Print Edition
      March 2008

Value-for-money auditing

By François Boisclair

The consensus is that VFM auditing truly helps elected officials improve the quality of public services

Value-for-money (VFM) auditing, also called management auditing, examines the ability of government organizations to discharge their responsibilities and control their costs by ensuring that resources are managed at the lowest cost and that activities are organized efficiently. It also deals with accountability in these areas.

To fully understand the need for VFM auditing in the public sector, the role of financial auditing in the private sector needs to be examined concurrently.

Providing assurance on the financial information of companies seeking external financing is essential to the operation of our economic system. Investments made by the private sector to strengthen such assurance following recent financial scandals clearly testify to this fact. Economic agents need this assurance to maintain the climate of trust required to carry out financial transactions in a market economy. The availability of financial information whose quality has formally been attested to helps ensure that resources are allocated to the top-performing companies. This means private companies have no choice but to enhance their productivity and profitability to avoid being forced out of the market.

The public sector operates differently as resources are allocated under the direction of a publicly elected body. Even when funded in large part by users, government organizations are often in a monopoly position and “customers” have to accept the service provided, whatever the quality or price.

Even when the audited financial statements of a government organization show a stable position or a positive balance, it does not mean the organization provides services that adequately meet the public’s needs at the best possible price. In this context, elected officials who allocate resources and are mandated to ensure their sound use must have more information to assess the actual performance of government entities. While essential, financial information is not enough. VFM auditing was introduced in the 1970s to meet the need for additional information.

Interestingly in October 1977, the International Organization of Supreme Audit Institutions adopted the Lima Declaration of Guidelines on Auditing Precepts, which placed VFM audits on the same footing as financial audits or compliance audits. The first chapter of the declaration deals with what we now know as VFM auditing:

Section 4.
Legality audit, regularity audit and performance audit

1. The traditional task of Supreme Audit Institutions is to audit the legality and regularity of financial management and of accounting.

2. In addition to this type of audit, which retains its significance, there is another equally important type of audit — performance audit — which is oriented towards examining the performance, economy, efficiency and effectiveness of public administration. Performance audit covers not only specific financial operations, but the full range of government activity including both organisational and administrative systems.

3. The Supreme Audit Institution’s audit objectives — legality, regularity, economy, efficiency and effectiveness of financial management — basically are of equal importance. However, it is for each Supreme Audit Institution to determine its priorities on a case-by-case basis.

Today, VFM auditing figures prominently among audit engagements performed in the public sector. As concerns the Auditor General of Quebec, close to 30% of its audit effort is devoted to this type of engagement.

A milestone in the development of VFM auditing occurred in 1988 when professional standards that apply specifically to VFM engagements were introduced in the public sector section of the CICA Handbook — Assurance (PS5400, PS6410 and PS6420). Other assurance standards also apply. For example, the general and performance standards set out in Standards for Assurance Engagements, Section 5025 apply to VFM audits, as stated in Value for Money Auditing in the Public Sector, Section PS5400. Also, the general standards of quality control for firms performing assurance engagements (GSC-QC) apply specifically to VFM audits.

This overview of VFM auditing standards clearly shows that the most rigorous professional standards also apply to this area of assurance. It could not be otherwise given the visibility and impact of VFM audit reports. A more in-depth look at some of the applicable standards provides valuable insight into a number of VFM auditing practices.

First, as concerns the general standards set out in CICA Hand-book Section 5025, auditors must be satisfied that the subject matter is within the collective professional expertise of their team. This is why nonaccounting specialists are engaged in VFM audits, as in many cases they have higher-level expertise in a field that is relevant to the analysis of the audited entities and have acquired a number of years of experience before joining a VFM audit team. The application of the same standards also leads to consultations with independent experts in the field subject to the audit; the experts associated with an engagement often set up an advisory committee. They help direct the work, interpret the findings and evaluate the conclusions.

Other general standards specify that the auditor should, to the extent possible, agree on the objective of the engagement with the entity’s management and seek management’s acknowledgment of responsibility for the sub-ject matter related to this objective.The auditor should also ensure that suitable criteria exist. All these requirements are met during the first phase of the engagement, i.e., the audit survey. In the first phase, the auditor methodically analyzes operations to assess their financial or other impact and identifies the risks facing the organization. This phase ends with an audit survey report.

The audit survey report provides an overview of the subject matter of the audit, specifies assigned responsibilities for the various aspects of the engagement and presents the audit objectives and the evaluation criteria on which the conclusions will be based. This report on which subsequent work will be based is validated by the advisory committee, and the auditor discusses its content with the entity’s management to obtain its approval.

Performance standards govern the planning and performance of the engagement. The extent of audit procedures to be performed depends on the significance of each matter to be audited, the assessment of related risks, and the high level of assurance that is expected in a VFM audit.

The procedures retained are therefore as varied as they are numerous in order to obtain sufficient appropriate evidence. They are usually set out in an audit program that is customized for each audit objective and each evaluation criterion. Without losing sight of financial information, these procedures focus on analyzing management practices and operational data, and on benchmarking with similar entities.

As for reporting standards, Handbook Section PS5400 lets auditors choose the form their conclusions will take. They may apply the standards of this section and state their conclusions in the form of observed deficiencies or apply the reporting standards of Section 5025 and state their conclusions in the form of an opinion on the subject matter of the audit. The report must mention which standards were used to prepare the report.

The AGQ elected to apply the Section 5025 standards, which provide for conclusions to be stated in the form of an opinion. However, the AGQ also reports observed deficiencies, as they support its conclusion in relation to the audit objective.

In addition to the conclusion, which is the essential result of an audit, the report generally contains recommendations intended to correct the weaknesses identified. It states the audit objectives, the evaluation criteria used and their source. Before issuing its report, the AGQ invites the managers concerned to submit their comments, which are incorporated into the report.

For two years now in Quebec, a standing parliamentary commission on public service has been systematically asking entities to submit an implementation plan on the AGQ recommendations that apply to them; managers generally discuss proposed actions with the Office of the Auditor General before submitting their plan to the commission.

Many of the VFM audit reports prepared by the AGQ are re-viewed by this commission in the presence of the managers concerned. Managers are asked to explain how they intend to correct the weaknesses identified. They do so by referring to the corrective measures proposed in their action plan or by indicating which measures have already been taken. Entities that are the focus of AGQ recommendations are also required to account for their progress in their management report, which is tabled before the National Assembly.

Three years after issuing a VFM audit report, the AGQ frequently follows up on its recommendations to provide the National Assembly with a status report on their implementation. The managers of certain entities may be called again before the parliamentary commission to provide an update. All these activities clearly demonstrate that elected officials are determined to ensure that the auditor general’s VFM audit reports are not shelved and that its recommendations are implemented in a timely manner.

Thirty years ago, the promoters of VFM auditing were on to a good thing. The foresight and commitment demonstrated by those who strove to develop this new type of assurance paid off. Today, there is a consensus that VFM auditing truly helps elected officials exercise control over the government and effectively contributes to improving the quality of public services.


François Boisclair, CA, is director of VFM consulting with the Auditor General of Quebec

Technical editor: Yves Nadeau, CA, partner, RSM Richter in Montreal




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