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How Audit Can Contribute to Better Governance
Thursday, 31 January 2008 20:00

JLapointeJacques Lapointe, CA, CIA

Jacques Lapointe is the Auditor General of Nova Scotia and a member of the Institute of Internal Auditors' International Government Relations Committee. In July 2007 he spoke to the IIA's International Conference in Amsterdam on The Role of Auditing in Public Sector Governance.

This article is based on his remarks at that conference, which in turn were based on a Practice Guide initiated by the IIA's Government Relations Committee. The Guide, entitled The Role of Auditing in Public Sector Governance, was written in collaboration with a group of North American government audit organizations, including CCAF and the Government Internal Auditors Council of Canada. The Guide was issued in November 2006.

Jacques was formerly the Chief Internal Auditor for the Province of Ontario. In his previous accounting practice, he audited a large municipality as a client.


An Auditor Looks at the Role of Audit

Governance has been defined as the process by which organizations are directed, controlled and held to account. (ANAO)

Several principles of good governance apply to all organizations, including government. These include:

  • Setting direction: establishing organizational policy; the budget is a major tool
  • Ethics: instilling values in the organization; setting the tone at the top, with clear lines of accountability that hold people responsible for doing the right thing
  • Overseeing results: oversight to ensure policies are implemented; monitoring that performance meets expectations
  • Accountability reporting: good financial and performance reports, preferably subject to independent audit
  • Correcting course: identifying problems; responding and taking corrective action - for instance, implementing auditors' recommendations.

Some principles are more critical in the public sector, because of the political context in which government operates and the public sector elements of public service and public trust. These include:

  • Transparency: Government needs to maintain openness to its citizens.
  • Probity: Government officials must act always with honesty and integrity.
  • Equity: Government officials must exercise the power entrusted to them fairly. Government must avoid the misuse of power, and corruption.

Lack of transparency, probity or equity will erode the public trust, undermine government's legitimacy and damage government's ability to govern.

An effective audit function is a basic requirement of sound governance and strong accountability.

The Role of Audit in the Public Sector

The auditor's role in the public sector in a democratic state derives from the principal/agent relationship between elected bodies and public servants.

Slide-11-graphicElected bodies (principals) provide resources and authority to government officials (agents) to implement government policies. The officials account to the elected bodies for their performance and their stewardship of resources. The auditor provides independent objective assessments of the agents' performance.

In 1991 the Canadian Comprehensive Auditing Foundation (now CCAF) defined public sector audit as:

“… the independent, objective assessment of the fairness of management's representations on performance or the assessment of management's systems and practices, against criteria, reported to a governing body or others with similar responsibilities.”

The IIA defines internal auditing as:

“… an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”

A modern public sector audit organization's role may incorporate elements of either definition. It may also include financial attest audit or forensic audit mandates.

A government's success is measured to a large extent by its delivery of programs and services to its citizens, and by its ability to carry out its programs properly.

Government auditors therefore must have both the ability and authority to assess the integrity, effectiveness and efficiency of that delivery as well as its management of citizens' financial resources.

 In effect, the audit function serves three distinct roles in a public sector organization:

  • Oversight
  • Insight
  • Foresight.

Oversight

The senior governing bodies in a public sector organization - whether a legislature, an appointed Board or a CEO - are responsible for providing oversight in any sound governance framework. Auditors assist them in that role and are a key component of it.

Auditors assist the oversight function by evaluating performance and asking questions about government's, and management's, activities.

Auditors evaluate whether programs are achieving their purpose; funds are used as intended; organizations are complying with policy and the law; and management has in place adequate procedures and internal controls to manage risks.

Auditors also have a major part to play in reducing the risk of corruption in public organizations, through investigations, audits and reviews of controls

Insight

Auditors report their findings on which programs work and which do not. In doing so they are also in a unique position to identify better practices and improvements.
With their broad view of government operations, and with their expertise and analytical technique, auditors are in a position to evaluate whether policies are in fact achieving what they are intended to achieve, and to recommend ways to improve delivery.

They see how the operations of the organization could be made more efficient or effective, and make recommendations to improve the operations of the public organization.Whether as part of the recommendations in a performance audit, or as part of an internal audit consultation assignment, auditors can provide insight into the organization's operations that can lead to better government.

Foresight

By looking ahead, auditors can play a major role in identifying the risks facing the organization, and mitigating those risks. They can also identify opportunities.

They can do this directly, by engaging in risk assessment and playing a part in the organization's risk management (an internal audit role), or indirectly, by delivering risk-based audit plans that focus audit resources on the areas of greatest risk to the organization.

Key Elements of an Effective Public Sector Audit Function

As a basic component of sound governance, public sector organizations require effective independent audit functions, whether internal, external or a combination, with the capacity and capability to provide a wide range of audit services. There are several critical success factors for effective public sector audit:

  • Organizational independence – including the right reporting level for the Chief Audit Executive (CAE), to ensure the auditor is free to conduct his or her work and to report without interference
  • A formal mandate – ideally legislation, providing the authority to audit
  • Unrestricted access – to people and information
  • Sufficient funding – to enable an adequately resourced function, with some security of funding to ensure budgets cannot be used to influence the conduct of audit
  • Competent leadership – a CAE who is an audit professional and can be an articulate spokesman for the audit activity
  • Competent staff – accredited and constantly training
  • Stakeholder support – from key elected and appointed officials, and from the media
  • Adherence to professional audit standards – preferably as a legal requirement
  • Audit committees – where appropriate, providing audit oversight and support.

Audit Protects Public Interest, Maintains Public Trust

Audit's three roles – oversight, insight and foresight – define the ways in which public sector auditors add value to the operations of government, government agencies, and the broader public sector. Through these roles auditors help the public sector operate with greater transparency, probity and equity. They help reduce risk, improve accountability and maintain the public trust.


Practice Guide Promotes
Strong Audit Function

The IIA Practice Guide The Role of Auditing in Public Sector Governance is addressed to appointed and elected government officials and government audit leaders. It advocates strong government audit to help instill ethics and integrity in government and to help improve government performance. It can be used to evaluate and improve a government audit function or provide guidance in establishing a new government audit function. It applies equally to internal and external audit activities and variations of them.


IIA Developing a Capability
Maturity Model

An IIA team under former CCAF senior research associate Libby MacRae is working on a capability maturity model for government audit. This model describes the characteristics and establishes standards of performance for government audit functions at five levels of evolution, from initiation to best practice. It will provide detailed guidance for implementing or improving government audit.

The model is intended as a companion piece to the IIA Practice Guide The Role of Auditing in Public Sector Governance. It will serve as a primary advocacy document for public sector audit world-wide.