsibility for maintaining public accountability, all audit reports must be retrievable, and, therefore, available to the citizens.

Content

A report of a performance audit is expected to include the objectives, scope, and methodology, as well as the audit results, with details of conclusions, recommendations, and acknowledgment of adherence to GAGAS. Since a draft of the report is to be shared with management of the agency under audit, the final report includes the responses of those who reviewed the draft and the outcome of the issues, if any, that needed to be resolved. Views of the responsible persons in the audited agency are to be reported. If there is any privileged or confidential information that has been omitted, a disclosure of this matter is to be included in the report.

PERFORMANCE AUDITS AT THE FEDERAL LEVEL

The Office of the Auditor General of Canada reported in a peer review on the performance audit practice in the U.S. GAO office that in 2004 the GAO began work on 773 new performance audit engagements. The report noted: "However, the total number of performance audit products issued in 2004 may be more than 1,000 since some engagements can result in multiple products and some products issued in 2004 were initiated in prior years." The performance audit practice of the GAO was given a "clean opinion" on their quality control system. The review team, however, made some suggestions, which were summarized in these words:

Distinguishing between audit and non-audit services

Provide further guidance to staff on the distinction between audit and non-audit services, the evidentiary standards appropriate for each form of product, and on the process for reconsidering a determination.

Strengthening reporting

Provide additional details on the sources of critical information and the implications of scope and methodological choices.

Reviewing the quality assurance system for further efficiencies

Review all the requirements to identify those that may not contribute significantly to audit quality.

Streamlining the documentation requirements

Expand the use of the streamlined documentation regime.

Making the inspection program more efficient

Focus the inspection program on the management of key risks facing the performance audit practice. (Canada, Office of the Auditor General of, 2005, p. 9)

THE VALUE OF PERFORMANCE AUDITS

Performance audits are potentially valuable to both the agencies for whom such audits are undertaken as well as for the citizens of the governmental unit.

Value to agency audited

As noted earlier, a draft of an audit team's report is presented to officials responsible for management. Such a draft is discussed with management and revised accordingly before it is issued to the appropriate parties. Auditors are expected to return to the agency after giving management sufficient time to implement any recommendations contained in the audit report. The purpose of this follow-up visit is to assess the degree to which management has addressed the findings contained in the audit report.

Value to citizens

Reports of governmental activity are generally available to the citizens, except in infrequent instances where confidentiality is judged necessary because of security or other sensitive matters. Citizens seek accountability for tax revenues. Objective results of performance audits are reliable evidence for enlightening citizens who are asked to vote on legislation related to increasing taxes, for example.

Performance audits are posted at states' Web sites, and are accessible through state government offices (keying "state of" followed by a state's name at a search engine is sufficient for reaching governmental offices). Georgia, Oklahoma, and Washington are examples of states with auditors who post performance audits that are clearly identified as performance audits.

The U.S. GAO does not identify performance audits in the title of such reports or make specific reference to the term performance audit. Searching for examples of such audits, therefore, at the GAO Web site is not direct; it is necessary to read the titles and make a judgment. According to staff at GAO in September 2005, most GAO reports are considered to be performance audits, even though explicit identification as such is not included in the report. There is generally a statement that the work was done in accordance with the publication Government Auditing Standards. Inasmuch as Government Auditing Standards includes attestation engagements that are described as "an examination, review, or agreed-upon procedures," there is some uncertainty in determining if a report is a performance audit report.

A PARALLEL AUDIT IN BUSINESS

Business has a parallel type of audit to the audit herein discussed. Outside of governmental units, however, such an audit is usually called an operational audit. Departments of internal audit in companies are generally responsible for operational audits. The guidance for such audits is similar, to a considerable extent, to that for the performance audit. Guidance for such operational audits is provided by the Institute of Internal Auditors.

The results of such nongovernmental audits, however, are not shared with the public. The results are shared with the unit of the business undergoing the operational audit and possibly with top management and the board of directors. The requirements for disclosure of internal control weaknesses related to financial reporting in annual financial reports that became effective as of December 15, 2005, does mean that some matters that might be operational weaknesses related to financial reporting are disclosed.

see also Human Resource Management

bibliography

Campbell, Mary (2003, Fall). Restoring trust in government: A cost-effective approach to the cry for "accountability." The Journal for Quality and Participation, 26 (3), 44.

Canada, Office of the Auditor General of. (2005, April). International peer review of the performance audit practice of the U.S. government accountability office. Ottawa, Ontario, Canada. Available from http://www.gao.gov/peerreviewrpt2005.pdf, accessed January 6, 2006.

U.S. Government Accountability Office. Comptroller General of the United States. (2003, June). Government auditing standards (The yellow book). Washington, DC: GAO.

Mary Ellen Oliverio